UOB - DBS Research 2018-05-03: Strong 1Q18; Keep Watch On Dividends Ahead

UOB - DBS Vickers 2018-05-03: Strong 1Q18; Keep Watch On Dividends Ahead UNITED OVERSEAS BANK LTD SGX: U11

UOB - Strong 1Q18; Keep Watch On Dividends Ahead

  • UOB's 1Q18 earnings were in line; topline driven largely from higher NIM; lower trading gains offset some revenues. 
  • Credit costs at new low of 23bps, guidance at 20-25bps possibly towards the lower end; still some buffers noted under the Expected Credit Losses line for other assets. 
  • Positive outlook ahead, topline growth supported by lower credit costs; dividends should be sustainable at S$1.00 per year and could head higher. 
  • Maintain BUY; Target Price at S$33.20 (1.5x FY18 BV); higher dividends and lower credit costs are upside risks. 

What’s New 

1Q18 earnings driven by higher NIM and lower credit costs.

  • UOB's 1Q18 earnings were within expectations, with NIM clearly on an uptrend (+3bps q-o-q; +11bps y-o-y) following SOR/ SIBOR spurts observed in 4Q17, as well as significantly lower credit costs. 

Credit costs is at a new low at 23bps (vs. historical 32bps).

  • With the IFRS9/SFRS109 in place, days of general provision buffers are over. Even then, we noted some buffers set aside under the Expected Credit Losses (ECL) for other assets. New NPL formation eased to a normalised c. S$400m. Absolute NPLs were slightly lower, resulting in NPL ratio easing marginally to 1.7% (4Q17: 1.8%). 
  • Expenses were 9% lower q-o-q due to higher year end seasonal costs incurred in 4Q17, but up by 6% y-o-y largely from technology-related expenses. 
  • Cost-to-income ratio stood at 44% in 1Q18. With effect from FY18, UOB will net off the relevant attributable expenses directly against its related fees, in line with peers’ practices. 

Broad-based loan growth.

  • Loans grew 2% q-o-q, 5% y-o-y, and was largely broad based. 
  • Deposit growth was flat q-o-q and up 5% y-o-y. 
  • Non-interest income was strongly driven by wealth management and loan-related fees, but was offset by lower trading income from fair value changes related to hedges (due to interest rate movements). 
  • Capital ratios were strong with CET1, Tier-1 and Total CAR at 14.9%, 16.4% and 18.8% respectively. 
  • No dividends were declared during the quarter. 

Key takeaways from the analyst briefing 

Positive outlook ahead.

  • UOB continues to be optimistic about FY18’s outlook and has guided for high single-digit loan growth (we have assumed 8%), NIM to continue to track higher with visibly higher rates ahead, and credit costs guided at 20-25bps, possibly at the lower end. 
  • High capital levels ensure that higher dividends are here to stay. 

High dividends here to stay; possible further upside.

  • UOB’s full year dividend of S$1.00 per share is here to stay. Possible upside to higher dividends would not be discounted. 
  • Management stated that it will be comfortable with CET1 of > 13% (previously 12.0-12.5%). UOB’s fully loaded CET1 ratio as at end-1Q18 was at 14.9%. So long as CET1 is > 13% and return on risk weighted assets (RORWA) >1.7%, there will be room for higher dividend with a dividend payout of at least 50% (implying an estimated S$1.20 per share). 
  • There might be special dividends along the way. Although scrip dividends will prevail, the shares would be issued without a discount. 

Hinted at 12% ROE over FY18-19F.

  • UOB hinted at a likelihood of attaining 12% ROE (1Q17: 11.0%) over these two years on the back of sustained NIM uplift (another 1- 2bps each quarter ahead), further improvements in cost management and higher dividends 

Valuation and recommendation 

Maintain BUY, Target Price at S$33.20.

  • UOB is currently trading at 1.4x FY18F BV which is equivalent to the 10-year mean P/BV multiple, lagging peers which have exceeded mean levels. 
  • Our Target Price is equivalent to 1.5x FY18F BV, above the 10-year mean P/BV and is based on the Gordon Growth Model assuming 12% ROE, 9.5% cost of equity and 4% growth. 

Sue Lin LIM DBS Vickers | Rui Wen LIM DBS Vickers | https://www.dbsvickers.com/ 2018-05-03
SGX Stock Analyst Report BUY Maintain BUY 33.20 Same 33.20