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

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.

Results highlights

  • 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%.

NIM expansion and loan growth tracking DBS

  • 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.

Non-II let down by trading income; expect 44% CIR for FY18F

  • 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 remained stable; credit costs more than halved

  • 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.

Robust RORWA & strong capital buffers point to higher DPS

  • 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.

Maintain ADD

  • 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
SGX Stock Analyst Report ADD Maintain ADD 33.000 Same 33.000