United Overseas Bank - CGS-CIMB Research 2018-10-26: S$1bn Net Profit A Quarter; The New Normal?


United Overseas Bank - S$1bn Net Profit A Quarter; The New Normal?

  • If the anticipated loan draw-downs materialise, UOB’s strategy to fund ahead of rising costs will work in its favour. Retain ADD and S$31.00 GGM Target Price.
  • UOB's 3Q18 net profit of S$1.04bn beat our forecast of S$990m and Bloomberg consensus' S$1.0bn; 9M18 at 78%/76% of our/consensus FY18 estimates.
  • We lower our FY18- 20F EPS by c.1% to reflect rising cost of funds.
  • Unchanged 50% dividend payout target is a key catalyst.

Net-Interest-Margin (NIM) focus

  • UOB’s 3Q18 loans grew 2.2% q-o-q, beating our expectation of 1.1% growth, driven by Singapore (+1.9% q-o-q, +4.5% y-o-y) and Greater China (+1.8% q-o-q, +23.1% y-o-y). However, NIM contracted 2bp q-o-q to 1.81% (+2bp y-o-y), below our 1.83% expectation as the rise in deposit costs (+10bp q-o-q) outpaced loan yield growth (+7bp q-o-q).
  • Most of the rise in UOB’s deposit base came in the form of fixed deposits (+4.7% q-o-q), and in S$ (+4.8% q-o-q). The bank has taken a stance to lock in required funding in view of the anticipated loan draw-downs in 3Q18 and continued rise in cost of funds. However, the mismatch in deposit and draw-down timing resulted in the NIM disappointment. We expect this to reverse in 4QF18 in tandem with the delayed loan draw-down. However, to reflect the significant rise in cost of fund, we trim our FY18F NIM to 1.84% (previously 1.85%).

ASEAN exposure and loan growth expectations

  • UOB’s net loans grew 82% in 9M18 and it is on track to meet its mid digit growth guidance. Loan came primarily from Singapore Greater China (+1.8% q-o-q +23% y-o-y).
  • Malaysia had its first 7.5% growth; the political climate and delayed/ cancelled asset spending were Thailand seat with 4.3% q-o-y growth, thanks to clarity in timing and improved Malaysia and Thailand to remain few quarters.
  • On a quarter deposit growth, UOB’s loan-to-stable at 86.9%.
  • We now forecast net 7% previously dips c.1% and FY20F.

Credit cost at 15bp, CTI steady and within target of 44%

  • UOB’s 3Q18 provisions rose slightly to S$95m (+5.6 q-o-q, -57.0% y-o-y) but credit costs held steady at 15bp, below our expected 17bp. NPL ratio improved to 1.6% (2Q18: 1.7%) on sale of a consumer portfolio in Thailand.
  • Total income was down 0.7% q-o-q due to lower loan-related and trade income, but was partly offset by strong NII (+3.6% q-o-q).
  • Staff cost grew 1% q-o-q and 15% y-o-y, related to performance-based incentives. However, JAW remained positive at 0.4% with CTI ratio at 43.4% (2Q18: 43.6%).
  • ROE stood at 11.7%, in line with the guidance of 11.5-12%.
  • Our Target Price implies FY18F P/BV of 1.3x and sustainable ROE of 11.7%.
  • Downside risks could come from a slowdown in ASEAN (ex-Singapore) markets.

Healthy capital position

  • UOB’s CET-14.1% in 3Q18 (2Q18: 14.5%) amid a larger-than-usual base (typically below loan from -1.5% to +1.7% q-o-q in the guided that this asset class and country mix in its credit outside Singapore attracted larger risk weights. Reported ROE/RORWA were at 11.7%/1.99% for 3Q18.
  • We expect dividend to be CET-1 capital ratio and RORWA still exceed management respectively.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-26
SGX Stock Analyst Report ADD MAINTAIN ADD 31.000 SAME 31.000