UOB - RHB Invest 2018-05-03: Higher ROE, Expect More Dividends

UNITED OVERSEAS BANK LTD SGX: U11

UOB - Higher ROE, Expect More Dividends

We remain positive on UOB, given prospects of wider NIM ahead.
We raised our 2018 net profit forecast by 3%, and lifted our Target Price to SGD33.30 (from SGD30), offering an 11% upside.
UOB’s 1Q18 results were in line with expectations, with net profit of SGD978m accounting for 25% of our pre-results 2018 forecast. 1Q18’s positives included wider NIM (up 3bps q-o-q to 1.84%).

We believe UOB’s target to lower CET1 CAR could translate to higher dividends and catalyse its share price higher.

The y-o-y growth was driven by strong growth in net interest income and fee & commission income.
NIMs to widen. 1Q18 NIM of 1.84% was 3bps wider q-o-q and 11bps wider y-o-y. Higher loan margin and interbank yields amid a rising interest rate environment, as well as UOB’s proactive balance sheet management were key contributing factors. We are forecasting NIM of 1.86% for 2018 and 1.92% for 2019, on the back of rising Singapore interest rates.
1Q18 loans were 2.3% higher q-o-q, driven mainly by manufacturing loans (8% loan share), which were up 7.4% q-o-q. Manufacturing loans in Malaysia grew as well. Loans were up 5.5% on a y-o-y basis in 1Q18. We forecast 2018 loan growth of 8%.
1Q18 credit cost (stage 3 expected credit loss (ECL) / specific loan allowances) of 12bps was sharply lower than 4Q17’s 125bps, and lower than 1Q17’s 49bps. The fall came on the back of a benign credit environment and reduced residual risks from the oil & gas and shipping sectors. Management guided for credit cost of 20-25 bps over the short term.
1Q18 common equity tier 1 (CET1) capital adequacy ratio (CAR) rose to 14.9% (from 12.8% in 1Q17). Management said that CET1 CAR could fall below 14% by end-2019, and guided that the dividend payout of 50% as a possible contributing factor.
1Q18 ROE of 11% was an improvement over 4Q17’s 9.8%. Management is targeting for ROE of 12% by end-2019.

Our revised GGM-derived Target Price of SGD33.30 assumes CoE of 9.6%, and ROE of 13% (1Q18 ROE was 11%).
We raised our ROE assumption from 11.5% given the more optimistic outlook on NIM, and likelihood of higher dividends. This yields a target P/BV of 1.51x, which we apply to our forecast FY18 BV of SGD22.12.
Over the past five years, UOB has traded at an average P/BV of 1.24x. We believe the higher P/BV target is reasonable given the improving NIM environment.
Downside risks to our forecasts include higher-than-expected impairment charges and weaker-than-expected NIMs.

Leng Seng Choon CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-03

SGX Stock Analyst Report BUY Maintain BUY 33.30 Up 30.000