UOB - OCBC Investment 2018-05-03: Make It Rain Dividends

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UNITED OVERSEAS BANK LTD SGX: U11

UOB - Make It Rain Dividends

• Record income.
• Improvement in NIM.
• Adjusted Fair Value of S$31.02.

1Q was slightly ahead of consensus

• UOB posted 1Q18 net earnings of S$978m, up 21% y-o-y and 14% q-o-q, and slightly ahead of street expectations of S$966m. 
• Better Net Interest Margin (NIM) together with healthy loans growth of 5% led to a new high of S$1.47b in Net Interest Income, which is a 13% improvement y-o-y. NIM rose from 1.73% in 1Q17 and 1.81% in 4Q17 to 1.84% in 1Q18. 
• Net fee and commission income increased 18% y-o-y to S$517m, supported by growth in wealth management (+30% y-o-y), fund management (+27% y-o-y) and loan-related fee income (+24% y-o-y). 
• Cost-to-income ratio stood at 44.2% this quarter. NPL was at 1.7%, down from 1.8% in the previous quarter. Allowances fell sharply from S$140m last quarter to S$80m this quarter.

Cautiously optimistic

• Management seems cautiously optimistic about its outlook and expects NIM to trend upwards with a benign credit environment. There is also indication of possible special dividend this year, to reward shareholders and also to bring down Common Equity Tier 1 from the current level of 14.9% to about 13% over the longer term. 
• As a recap, FY17 declared dividend was 80 cents with special dividend of 20 cents, giving a total of S$1.00. 
• On the Oil & Gas front, management believes that the restructuring in the sector is still on- going and do not expect any major recovery this year. 
• While staff cost went up 15% y-o-y in 1Q18, management is hoping to cap the annual increase to < 10%.

Buy at S$29.00 or lower

• UOB’s share price has gained 14.2% YTD, outperforming the Straits Times Index and most key regional indices for the same period. Based on dividend payout of S$1.00, yield is about 3.3%. 
• Since our last report in 2018, UOB has gained about 8%. With the more favorable outlook and better margin expectation, we have raised our Net Interest Income which in turn led to a 1.5% increase at the bottomline, resulting in projected FY18 earnings of S$4,007m (versus S$3,841m previously). 
• We have raised our fair value estimate marginally from S$30.86 to S$31.02. We prefer to be buyer of the stock at S$29.00 or lower.

Carmen Lee OCBC Investment | https://www.iocbc.com/ 2018-05-03

SGX Stock Analyst Report BUY Maintain BUY 31.02 Up 30.860