UOB - RHB Invest 2018-02-14: Margin Widened; Expected To Widen Further

UOB - RHB Invest 2018-02-14: Margin Widened; Expected To Widen Further UNITED OVERSEAS BANK LTD U11.SI

UOB - Margin Widened; Expected To Widen Further

  • UOB’s 4Q17 results were in line with expectations. 4Q17’s positives included wider NIM (up 2bps q-o-q to 1.81%). As expected, UOB wrote back GPs to offset the impact of SPs on its P&L. 
  • We remain positive on UOB, given prospects of wider NIM ahead. We raised our 2018 net profit forecast by 2%, and raised our Target Price to SGD30.00 (from SGD28.88, 12% upside). 
  • UOB’s relative share price underperformance vs peers could catalyse its share price higher, in our view. BUY maintained.

4Q17 net profit of SGD855m

  • 4Q17 net profit of SGD855m was 16% higher y-o-y, but 3% lower q-o-q. 2017 net profit was in line with expectations.

Wider NIM ahead. 

  • 4Q17 net interest margin (NIM) of 1.81% was 2bps wider QoQ, and a significant 12bps wider y-o-y. For the past six quarters, NIM has been flat or widening on a q-o-q basis. 
  • Management guided for wider NIM going forward, on the back of a higher interest rate environment. We forecast 2018 NIM of 1.82%, wider than 2017’s 1.77%.
  • Management guided for high single-digit loan growth. 2017 loans expanded 5% y-o-y, with 4Q17 up 1% q-o-q. We are forecasting 2018 loan growth of 6%.

Write-back of general provisions (GPs) cushioned impact from higher specific provisions (SPs). 

  • 4Q17 total credit cost of 17bps was lower than 3Q17’s 32bps. Whilst 4Q17 specific credit cost of 125bps was ~3x that of 3Q17’s 37bps, general provisioning reversal led to lower total credit cost. 
  • The higher specific allowance was mainly due to residual vulnerable exposure in the oil and gas and shipping sectors being recognised as NPLs and collateral valuation markdown in 4Q17. Consequently, NPL ratio rose to 1.8%, from 3Q17’s 1.6%. 
  • Management is guiding for lower NPL ratio going into 2018.

Special dividend declared. 

  • The Board declared a final dividend of SGD0.45/share, and a special dividend of SGD0.20/share. Inclusive of the special dividend, the payout ratio is 49%. 
  • Despite UOB’s fully loaded Core Equity Tier 1 Capital Adequacy Ratio of 14.7%, and management being comfortable with a 12.5% long-term level, UOB has chosen to be relatively conservative in its dividend payout.

We raised Target Price to SGD30.00. 

  • Our revised GGM-derived Target Price of SGD30.00 assumes CoE of 9.3%, and ROE of 11.5% (2017 ROE was 10.2%) – we raised ROE assumption from 10.7% given the more optimistic outlook on NIM. This yields a target P/BV of 1.35x, which we apply to our forecast FY18 BV of SGD22.30. 
  • Over the past five years, UOB has traded at an average P/BV of 1.24x.

Downside risks 

  • Downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs.

Leng Seng Choon CFA RHB Invest | http://www.rhbinvest.com.sg/ 2018-02-14
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 30 Up 28.880