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

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


A good quarter; Raised net profit estimates and Target Price; BUY

  • 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.



Positive outlook

  • 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%.


Higher CET1 capital: rewarding shareholders

  • 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.


A laggard play; Maintain BUY

  • 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.


Swing Factors 


Upside 

  • 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. 

Downside 

  • 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



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