United Overseas Bank - CGS-CIMB Research 2019-01-28: Relatively Less Affected By Market Volatility


United Overseas Bank - Relatively Less Affected By Market Volatility

  • UOB’s target mass affluent segment (vs. HNWI) provides stability to wealth management income. UOB’s non-II likely held up better than peers’.
  • We project stronger loan growth from drawdown of previously delayed capex commitments, although lower risk appetite likely impinged on margins.
  • Maintain ADD with higher Target Price of S$32.00. UOB looks comparatively shielded from trade war noise and volatility. CY19 dividend yield of c.5% is attractive.

More stable, recurring fees from wealth management segment

  • We expect UNITED OVERSEAS BANK LTD (SGX:U11) to post a net profit of S$917m in 4Q18 (-11.6% q-o-q, +7.5% y-o-y).
  • While the general risk-off stance seen in 3Q18 likely persisted in 4Q as markets remained volatile, we believe UOB was the least affected by weakened sentiment given its smaller wealth management (WM) franchise compared to peers.
  • UOB’s WM unit targets the mass affluent rather than high net worth individuals (HNWI), thus generating more stable, less market-dependent, recurring fees. 4Q18 likely saw UOB’s non-II holding up better than its peers despite some weakness in other market-related segments, such as trading income.

UOB likely charted stronger loan growth but at NIM’s expense

  • We understand that loan growth was likely a bright spot for UOB in 4Q18 as previously delayed capex commitments were drawn down. However, as credit risk may be heightened in periods of slower economic growth, lower risk appetite would result in the extension of lower-yielding loans.
  • Meanwhile, the build-up of liquidity reserves in anticipation of higher funding costs ahead likely dragged NIM expansion. Recall that UOB started shoring up fixed deposits in 3Q18 as these rates started inching towards c.2% for 6-month placements in 4Q18. We estimate NIMs were flattish at 1.81% in 4Q18, therefore translating into a 5bp y-o-y NIM expansion to 1.82% in FY18.

Maintain ADD with a higher Target Price of S$32.00 (from S$31.00)

  • As we adjust our earnings estimates for lower NIM expansion, our FY18-20F EPS is fine-tuned by -1.8% to 1.4%.
  • Although NIM expansion was likely more modest for UOB given its smaller CASA funding cost shield compared to peers, we think that the bank was relatively shielded against further market weakness given its smaller exposure to market-related fee income and it is well placed to benefit from the displacement of supply chains from Greater China into neighbouring ASEAN countries in the event of escalating US-China trade tensions.
  • We roll over to CY19F and raise our GGM-based Target Price to S$32.00 (1.4x CY19 P/BV). Valuations are attractive; UOB trades below mean at 1.1x CY19F P/BV (ROE: 10.5%) with dividend yield of c.5%.
  • Catalysts/downside risks: stronger loan growth/asset quality pressure from regional markets.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-28
SGX Stock Analyst Report ADD MAINTAIN ADD 32 UP 31.000