United Overseas Bank - RHB Invest 2018-10-26: Dividend Play Despite Sequential NIM Narrowing; BUY

UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank - Dividend Play Despite Sequential NIM Narrowing; BUY

Maintain BUY with a new SGD30.80 Target Price from SGD33.30, 24% upside, tied to a long-term ROE assumption of 12.8% from 13%.
UOB’s 3Q18 net profit of SGD1.04bn was in line.
While the 2bps q-o-q NIM compression disappointed, management attributed this to increases in deposits ahead of future rises in deposit rates. With a rising SIBOR, we expect NIM to widen to 1.88% in 2019 from 9M18’s 1.83%.

United Overseas Bank’s 3Q18 net profit stood at SGD1.04bn (-4% q-o-q, +17% y-o-y). The key driver to y-o-y earnings growth was NII, which rose 14% y-o-y.

United Overseas Bank’s 3Q18 NIM of 1.81% was 2bps narrower q-o-q, but 2bps wider y-o-y. As the 3Q18 average 3-month SIBOR was up 12bps q-o-q, we saw UOB’s overall yields rise 7bps q-o-q to 3.31%. However, this was more than offset by the rise in funding costs.
During the analysts teleconference today, UOB said it raised fixed deposits 5% q-o-q to lock in funding ahead of expected year-end interest rate rises.
Singapore NIM fell 2bps sequentially to 1.49%, while Malaysia and Indonesia NIMs also narrowed sequentially.

With the US federal fund rate expected to rise further over further rises in 3-month SIBOR, which will raise lending yields. However, is expected to remain.
Overall, we forecast UOB’s NIMs at 2019.

Leading the sequential loan increase were building & construction loans (+4% q-o-q) – UOB mainly lends to high-quality developers. Overall loans recorded a YTD increase of 8%. Consequently, NII was up 4% q-o-q and 14% y-o-y.
Management guided for 2019 loan growth of mid-to-high single-digits. In any case, we are conservative on our 2018F-2019F loan growth for UOB: 10% and 6.5%.

United Overseas Bank’s 9M18 staff costs rose 14% y-o-y, attributed to more accrued variable bonuses.
Management sees CIR falling closer to the 40% level, as digital efforts lower processing costs and revenue rises with higher interest rates and more economies of scale.

United Overseas Bank’s 3Q18 CET1 capital adequacy ratio (CAR) of 141% is higher than its other two peers’ 2Q18 average of 13.4% – management sees no change to its commitment for a dividend payout ratio of 13.5% and sustainable financial performances.

Our GGM-derived Target Price assumes cost of equity of 9.9% and ROE of 12.8% (3Q18 ROE: 11.7%). This gives a target P/BV of 1.41x, which we apply to 2019F BV of SGD21.81.
We believe the P/BV premium over the 5-year historical average of 1.24x is justified by the future NIM improvements.

Whilst 3Q18 asset yields were up 7bps q-o-q to 3.31%, this was more than offset by funding costs rising 9bps q-o-q to 1.81%. Management indicated that it has locked in funding early, as deposit costs typically rise towards the end of the year.
The increase in fixed deposits (+5% q-o-q) was more aggressive in August and September. As such, management expects funding costs to rise further in 4Q18, but higher lending yields should help widen 4Q18 NIM sequentially.
We are forecasting a 2018 NIM of 1.83%, similar to 9M18’s NIM of 1.83%. We forecast NIM to widen further to 1.88% in 2019.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-10-26

SGX Stock Analyst Report BUY MAINTAIN BUY 30.80 DOWN 33.300