United Overseas Bank - RHB Invest 2018-08-03: Introduces Digital Bank; Robust 2Q18 Results

United Overseas Bank - RHB Securities Research 2018-08-03: Introduces Digital Bank; Robust 2q18 Results UNITED OVERSEAS BANK LTD SGX:U11

United Overseas Bank - Introduces Digital Bank; Robust 2Q18 Results

  • Maintain BUY and SGD33.30 Target Price, 25% upside, tied to a long-term ROE assumption of 12.8% (2Q18: 12.1%).
  • UOB’s 2Q18 net profit of SGD1.08bn was up 28% y-o-y (+10% q-o-q), whilst NIM of 1.83% was 1bp narrower q-o-q – the growth trend is evident from the 8bps y-o-y widening and management sees future NIM upside. 
  • It also sees little impact of the property cooling measures on near-term loan growth and guided for high single-digit 2018 loans expansion.
  • UOB’s introduction of a digital bank is also long-term positive.

Strong 2Q18 earnings.

  • UOB’s 2Q18 net profit was SGD1.08bn, up 10% q-o-q and 28% y-o-y. The key driver was NII, which rose 5% q-o-q and 14% y-o-y.

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NIM expansion likely going forward.

  • UOB’s 2Q18 NIM of 1.83% was 1bp narrower q-o-q, but 8bps wider y-o-y. United Overseas Bank is priced competitively, resulting in 4% q-o-q loan growth. Also, UOB’s efforts to increase deposits – ahead of the expected interest rate hike – have led to higher funding costs.
  • Going forward, management sees NIM rising, with the extent dependent on when federal fund rate (FFR) hikes occur. We are forecasting 2018 and 2019 NIMs of 1.85% and 1.92%.

2018 high single-digit loan growth guidance maintained.

  • After the 6.1% YTD loan expansion, management expects 2018 y-o-y loan growth in the high single digits. Management sees little impact of the July Singapore property cooling measures on 2018 loan growth, although the impact should be felt later.
  • We are forecasting 2018 and 2019 loans growth of 8% and 6.5%.

UOB introducing a digital bank.

  • During the results briefing, UOB announced the introduction of a digital bank for ASEAN “mobile first” and “mobile only” customers. This model is designed to comprehensively address the entire customer life cycle.
  • UOB’s digital bank aims for a customer base of 3-5m over the next five years, operating at a steady-state CIR of 35%.

SGD0.50/share interim dividend declared – potential for more future dividends.

  • UOB’s 2Q18 CET1 capital adequacy ratio (CAR) of 14.5% was sharply higher than DBS’ (DBS SP, Rating: BUY, Target Price: SGD30.30) 13.6% in the same quarter under review – pointing towards the potential for UOB to dish out more dividends going forward.
  • For 2Q18, the bank declared an interim ordinary dividend of SGD0.50/share. Its commitment is for a dividend payout ratio of 50%, subject to a minimum CET1 CAR of 13.5% and sustainable financial performances.

Maintain BUY and SGD33.30 TP, 25% upside.

  • Our GGM-derived Target Price assumes cost of equity (CoE) of 9.9% and ROE of 12.8% (2Q18 ROE: 12.1%). This yields a target P/BV of 1.42x, which we apply to our forecast FY19 BV of SGD23.51.
  • 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 impairment charges and weaker NIMs.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-03
SGX Stock Analyst Report BUY Maintain BUY 33.300 Same 33.300