United Overseas Bank - RHB Invest 2019-02-22: Special Dividend Amidst Stronger NII But 4Q18 NIM Fails To Excite; BUY


United Overseas Bank - Special Dividend Amidst Stronger NII But 4Q18 NIM Fails To Excite; BUY

  • Maintain BUY with unchanged Target Price of SGD29.80 – pegged to 2019F P/BV of 1.35x. This grants 15% upside plus 5% FY19F yield, based on our long-term ROE assumption of 12.9% (ahead of management’s 2019 ROE guidance of ~12%), which we think achievable from NII growth and efficiencies from digitisation.
  • UOB is our Top Pick for SG Banks, and we believe UOB's share price weakness after the results’ release offers a good entry point.

Results in line with expectations.

  • UNITED OVERSEAS BANK LTD (SGX:U11, UOB)’s 4Q18 results were in line with expectations. 2018 net profit of SGD4.01bn was up 18% y-o-y – close to our forecast of SGD4.16bn and consensus’ SGD4.05bn.
  • 4Q18 net profit rose 7% y-o-y, but was down 12% q-o-q. The y-o-y improvement was attributed to higher NII (+10% y-o-y), but was partly offset by a 4Q18 net loss from investment securities vis-à-vis slight gains in 4Q17. The sequential earnings decline was largely due to the investment securities net loss.
  • Capital position remains strong, with the CET1 capital adequacy ratio at 13.9%, similar to the levels for its other two peers.

Upward bias for NIM in 2019.

  • 4Q18 NIM of 1.80% was 1bp narrower y-o-y and q-o-q. While asset yields rose, cost of funds rose slightly more. Singapore NIM was unchanged q-o-q at 1.49%. Management guided 2019 NIM to be flattish y-o-y, with an upward bias.
  • Loans are repriced with a lag of about three months, and UOB sees home mortgage upward repricing helping to raise asset yields. We forecast 2019 NIM of 1.84%, vs 2018’s 1.82%.

Guidance of mid single-digit 2019 loan growth.

  • 4Q18 loans expanded 11% y-o-y and 3% q-o-q, driving up NII. Loan drawdown was muted after the Jul 2018 property cooling measures.
  • Management guided for fees to expand by mid single-digits in 2019.

Expect CIR to remain at ~44% in the near term.

  • 2018 CIR was 43.9%, up marginally from 2017’s 43.7%.
  • Whilst we believe CIR will improve across all banks over the longer term, as digitisation efforts lower costs, management guided for ~44% in the near term.

Attractive dividend yield.

  • UOB declared a final dividend of SGD0.50/share and special dividend of SGD0.20/share.
  • 2018 total dividend of SGD1.20 gives an attractive yield of 4.6%. The scrip dividend will not be applied.

Our long-term ROE assumption is 12.9%.

  • This is higher than UOB’s 2018 ROE of 11.3%, and management guidance for 2019 ROE of ~12%. Our CoE assumption is 10.4%, yielding a target P/BV of 1.35x – applying this to our 2019F BV results in our Target Price of SGD29.80.
  • We believe the slight premium over its 5-year historical average P/BV of 1.25 is justified, given the rising NII trend, and more efficiencies from its digitisation efforts.
  • Downside risks to our forecasts include higher impairment charges and an-expected NIM.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 29.800 SAME 29.800