United Overseas Bank - RHB Invest 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.

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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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%.

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%.

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%.

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.

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