UNITED OVERSEAS BANK LTD
SGX:U11
UOB - Property-Related Loans Take A Hit
- Property-related loans would be affected by newly introduced cooling measures.
- UOB, having the largest property-related loans exposure, may see slower than expected loans growth.
- Stock price may be well-supported in the meantime as it offers c. 3.7% dividend yield; potential dividend upside may be a catalyst.
- Downgrade to HOLD, Target Price S$28.30.
Cooling measures a dampener; downgrade to HOLD.
- For UOB, cooling measures are set to be a dampener as it may see slower than expected loan growth arising from the recent set of property cooling measures effective 6 July 2018. UOB has the largest property-related loans exposure among the Singapore banks with its mortgage loans accounting for c.28% of total loans in 1Q18.
- We lower our loan growth forecast for FY18 to c.6% (previously 7.5%) on slowing demand, with earnings cuts of 1-5% through to FY2020F on lower loan growth outlook. However, we believe that NIM uptrend remains in sight alongside lower credit costs assumption of c. 25bps over FY18- 20F (from 26-28bps previously). Capital levels remain strong with fully loaded CET1 ratio at 14.9% as at Mar 18.
- Although scrip dividends will prevail, the shares would be issued without a discount. We believe a full year dividend of S$1.00 per share is sustainable and that higher dividends are possible on its higher capital levels.
Where we differ.
- We believe that UOB will be more affected by the newly introduced cooling measures as it has the largest property-related loans exposure among the banks.
Potential catalyst: Sustained positive deliveries.
- Further improvement in NIM should support earnings strongly. Lower credit cost is a new trend for UOB and should be viewed positively.
- Potential dividend upside may also be a catalyst should higher dividends be effected.
Valuation:
Downgrade to HOLD, Target Price S$28.30.
- Our revised Target Price of S$28.30 following our earnings adjustment is based on the Gordon Growth Model (11% ROE, 3% growth and 9.4% cost of equity), equivalent to 1.3x FY18 P/BV, which is at its 10-year average P/BV multiple.
Key Risks to Our View:
- Relapse in NIM and asset quality trends. A relapse in SIBOR movement could also pose risks to our NIM forecast. If NPL issues start to spread further from here, more specific provisions might be required.
- In the event that trade war escalates, it might trigger further risks to loan growth.
CRITICAL DATA POINTS TO WATCH
Lowering loan growth against rising NIM.
- Our FY18-19F loan growth forecast is now lowered to 5-6% p.a. from 7-8% as we expect the new cooling measures to impact UOB’s large portion of property-related loans. Meanwhile, we expect UOB’s NIM to rise by 9bps in FY18F and another 5bps in FY19F, taking into account some element of competition. Our sensitivity analysis indicates that for every additional 25 bps increase in SIBOR, UOB’s NIM will rise by 1bp, holding other variables constant, and this would lead to a further 1.1% uplift to earnings.
- We note that UOB’s S$ loan-to-deposit ratio remains the highest among peers and that itself could pressure S$ funding cost; S$ deposits forms close to half of UOB’s total deposit base.
Non-interest income driven more by loan activities.
- Contrary to peers, UOB’s non-interest income focuses more on loan activities, which is its core business. While there is increasing traction from wealth management income, it remains small vs peers. Fee income should be consumer-business driven from credit cards and private banking rather than from capital markets.
- UOB’s wealth management business continues to pick up albeit makes up a smaller proportion of non-interest income vs its peers.
Costs skewed to business growth.
- We expect operating expenses to stay high with costs skewed towards business expansion and technology which is required particularly for digital banking and cyber security. Other investments to further enhance regional operations are still ongoing but the increase should not be high.
- Cost-to-income ratio may ease with stronger revenue growth amid its tight cost control strategies despite having to invest to grow its business but the target is 40% over the longer term. We forecast a 44% cost-to-income ratio in FY18F.
Expect lower credit costs; reversal in trends with IFRS9.
- Compared to peers, UOB’s credit costs tend to hover at higher levels largely due to its conservative stance towards setting aside higher general provisions (1.2% of total loans). With IFRS9 implemented, banks will no longer be allowed to build general provision buffers. This is a new positive for UOB. Management is guiding for 20-25bps credit cost at the moment.
- We are assuming 25bps credit cost over FY18-20F (previously 26-28bps), which is at the higher end of guidance.
Regionalisation remains core to UOB’s strategy.
- UOB’s regionalisation agenda remains intact. The bank is relooking at its operations in Indonesia, given the current challenging operating environment.
- In Malaysia, growth remains cautious but asset quality is at a comfortable position. Its Thai operations remain small, while its Greater China operations are still smaller than peers.
- UOB has not been aggressively acquiring to add new revenue streams but has chosen to grow organically.
Sector Reports:
Sue Lin LIM
DBS Group Research Research
|
Rui Wen LIM
DBS Research
|
https://www.dbsvickers.com/
2018-07-06
SGX Stock
Analyst Report
28.30
Down
33.200
