United Overseas Bank - CGS-CIMB 2018-05-03: Stellar 1Q18, Just That DBS Is Currently Peerless

UNITED OVERSEAS BANK LTD SGX: U11

United Overseas Bank - Stellar 1Q18, Just That DBS Is Currently Peerless

UOB's 1Q18 net profit of S$978m (+21% y-o-y) was slightly above consensus and our expectations, at 26% of our FY18F. Positive variance came from lower credit costs.
NIM expansion and loan growth tracked DBS. NIM expanded 3bp q-o-q to 1.84% (higher loan yields) while loans grew 2% pt q-o-q (led by regional demand).
Non-II was let down by lower trading income though fee momentum remained healthy. CIR increased 1% pt to 44.2% as the bank ramped up on tech investments.
Asset quality was stable with total credit costs at 11bp of loans.

With strong capital buffers and returns, we believe UOB can easily sustain a 50% payout. ADD maintained with an unchanged Target Price.

UOB achieved record earnings as net profit grew 21% y-o-y to S$978m. The underlying trends which we observed for DBS's 1Q18 performance were also evident here. However, unlike DBS, UOB did not have a positive jaw, a feature which we expect to persist in the near-term as the bank ramps up on tech investments.
In terms of returns, UOB achieved ROE/RORWA of 11%/1.95% for the quarter. With RORWA above UOB's benchmark of ~1.6%, we raise our dividend payout from c.40% to c.50%.

NII increased 13% y-o-y as NIM expanded 3bp q-o-q/11bp y-o-y to 1.84% while gross loans increased 2% pt q-o-q/5% pt y-o-y. This underscores our confidence that the bank is on track to achieving high-single digit expansion for both NIM and loan growth for FY18F.
We note that q-o-q NIM expansion was driven by loan yields and increases across all of UOB’s ASEAN markets. We factor in an 8bp increase in NIM for FY18F (previously +5bp).
Meanwhile, loan growth was primarily driven by US$- and RM-denominated loans.

Fees increased 18% y-o-y/2% q-o-q on higher wealth management (+30% y-o-y), card fees (+11% y-o-y), fund management (+27% y-o-y) and loan-related fees (+24% y-o-y). Other non- II decreased 22% due to lower trading income. Accordingly, total income grew 9% y-o-y.
On the other hand, expenses grew more than total income, at 11%. CIR increased 1% pt y-o-y to 44.2% as the group ramped up on tech investments. Staff costs also increased 15% y-o-y on higher headcount and human capital investments.

Asset quality was stable with NPA formation normalising to S$416m. NPA allowance coverage was maintained at 91bp of loans while the NPL ratio dipped to 1.7% (4Q17: 1.8%). Total credit costs more than halved to S$80m, with credit costs forming 11bp of loans.
Management expects total credit costs to come in at the low-end of the 20-25bp guidance; we now factor in 19bp.

On the balance sheet, deposits growth was in tandem with loan growth. LDR stood at 86.7%; S$-LDR and US$-LDR were at 94.2% and 66.2% respectively. Fully phased-in CET1 stood at 14.9%, which is slightly excessive, in our view.
Post the payout of FY17’s final and special DPS, we estimate CET1 to decrease to c.14.3%.
Given that current market conditions allow UOB to generate RORWA in excess of 1.6-1.7%, we estimate that a payout of 50% still allows UOB to have a high CET1 headroom.

We raise our FY18F-20F EPS by 3.7-4.2% as we increase our NIM expectations and reduce our credit costs assumptions. We also increase our FY18F-20F DPS by 33-56%, expecting UOB to dish out a total FY18F-20F DPS of S$1.20-1.40/share (assuming c.50% payout).
Our GGM-based Target Price (S$33.00) remains intact and implies 1.5x FY18 P/BV vs. 11.7% sustainable ROE.
Downside risks could include disorderly rise in interest rates and turn in credit environment.
Catalyst could come from UOB meeting our growth targets.

YEO Zhi Bin CGS-CIMB | https://research.itradecimb.com/ 2018-05-03

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