UOB - DBS Research 2018-04-26: All Engines Cranking

SGinvestors.io

UNITED OVERSEAS BANK LTD U11.SI

UOB - All Engines Cranking

• NIM and loans to drive topline growth; NIM uptrend clearly in sight; loan growth at high single digit.
• Lower credit costs; no longer buffering general provisions; expecting 25bps credit cost ahead.
• FY18-19F earnings raised by 4% each year on adjustments to NIM, loan growth and provisions.
• Maintain BUY, Target Price raised to S$33.20 (1.5x FY18 BV); dividends should be sustainable at S$1.00 per year.

Getting more bullish; maintain BUY.

• This is the first time in a decade that all income items for the Singapore banks are positive. 
• For UOB, NIM uptrend is clearly in sight. With expectations of an intact SOR/SIBOR uptrend, we are now forecasting NIM to accelerate by 9bps in FY18F (from 6bps) and 5bps in FY19F. 
• Loan growth should also stand tall. With guidance at high single digit for FY18F, we have also raised our loan growth forecast to 8% (from 7%). With IFRS9/SFAS109, banks will no longer be able to continuously build up general provisions. In the case of UOB, this is a new positive. 
• We now expect credit cost to hover around 25bps over FY18-20F (from 26-28bps previously). NPL issues should be a thing of the past with the last brunt of impairments and provisions done in 4Q17. Capital levels remain high and strong with fully loaded CET1 ratio at 14.7% as at Dec 17. 
• Although scrip dividends will prevail, the shares would be issued without a discount. We believe a full year dividend of S$1.00 per share is sustainable and do not discount further upside from here.

Where we differ. Staying above consensus.

• Our earnings remain above consensus with a further boost from NIM, loan growth and lower provisions resulting in 4% p.a. earnings uplift for FY18-19F. 
• Our Target Price is also at the higher end of consensus.

Potential catalyst: Sustained positive deliveries.

• Further improvement in NIM and more importantly, a pickup in loan growth due to the recovery of the property market should support earnings strongly. 
• Lower credit cost is a new trend for UOB and should be viewed positively.

Valuation:

• Maintain BUY, Target Price raised further to S$33.20. Our revised Target Price of S$33.20 is based on the Gordon Growth Model (12% ROE, 4% growth and 9.5% cost of equity), equivalent to 1.5x FY18 P/BV, which is above its 10-year average P/BV multiple (1.4x BV).

Key Risks to Our View:

• Relapse in NIM and asset quality trends. A relapse in SIBOR movement could also pose risks to our NIM forecast. 
• If NPL issues start to spread further from here, more specific provisions might be required.

WHAT’S NEW - New norms

Trends to watch in 1Q18 results.

• This should be a strong quarter for UOB. This is first time in years that topline growth will be driven by both NIM and loan growth.
  1. NIM clearly on an uptrend following SOR/SIBOR spurts observed in 4Q17 (guidance of 5-10bps).
  2. Loan growth 1Q18 is expected to pick up, estimated at 2- 3% y-o-y (FY18F loan growth guided at high single digit; FY17: 4.6%). UOB remains optimistic about Thailand and Greater China, as domestic loan growth continues to grow.
  3. Decent trends on fee income. While there is strong growth in wealth management, fee income should still be largely driven by loan-related fees.
  4. Cost-to-income ratio should hover around 44%. With effect from FY18, UOB will be netting attributable expenses directly against its related fees, in line with peers’ practices. This would reduce cost-to-income ratio from 45.5% in FY17 to 43.7% on an adjusted basis. We are forecasting UOB’s cost-to-income ratio to be at c.44% for FY18F.
  5. Credit cost at a new low. With the IFRS9/SFAS109 in place, days of general provision buffers are over. Credit cost is guided at 20-25bps for FY18F.
  6. Stable NPLs from here. The worst is over for the oil & gas asset quality episode. UOB deems that it now has a comfortable level of allowances to meet the new requirements after the reversal of S$0.6bn of general provisions. Going forward, UOB expects new NPL formation to be at S$300-400m a quarter.

Opportunities abound in the region.

• Specifically, UOB highlighted two key priorities:
  1. boost fee income, and
  2. tap connectivity flow.
• UOB has launched a new Financial Institution segment as it attempts to focus on sectors with high trade and connectivity flows as it continues to eye opportunities in the flow business, which will add to both loan and non-loan income.

High capital levels – possible outcomes.

• Compared to its peers, UOB may require a higher capital buffer as it relies more on asset growth. There remains a possibility for UOB to take on acquisitions in the near term as it seeks to optimise healthy returns on its capital.

Higher dividends are here to stay.

• The S$1.00 full year dividend per share is here to stay. Expect 40 S cts interim dividend in 1H18, with a combination of 40 S cts final plus 20 S cts special dividend in 2H18. Over time, this could normalise to 50 S cts per share for interim and final dividends. 
• With ample capital buffer, further dividend upside is still possible. Management stated that it will be comfortable with CET1 of > 12.5%. UOB’s fully loaded CET1 ratio as at end Dec 2017 was at 14.7%.

Earnings revision

• Raising NIM, loan growth and lowering credit costs. With a sustained SOR/SIBOR uptrend expected, we are now forecasting NIM to accelerate by 9bps in FY18F (from 6bps) and 5bps in FY19F. 
• Loan growth should also stand tall. With guidance at high single digit for FY18F, we have also raised our loan growth assumption to 8% (from 7%). 
• With IFRS9/SFAS109, banks will no longer be able to continuously build up general provisions. We now expect credit cost to hover around 25bps over FY18-20F (from 26-28bps previously). All in, this led us to raise our FY18-19F earnings by 4% for each year. 
• We have introduced FY20F earnings estimates.

Valuation & Recommendation:

Maintain BUY, Target Price raised to S$33.20. 

• With our earnings revisions, our Target Price is now raised to S$33.20. UOB is currently trading at 1.4x FY18F BV which is equivalent to the 10-year mean P/BV, lagging peers which have exceeded mean levels. 
• Our revised Target Price is equivalent to 1.5x FY18F BV, above the 10- year mean P/BV and is based on the Gordon Growth Model assuming 12% ROE, 9.5% cost of equity and 4% growth.

Sue Lin LIM DBS Vickers | Rui Wen LIM DBS Vickers | http://www.dbsvickers.com/ 2018-04-26

SGX Stock Analyst Report BUY Maintain BUY 33.20 Up 29.500