United Overseas Bank (UOB SP) - Maybank Kim Eng 2018-02-15: Moving Steadily

United Overseas Bank (UOB SP) - Maybank Kim Eng 2018-02-15: Moving Steadily UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - Moving Steadily


EPS and Target Price raised; Maintain BUY 

  • Although FY17 earnings achieved only 94% of our forecast and missed our expectation, we continue to believe UOB can generate robust earnings growth ahead in a cyclical upturn. 
  • With our revised estimates, sustainable ROE is now 12.1% (11.7% previously), and COE 10.1%, and growth rate 3.5% (both unchanged). Our Target Price is raised 8% to SGD29.33 based on 1.3x FY18E P/BV (from 1.2x previously), in line with its historical mean.
  • Maintain BUY.


Healthy momentum ahead 

  • FY17 came up short mainly due to:
    1. lower net interest income on lower loan growth of 5% y-o-y and lower lending yields; and
    2. higher expenses.
  • We forecast total income to grow at a 3-year CAGR (2017-2020E) of ~11% from:
    1. more lending opportunities (~9-10% vs 7-8% previously) from Singapore and the region. With 50% of loans related to housing and B&C loans (vs. peers’ 42%), it stands to benefit from a recovery in Singapore property market;
    2. sensitivity to repricing intervals; and
    3. increase in non-interest income from higher WM fees and trading income. 
  • The downside would be higher costs (3-year CAGR of 7%), weighed down by IT investments to build its franchise. 
  • With no major asset quality deterioration, we expect credit costs to ease to 21-25bps in FY18-20E. For every 10bps increase in credit costs, we estimate that FY18-20E net profits could decline by 6%.


CET1 ratio highest among peers 

  • Management declared a final one-tier dividend of SGD0.45/sh and special dividend of SGD0.20/sh, bringing total FY17 dividends to SGD1.00/sh (SGD0.35/sh for interim dividend). This is higher than our expectation of SGD0.70/sh. 
  • With current fully-loaded CET1 capital at 14.7% (comfort level: 12.5%), we think there is scope for dividend upside from continued earnings momentum. We raise our FY18-19E DPS forecast to SGD1.00/sh (from SGD0.70/sh).


Maintain BUY 

  • We like UOB’s disciplined pricing strategy and its sensitivity to re-pricing intervals. 
  • Upside risks are:
    1. higher revenue; and
    2. lower provisions; 
  • downside risks are:
    1. lower income; and
    2. higher provisions.
  • UOB maintained its market share of Singapore’s housing loans from new sales at ~30% (unchanged from a year ago). Management expects FY18E loan growth to improve to high single digits with growth from Singapore, Indonesia, Thailand and Greater China. 
  • We baked into our forecast a 35/20/25bps increase in 3M SIBOR for FY18/19/20E, in line with our Singapore economist’s SIBOR forecasts of 1.55%/1.75% for FY18/19E. 
  • We expect its WM fees to continue at double digit growth in FY18E, given that its organic growth in AUM has been solid (+12% y-o-y), with a faster increase seen in high net worth clients (AUM for HNW clients: +35% YoY).


Swing Factors


Upside

  • Sharp and sustained rebound in commodity prices ease concerns about global risks.
  • Ability to re-price assets at higher interest rates, widening credit spreads.
  • Proactive restructuring of loans allows asset quality to hold up better than expected, with no major credit slippages.
  • Higher demand for domestic mortgages from easing of property-cooling measures.

Downside

  • Asset-quality deterioration becomes a systemic problem, especially if job losses in Singapore become pervasive and hurt the mortgage portfolio.
  • Shocks in the fixed-income portfolio.
  • Lack of liquidity of a funding currency.
  • Succession issues.
  • Major changes in the banking competitive landscape in Singapore that result in the emergence of a dominant financial institution.
  • Translational losses from MYR/IDR depreciation.
  • Capital raising by any institution in sector.




Ng Li Hiang Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-15
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 29.33 Up 27.100



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