United Overseas Bank (UOB) - Maybank Kim Eng 2018-05-04: The Stars Are Aligning

UNITED OVERSEAS BANK LTD SGX: U11

United Overseas Bank (UOB) - The Stars Are Aligning

UOB's 1Q18 results reflected a good quarter with core PATMI of SGD978m (+14% q-o-q, +21% y-o-y), in line with our expectation and met 22% of our previous FY18 forecast.
Due to a higher interest rate outlook and favourable credit conditions, we lifted FY18-20E net profit estimates by ~3-7%. Sustainable ROE is now 13.5% (12.7% previously), but we left our COE unchanged at 10.1% and growth rate at 3.5%.
Our Target Price is raised 6% to SGD32.88, based on 1.5x FY18E P/BV (from 1.4x previously), nearly 1SD above its historical mean of 1.3x to reflect higher forecast ROEs. Dividend yield of 4.4% (FY18E) provides share price support.

While loan growth was lower at 5% y-o-y vs our expectation of ~10%, we believe the outlook remains positive and expect it to improve in the coming quarters.
Management reiterated guidance for high single digit loan growth. We raised net interest income by 2-4% for FY18-20E after factoring in a higher SIBOR forecast for FY18/19E of 1.65%/1.90% (from 1.55%/1.75%) per our Singapore economist. We expect NIM to expand to 1.86-1.99% (from 1.83-1.92%).
We estimate FY18-20E credit costs to be 21-24bps in a benign credit environment (from 21-26bps), lower than the average of ~30bps between FY10-17. For every 10bps increase in credit costs, we estimate our FY18-20E net profits could decline by 5-6%.

Management is comfortable with a 50% payout if CET1 capital ratio stays above 13% and return on risk-weighted assets (RoRWA) remains above 1.65-1.7%. With CET1 capital at 14.9% and RoRWA improved to 1.95% in 1Q, we see scope for meaningful dividend upside amid continued earnings momentum.
We raised our FY18-20 DPS forecast to SGD1.30- SGD1.50/sh (from SGD1.20-SGD1.40/sh). This implies ~50% payout ratio for FY18E.

UOB remains a laggard among Singapore banks, trading at ~1.2x, cheaper than the 1.3–1.5x for peers. The dividend yield of > 4% should lend support to UOB share price. Risks to our call are:
1. lower income;
2. higher costs; and
3. higher allowances.

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 banking competitive 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 | https://www.maybank-ke.com.sg/ 2018-05-04

SGX Stock Analyst Report BUY Maintain BUY 32.88 Up 31.080