United Overseas Bank - RHB Invest 2018-09-28: More NIM Widening From Rising Federal Fund Rate; Maintain BUY

SGinvestors.io

UNITED OVERSEAS BANK LTD SGX:U11

United Overseas Bank - More NIM Widening From Rising Federal Fund Rate; Maintain BUY

• Reiterate BUY and SGD33.30 Target Price, 24% upside.
• The most critical catalyst is the rising US federal funds rate (FFR) trend – the Federal Open Market Committee (FOMC) raised the rate 25bps on 26 Sep and indicated the possibility of another 4 more hikes by end-2019. 
• After July’s property cooling measures, subsequent good sales in new property launches should allay fears of slowing mortgage loan growth.
• We believe UOB’s plan for a digital bank will also be positive for long-term growth.

Expect widening NIMs.

• The Federal Open Market Committee (FOMC) raised the US federal funds rate (FFR) by 25bps on 26 Sep. The FOMC dot-plot points to another FFR hike in December, with three more following in 2019.

~ SGinvestors.io ~ Where SG investors share

• From an average of 1.51% in 2Q18, the 3-month SIBOR has risen to an average of 1.63% in 3Q18, representing a 12bps q-o-q rise. This will help to widen the 3Q18 NIM for the banks under our coverage (SG Banks), including United Overseas Bank. There is also a historical positive correlation between the FFR and 3-month SIBOR – this is likely to continue driving the 3-month SIBOR in the quarters ahead.
• From UOB’s 2Q18 NIM of 1.83%, we forecast NIMs of 1.85% for 2018, rising further to 1.92% in 2019.

Recent indications point to the Government’s property-cooling measures on mortgages having limited impact.

• The Government’s property cooling measures in early July led to investor concerns over the future trend of mortgage growth. However, recent launches were well received, with indications that the JadeScape project sold ~330 units in September. This initial signal points towards the property cooling measures’ limited impact on banks’ mortgage growth.
• In any case, we are conservative on our 2018F- 2019F loan growth for UOB: 8% and 6.5%. ~ S G investors . io ~ Where SG investors share

Potential for more dividends.

• The bank’s CET1 capital adequacy ratio (CAR) of 14.5% is higher than its other two peers’ average of 13.4% – this provides scope for UOB to dish out more dividends ahead. Its commitment is for a dividend payout ratio of 50%, subject to minimum CET1 CAR of 13.5% and sustainable financial performances.
• UOB is pressing on with a digital bank, which will be made simple, engaging, and transparent. We are optimistic on its proposed scale of five countries, 3-5m customers, and steady-state CIR of ~35%. In the meantime, we await more implementation details. ~ S G investors . io ~ Where SG investors share

Reiterate BUY and SGD33.30 Target Price, 24% upside.

• Our GGM-derived Target Price assumes cost of equity (CoE) of 9.9% and ROE of 13% (2Q18 ROE: 12.1%). This gives a target P/BV of 1.45x, which we apply to a 2019F BV of SGD22.94. We believe the P/BV premium over the 5-year historical average of 1.24x is justified by the improving NIM environment.
• UOB’s share price underperformance relative to DBS share price (SGX:D05; Rating: BUY; Target Price: SGD30.30) over the past 12 months points towards catch-up potential.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-09-28

SGX Stock Analyst Report BUY Maintain BUY 33.300 Same 33.300