UOB - DBS Research 2019-02-25: Buoyed By Dividend Yield


UOB - Buoyed By Dividend Yield

  • UOB's 4Q18 results weighed down by lower non-interest income. 
  • Loan growth strong at 11% y-o-y for FY18; NIM declined 1bps in 4Q18 as funding costs continued to see pressure. 
  • Final and special dividends of S$0.70 declared in line with expectations, bringing total dividend per share to S$1.20 (FY17: S$1.00). 
  • Maintain BUY, Target Price lowered to S$29.20 following earnings cut. 

Defensive franchise with dividend yield support.

  • We maintain our BUY call on UNITED OVERSEAS BANK LTD (SGX:U11, UOB) as we believe valuations are undemanding at c.1.1x FY19F P/BV, near 1SD below its average 10-year forward P/BV multiple. The stock is also supported by high dividend yield of c.5%.
  • UOB tends to outperform in weaker market conditions and has a defensive franchise which is less exposed to volatility in wealth management fees as its customers invest mostly in non-leveraged products.
  • Entering FY19, we believe UOB will continue to leverage on its strong capital position to capture loan growth opportunities, though to a lesser extent than in FY18 when it delivered c.11% y-o-y loan growth.

Where We Differ:

  • Our earnings forecasts are currently below market’s consensus as factor in lower loan growth assumptions of c. 5% for FY19-20F.

Potential catalyst:

  • Sustained positive deliveries. Further improvement in NIM should support earnings.

Key Risks to Our View:

  • Asset quality trends. Further escalation of trade war may subject some companies to vulnerability. Should asset quality deteriorate, more provisions might be required. In the event that the trade war escalates, it might trigger further risks to loan and fee growth.

WHAT’S NEW - 4Q18 results weighed down by lower non-interest income

4Q18 results weighed down by lower non-interest income.

  • UOB's FY18 net profit was 18% higher y-o-y at S$4.0bn, in line with consensus.
  • For the quarter, net profit was 7% higher y-o-y and 12% lower q-o-q at S$916m, supported by net interest income (+10% y-o-y/+1% q-o-q) and offset by lower net fee income (- 8% y-o-y/-4% q-o-q) where higher credit card fees were offset by lower wealth management and loan-related fees. Other income was also weighed down by unrealised mark-to-market on investment securities.

Loan growth momentum continues; NIM declined 1bp q-o-q.

  • Loan growth came in at 3% q-o-q, 11% y-o-y. NIM for the quarter at 1.80% was 1bp lower q-o-q, primarily due to higher cost of funds, and saw an improvement of 5bps over FY18 (1.82% for FY18).
  • Specifically, UOB had used commercial paper issuances to buffer funding in 4Q18 and has since went back to the market to garner deposits in 1Q19.

New NPA formation is slightly higher at S$609m.

  • New NPA formation is slightly higher at S$609m for 4Q18 (post 4Q17 normalised levels averaged at c.S$442m for the last three quarters). Special allowances were higher q-o-q at 22bps (3Q18: 15bps) mainly on Singapore and Indonesia assets.
  • FY18 total credit costs remained low at 16bps (FY17: 28bps). NPL ratio declined slightly to 1.5% (3Q18: 1.6%).

Final DPS of S$0.70 in line with street expectations.

  • The final DPS declared comprises a final dividend of S$0.50 and a special dividend of S$0.20. Total dividends declared for the year: S$1.20 (FY17: S$0.80 dividends + S$0.20 80th anniversary dividends).
  • UOB continues to reiterate its dividend policy of c.50% payout ratio, subject to CET1 ratio of 13.5% and sustainable business performance.

Strong capital levels.

  • Capital levels remained strong with CET1 ratio at 13.9%.
  • UOB’s capital levels are in line with peers’, at between 13.9% and 14.0%. Tier-1 CAR and total CAR are at 14.9% and 17.0% respectively.

Key takeaways from analyst briefing

Guidance into 2019.

  • UOB has lowered its loan growth guidance from mid-to-high to mid-single digit, in view of macroeconomic conditions. Cost-to-income ratio is expected to remain stable at 44% in the near term as it continues to drive cost-to-income ratio lower on digitalisation and cost efficiencies.

Bright spot in NIM improvement to come from mortgages.

  • UOB continues to see some upward bias for NIM in FY2019 amid challenging markets as regional markets’ margins continue to face pressure from higher cost of funds. A bright spot could come from mortgages where there may be room to price up further.

Normalising credit costs.

  • UOB expects higher credit costs at 20- 25bps amid slower growth environment (FY18: 16bps). In particular, the higher credit costs seen in 4Q18 was due to some chunky cases in Singapore and Malaysia across various sectors including Coastal Oil’s exposure (which has been fully provided for).
  • UOB has also written off some older oil and gas loans during the quarter.

Updates on Evergrowing bank.

  • According to UOB, regulators are still investigating Evergrowing’s books. In the meantime, the management team has changed and UOB believes that progressive changes are in the right direction.
  • UOB had mentioned in previous quarters that it does not expect significant impact on its books as the bank took a significant discount to Evergrowing’s net tangible assets when valuing the investment on its books.

Valuation and recommendation

Maintain BUY, Target Price revised to S$29.20.

  • We arrive at our revised Target Price of S$29.20 based on the Gordon Growth Model (12% ROE, 3% growth, 10% cost of equity). This is equivalent to c.1.2x FY19F P/BV, which is also its average 10-year forward P/BV multiple.
  • We cut our earnings marginally by c.5% on lower income expectations going forward.

Sue Lin LIM DBS Group Research | https://www.dbsvickers.com/ 2019-02-25
SGX Stock Analyst Report BUY MAINTAIN BUY 29.20 DOWN 29.500