United Overseas Bank - RHB Invest 2018-07-18: Still A Play On Rising Interest Rates

United Overseas Bank - RHB Securities Research 2018-07-18: Still A Play On Rising Interest Rates UNITED OVERSEAS BANK LTD SGX:U11

United Overseas Bank - Still A Play On Rising Interest Rates

  • Maintain BUY and SGD33.30 Target Price, 28% upside.
  • UOB remains our Top Pick in the Singapore banking sector as future NIM widening would offset negative effects from the recently-announced government measures to cool Singapore’s residential property market.
  • Management’s intention to lower its CAR could potentially provide investors with more dividends.
  • We believe the surge in UOB’s P/BV between 2003-2007 (during FFR upcycle) could be repeated in the current FFR upcycle. We expect 2Q18 earnings to be in line with our expectations, with loan expansion supporting net interest income growth.

2Q18 net interest income growth may be more volume driven.

  • For 2Q18, management indicated that more focus would be placed on the corporate segment, which generates lower margin on average. In addition, more high quality liquid assets (due to the riskier global environment) could keep yields subdued. SG. However, the higher SIBOR will be a positive for NIM. 
  • Overall, we forecast 2Q18 NIM to be marginally wider than 1Q18’s 1.84%, which was 3bps higher than 4Q17’s. We believe 2Q18 loan expansion will be in tandem with management’s guidance of high single-digit for FY18.

NIM expected to expand over next few quarters.

  • On a longer term perspective, the gradual increases in the US’ federal funds rate (FFR) – US Federal Reserve (Fed) Chair Jerome Powell reiterated gradual interest rate hikes on 17 Jul 2018 – will also translate into wider NIM. 
  • We are forecasting NIM to widen further in subsequent quarters, and are projecting FY20 NIM of 1.97%.

Lending to property space to be supported near term.

  • The 5 Jul 2018 announcement by the Government on measures to cool Singapore’s residential property market could slow loan growth more obviously by 2020 and beyond. Over the next 1-2 years, lending to the property segment is likely to be supported by loans already approved in 1H18 and earlier, as drawdown will be gradual over the next few quarters. We are forecasting loan expansion of 8% and 6.5% for FY18 and FY19 respectively at UOB.
  • The trade war between the US and China is expected to impact the wealth management business. Wealth management AUM is likely to be affected as well. investors. However, loan growth in 2Q18 should lead to more loan-related fees.

Maintain BUY and SGD33.30 Price Target.

  • Our GGM-derived Target Price of SGD33.30 assumes CoE of 9.8% and ROE of 12.8% (1Q18 ROE was 11%). io. This yields a target P/BV of 1.43x, which we apply to our forecast FY19 BV of SGD23.35. 
  • 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 Securities Research | https://www.rhbinvest.com.sg/ 2018-07-18
SGX Stock Analyst Report BUY Maintain BUY 33.300 Same 33.300