United Overseas Bank Limited - Phillip Securities 2018-05-04: Better Margins And Provisions Drove Growth

United Overseas Bank Limited - Phillip Securities 2018-05-04: Better Margins And Provisions Drove Growth UNITED OVERSEAS BANK LTD SGX: U11

United Overseas Bank Limited - Better Margins And Provisions Drove Growth

  • UOB's 1Q18 PATMI exceeded our estimates by 10% due to lower than expected impairments. NIM, lower impairments and fee were the key earnings drivers.
  • Expect special and higher ordinary dividends as CET 1 surged to 14.9%, against 13% comfort level.
  • We raised our target price to S$31.70 (previously S$29.00) on a higher ROE and earnings. Nevertheless, our rating has been downgraded to ACCUMULATE due to the share price performance.



The Positives


+ Net interest margins (NIM) at five-year highs.

  • NIM touched 1.85%, the best in five years. Almost 2/3 (or S$100mn) of the improvement in NII came from better margins. We have modelled in NIM of 1.9% for FY18e. 
  • Separately, UOB mentioned SGD deposits is turning more competitive and sourcing more USD deposits for their short-term trade finance loans.

+ Impressive momentum in asset gathering fees.

  • Wealth income and fund management has driven fee income growth. Combined, both segments grew their fee income by 30% CAGR for past two quarters. This was an upside surprise to us. 
  • UOB has not been as aggressive as its peers in building up a wealth management platform via acquisitions, but it has still managed to grow fees at impressive rate.

+ Expect a large increase is dividends.

  • UOB CET 1 has touched 14.9% against their 13% comfort level. The bank could return this capital through dividends or deploy the capital to compete more aggressively. Assuming a simplistic 1.5% decline in CET 1, this could release almost S$3bn in capital (or S$1.80 per share) in special dividends over next 2-3 years. 
  • We expect a combination of special and higher interim dividend in the coming quarter. Assuming 50% payout, ordinary dividend in 2018e could be at least S$1.20 per share.


The Negatives


Loans growth was relatively soft.

  • Loan growth was up 5% y-o-y in 1Q18 (DBS + 9% y-o-y). SGD loans performed even poorer, a rise of only 2% y-o-y. In comparison, system loans in Singapore rose around 5%. 
  • UOB is focusing its efforts on overseas loans especially USD, where the yield pick-up is higher. SGD loans growth expected to be slower due to competitive pressure, until current housing loan pipeline is drawn down.

Staff cost is outpacing income.

  • Past two quarters have seen staff cost rising at mid-teens growth rate. This pulled up CIR to 44.2% (1Q17: 43.2%) despite the improvement in revenue. Staff cost is now trending at S$600mn per quarter run-rate against the S$500mn, just two years ago.


Outlook

  • UOB was hesitant on their outlook for SGD loans growth this year to the aggressive pricing environment. The focus seems to be on overseas and trade finance loan book. 
  • UOB still maintains a high single-digit loans growth target. Bulk of the growth in FY18e will come from margin expansion and lower impairments.


Investment Actions

  • We raised our target price to S$31.70 (previously S$29.00). Nevertheless, our rating has been downgraded to ACCUMULATE due to the share price performance. 
  • The improvement in target price was due to better ROE and higher terminal growth rates. 
  • Our FY18e earnings was revised upwards by 6%. We think there will be upside surprises in dividend paid in FY18e. Dividends will play a larger role in total returns for the stock.





Phillip Research Team Phillip Securities | https://www.stocksbnb.com/ 2018-05-04
SGX Stock Analyst Report ACCUMULATE Downgrade BUY 31.70 Up 29.000



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