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


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 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 0 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 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