United Overseas Bank - CGS-CIMB Research 2018-08-04: Can It Keep The S$1bn Momentum?

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UNITED OVERSEAS BANK LTD SGX:U11

United Overseas Bank - Can It Keep The S$1bn Momentum?

• UOB’s 2Q net profit crossed S$1bn for the first time and beat our expectations by 9%, mainly from lower credit costs, tax and higher associates. PPOP of S$1.3bn in line.
• Total income up 5% q-o-q with equal weight from NII (+4.9% q-o-q) and non-II (5.3% q-o-q). Loan growth of 3.8% (YTD 6%) was at the expense of -1bp in NIM (1.83%).
• Positive jaw with CIR down to 43.6% from 44.2% in 1Q18. The upcoming launch of ‘digital bank’ initiative (more focused on mobile) not expected to heighten costs.
• Our EPS is up by 1% for FY18F on lower credit cost. We lower our GGM Target Price to S$31.00 (lowering LTG to 3% from 4%, tracking DBS).
• Maintain ADD. We think UOB is a relative pick as it is trading below its long-term mean of 1.2x FY18F P/BV on top of its strong capital buffer (fully-loaded CET 1: 14.5%).

PPOP of S$1.3bn in line, earnings beat from below the line

• UOB’s 2Q18 net profit of S$1.08bn was a record high (+10% q-o-q, +28% y-o-y), above our/consensus expectations of S$984m and S$954m, respectively. 
• 1H18 net profit was 52% of FY18F. The positive variance stemmed from lower-than-expected loan loss provision (S$90m), higher associates/JV (+79% q-o-q to S$52m) and lower tax rate (15.8%). UOB had appositive jaw as total income grew 5% q-o-q while expenses grew 3.5% q-o-q. ROE/RORWA were at 12.1%/2.13% for 2Q18. 
• Interim DPS of 50 Scts (1H17: 35 Scts); dividend payout guidance remains at 50% with a minimum CET1 ratio of 13.5%.

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Loan growth slightly ahead of DBS but at the expense of NIM dip

• UOB’s 2Q18 NII up 4.9% q-o-q to S$1.54bn, backed by 3.8% q-o-q loan growth (DBS: 3%). Loan book grew the most in Greater China, mainly HK (+S$4.4bn or 12.9% q-o-q), led by FIs, trade finance and global property market fund. Singapore loan book up S$1.9bn or 1.5% q-o-q. 
• YTD loan growth has totaled 6% but management sticks to its “high-single digit” growth target due to trade war uncertainty. We forecast 7% and see upside potential. 
• NIM dipped to 1.83% (1H18: 1.84%) due to higher funding costs as UOB built up liquidity. LDR dipped to 85.7% (1Q18: 86.7%). We expect NIM to improve as more funds are expected to shift to the higher margin loan market in addition to the effects of more rate hikes in 2H18. Our NIM forecast is 1.85% for FY18F.

Non-interest income up on higher trading income

• UOB’s 2Q18 non-NII up 5.3% q-o-q to S$800m mainly on higher trading income (+22.9% q-o-q). 1Q18 net trading income was exceptionally low due to MTM losses. Fees dipped 3.7% q-o-q to S$498m due to weaker wealth management (-20% q-o-q), offset by higher card (+9% q-o-q) and loan related fees (+5% q-o-q). 
• CIR improved slightly to 43.6% (1Q18: 44.3%), FY18F guidance unchanged at 44%.

15bp credit cost was lower than 20bp guidance, we expect 19bp

• Credit cost was low at 15bp (1Q18: 13bp). New NPA was stable q-o-q at S$436m. NPL also stood firm q-o-q at 1.7%. 2Q18 provisions inched up to S$90m (1Q18: S$80m) but were still well below c.S$182m/quarter in 2017. 
• We think UOB could track DBS to see some ad-hoc sale in the oil & gas services ahead. We lower our credit cost assumptions to 18bp (from 19bp). Accordingly, our EPS is up by a marginal 1% for FY18F.

At 1.2x P/BV, it is slightly below long-term mean

• Maintain ADD but lower our GGM Target Price to S$31.00, with a lower LTG of 3%, in line with our recent cut for DBS. Our Target Price implies 1.4x FY18F P/BV vs. 11.7% sustainable ROE. 
• The fully loaded CET 1 ratio remained stable at 14.5%. The stock is supported by c. 4.5% dividend yield. We think it is a relative value pick. 
• Catalysts include stronger-than- expected loan growth and NIM expansion. 
• Downside risks could come from a deterioration of its book.

Digital Bank

• UOB announced a new Digital Bank initiative with a heavy focus on customer engagement. This Digital Bank is a mobile-only platform and is expected to be separate from its omni-channel universal bank in order to better target GenY and GenZ customers (~3-5m customers in five years). The Digital Bank is expected to debut with conventional banking products like deposits, unsecured loans and transactions in five ASEAN markets. 
• Management targets a steady state CIR of 35% for Digital Bank due to cost efficiencies from process redesign; the steady state CIR is expected to be 40% for UOB as a group. Management was mum on the capex or incremental costs for the initiative but we think CIR could creep up slightly in the quarters to come, but not to an alarming level.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-04

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