UOB - OCBC Investment 2019-02-25: Challenging Conditions, But Earnings Intact

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - Challenging Conditions, But Earnings Intact

UNITED OVERSEAS BANK LTD (SGX:U11, UOB) posted 4Q18 net earnings of S$916m, up 7% y-o-y and down 12% q-o-q. This brings full year earnings to S$4008m, just slightly below Bloomberg consensus of S$4038m. Weakness in 4Q18 earnings is widely expected, especially with the weakness in global markets late last year.

UOB's 4Q18 Net Interest Income rose 10% y-o-y and 1% q-o-q to S$1461m. However, Non-interest Income was down 21% y-o-y and 17% q-o-q to S$607m.
Net Interest Margin eased off 1bp from the last quarter to 1.80% this quarter (1.77% in FY17 and 1.82% in FY18). Allowances went up from S$34m in the previous quarter to S$128m.
UOB's NPL ratio came off from 1.6% last quarter to 1.5% this quarter. Management declared a final special dividend of 20 cents and a final dividend of 50 cents, bringing final total dividend to 70 cents or full year dividend of $1.20 (versus total of S$1.00 in FY17).

Management remains fairly positive on the longer term growth prospects in Asia as well as the stability of its business. While challenges remain in the regional operating environment, management is confident of growing its loans by mid-single-digit in 2019. There is also room for NIM to improve from current level, largely due to the re-pricing of mortgage loans this year.
In terms of cost-to-income, it went up slightly to 43.9% in FY18 and management is aiming to maintain this at 44%. It will also continue to invest in technology, especially in cash management, wealth and trade.
For ROE guidance, this is expected to be 12% this year versus 11.3% in FY18.

Market trading activity has picked up since the start of the year, but we believe that the operating environment will remain volatile. As such, we have moderated our UOB's earnings estimates for FY19, cutting our net earnings estimate from S$4359m to S$4260m.
As we roll our valuation into FY19, and based on our revised estimates and same valuation of 1.2x book, our fair value estimate drops slightly from S$28.80 to S$28.30.
Based on a 42% payout ratio, our DPS estimate is S$1.30. At S$25.58, this means dividend yield of 5.1%.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2019-02-25

SGX Stock Analyst Report BUY MAINTAIN BUY 28.300 DOWN 28.800