United Overseas Bank (UOB) - UOB Kay Hian 2018-05-04: 1Q18 Credit Costs Drop On Benign Credit Environment

United Overseas Bank (UOB) - UOB Kay Hian 2018-05-04: 1Q18: Credit Costs Drop On Benign Credit Environment UNITED OVERSEAS BANK LTD SGX: U11

United Overseas Bank (UOB) - 1Q18: Credit Costs Drop On Benign Credit Environment

  • UOB reported earnings growth of 21.2% y-o-y driven by NIM expansion of 11bp y-o-y and growth in wealth management fees of 30% y-o-y. The normalisation of credit costs downwards to just 13bp also contributed greatly to the good performance.
  • UOB would consider lifting dividend payout ratio to 50% if CET-1 CAR is maintained at above 13% and return on RWA is maintained at above 1.65% on a sustainable basis.


  • United Overseas Bank (UOB) reported a net profit of S$978m for 1Q18, up 21.2% y-o-y and slightly above consensus estimate of S$951m.
  • Growth driven by overseas operations. Loans grew 5.1% y-o-y and 2.0% q-o-q in 1Q18. The sequential expansion was driven by Malaysia and Greater China (predominantly trade loans booked in Hong Kong), which saw loans growth of 6.8% and 4.7% q-o-q respectively. From an industry perspective, loans for the manufacturing sector expanded by 7.4% q-o-q.
  • Significant NIM expansion overseas. NIM expanded 11bp y-o-y and 3bp q-o-q to 1.84%. Loan yield further improved by 10bp q-o-q to 3.41% due to rising interest rates. Interbank yield also improved 14bp q-o-q to 1.96%. NIM for Singapore, Malaysia, Thailand and Indonesia expanded by 3bp, 9bp, 3bp and 11bp to 1.49%, 2.16%, 3.33% and 4.09% respectively. Net interest income grew at a double-digit rate of 12.8% y-o-y.
  • Broad-based growth in fee income. Fees and commissions increased 18.5% y-o-y, driven by growth of 30% y-o-y from wealth management. Contributions from loan-related fees and fund management also grew 23.7% and 25.9% y-o-y respectively.
  • Asset quality has stabilised. NPL balance declined 1.7% q-o-q while NPL ratio improved by 6bp q-o-q to 1.72%. UOB could have benefitted from recoveries/upgrades for the oil & gas sector as NPL balance for transportation, storage and communications declined by 8.6% q-o-q. Total provisions were at S$80m, down 57% y-o-y. Credit costs were at just 13bp, compared to 33bp last year, due to the benign credit environment.


  • Guidance for 2018. Management guided for high single-digit growth for loans and fee income for 2018. NIM is expected to be on an upward trend. Cost/income ratio is expected to remain relatively unchanged compared to 43.7% in 2017. NPL formation has moderated to levels before the crisis in the oil & gas sector. Management expects asset quality to be benign for the rest of the year and guided for credit costs of 20-25bp for 2018.
  • Aiming for higher ROE. UOB could achieve a ROE of 12% by 2019 if NIM maintains the positive trend of expanding 1-2bp q-o-q every quarter. Management plans to contain increases in staff costs to less than 10%. The bank has initiated productivity programmes to improve efficiency and to reduce expenses.
  • Potential hike in dividend payout ratio. UOB has a robust fully-loaded CET-1 CAR of 14.9% as of Mar 18, which is substantially above the minimum requirement of 9%. UOB will consider lifting dividend payout ratio to 50% if CET-1 CAR maintains at above 13% and return on risk-weighted assets (RWA) maintains at above 1.65% on a sustainable basis. Management could improve UOB’s dividend policy by converting the special dividend of 20 S cents into a regular interim and final dividends in 2018.
  • Divestment of Hengfeng Bank. UOB has entered into exclusive negotiation to divest its 13% stake in Hengfeng Bank. Management is waiting for regulatory clearance in China before wrapping up the divestment.

Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-04
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