UOB - OCBC Investment 2018-08-06: Good Company, Bad Trade Situation

UOB - OCBC Investment Research 2018-08-06: Good Company, Bad Trade Situation UNITED OVERSEAS BANK LTD SGX:U11

UOB - Good Company, Bad Trade Situation

  • Broad-based 2Q growth.
  • Interim dividend of 50 cents.
  • Fair Value raised to S$32.09.

Better than expected 2Q

  • UOB delivered 2Q18 net earnings of S$1077m, +28% y-o-y and +10% q-o-q, and better than the street’s estimate of S$976m. The outperformance came from a strong improvement in Net Interest Income which rose 14% y-o-y and 5% q-o-q. In addition, Non-interest Income also grew 5% q-o-q to S$800m.

~ SGinvestors.io ~ Where SG investors share

  • Allowances fell 50% y-o-y, but were up 14% q-o-q to S$90m. Net Interest Margin (NIM) eased off slightly from 1.84% in the previous quarter to 1.83% this quarter, but this is still an increase over 1.75% in 2Q17. Cost-to-income ratio improved from 44.2% in 1Q18 to 43.6% in 2Q18.
  • Management has declared an interim dividend of 50 cents (versus 35 cents in 2Q17), and this is payable on 28 Aug 2018.
  • Together with the 2Q results, UOB also announced that it is launching its Digital Bank which aims to build a customer base of 3-5m in the next 5 years operating at a steady state cost-to-income ratio of 35%.

Trade tensions add to uncertainty

  • While 2Q18 showed healthy contribution from its business units with broad-based growth, heading into the 2H of the year, the key focus will be on the trade situation and the potential impact on regional growth.
  • In Singapore, one of the key concerns is the impact from the property cooling measures on 2019. Management is guiding for high single-digit loans growth, and higher rates ahead will be positive for NIM and management is expecting NIM to hold at current level (1.83%) or higher. NPL ratio is likely to stay stable at around 1.7%.

Upping Fair Value from S$31.02 to S$32.09

  • We have fine-tuned our earnings estimates for FY18, raising it marginally from S$4007m to S$4030m.
  • We expect cost-to-income ratio to go up marginally in FY18/19 due to its plan to launch a Digital Bank. Management’s dividend payout ratio is 50%. Based on annualized amount, current payout is below 50% and there is a good likelihood that dividend in 2H could be higher.
  • We have also raised our fair value estimate from S$31.02 to S$32.09 as we roll into a blended FY18/19 valuation.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2018-08-06
SGX Stock Analyst Report BUY Maintain BUY 32.09 Up 31.020