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

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.

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.

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%.

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.

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.

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