United Overseas Bank (UOB SP) - Maybank Kim Eng 2018-03-20: Onwards And Upwards

United Overseas Bank (UOB SP) - Maybank Kim Eng 2018-03-20: Onwards And Upwards UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank (UOB SP) - Onwards And Upwards


ROE to recover; EPS and Target Price raised 

  • We believe UOB can generate robust earnings in a cyclical upturn. We raised FY18-20E net profits by 2-5% mainly on higher loan growth and non-interest income assumptions. 
  • With the change in our EPS estimates, our assumed sustainable ROE is now 12.7% (12.1% previously), with COE of 10.1% and a growth rate of 3.5% (both unchanged). Accordingly, our Target Price is raised 6% to SGD31.08, pegged to ~1.4x FY18E P/BV (from 1.3x), 0.5SD above its historical mean of 1.3x to reflect higher forecast ROEs.
  • Maintain BUY.



Healthy momentum 

  • We raised FY18-20E loan growth slightly to ~9-10% from 9-9.5% based on an average multiplier between its loan growth and Singapore’s GDP growth of 2.6x. A rebound in Singapore’s property market can benefit UOB as 50% of its total loan book is related to housing and building and construction (B&C) loan vs 42% for peers. 
  • Also, we remain positive on UOB’s capability for further WM fee growth. We think UOB’s wealth franchise is under-appreciated. Its organic AUM grew decently at a 7-year CAGR of 12% (vs peers’ 15-22%). FY17 saw solid 12% y-o-y growth in AUM.


Scope for higher dividends 

  • With earnings momentum likely to continue, strong fully-loaded CET1 capital at 14.7% and consistent improvement in return on risk-weighted assets in recent quarters, we think there is scope for capital management and higher dividends. We raised our FY18-20E DPS forecast to SGD1.20-1.40/sh (from SGD1/sh). This implies payout ratio of 42-46%.


Maintain BUY 

  • We like UOB’s disciplined pricing strategy and its sensitivity to re-pricing intervals. 
  • Risks to our BUY thesis are:
    1. lower income; and
    2. higher provisions.



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 competitive banking 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/ 2018-03-20
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 31.08 Up 29.330



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