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


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%.

Earnings in line.

  • 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.

3Q18 saw a sequential NIM dip.

  • 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.

Expect NIM expansion going forward.

  • 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.

The 2% q-o-q loan expansion was positive.

  • 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%.

CIR fell to 43.4% from 2Q18’s 43.6%.

  • 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.

Potential for more dividends.

  • 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.

Maintain BUY with a new SGD30.80 Target Price from SGD33.30.

  • 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.

Expect NIM to widen from 3Q18’s levels.

  • 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