United Overseas Bank - RHB Invest 2018-12-14: Dividend Catalyst; Maintain Buy On Top Pick


United Overseas Bank - Dividend Catalyst; Maintain Buy On Top Pick

  • Maintain BUY with SGD30.80 Target Price on our Banks Top Pick, offering 25.0% upside plus 5.1% FY19F yield, tied to a long-term ROE assumption of 12.8%.
  • UOB raised more deposits in 3Q18 ahead of management’s expectations of future rises in deposit rates. The 3-month SIBOR has since risen to 1.77%, from 3Q18’s 1.63%, and we forecast UOB’s NIM to widen to 1.88% in 2019 from 9M18’s 1.83%.
  • UOB could potentially dish out more dividends, given its higher-than-peers CAR.

Expect NIM expansion moving ahead.

  • UOB’s 3Q18 NIM of 1.81% was 2bps narrower q-o-q, due to funding costs rising more than lending yields.
  • UOB raised fixed deposits 5% q-o-q to lock in funding ahead of expected year-end interest rate rises. With the US FFR expected to rise further over the next few quarters, we forecast further rises in 3-month SIBOR, which will raise lending yields. However, the high funding cost is expected to remain.
  • Overall, we forecast UOB’s NIMs at 1.83% and 1.88% for 2018 and 2019.

Mid to high single-digit loan growth for 2019.

  • UOB’s 3Q18’s 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%. 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%.
  • 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. CIR fell to 43.4% from 2Q18’s 43.6%.

Potential for more dividends.

  • UOB’s 3Q18 CET1 capital adequacy ratio (CAR) of 14.1% is higher than its two peers’ average of 13.5% – management maintains its commitment for a dividend payout ratio of 50%, subject to minimum CET1 CAR of 13.5% and sustainable financial performances.

Maintain BUY with SGD30.80 Target Price.

  • Our GGM-derived UOB’s target price assumes CoE 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.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 30.800 SAME 30.800

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