United Overseas Bank - RHB Invest 2019-04-24: Expect Higher Net Interest Income; Retain BUY


United Overseas Bank - Expect Higher Net Interest Income; Retain BUY

  • Whilst 1Q19 NIM could be relatively flat sequentially, net interest income is expected to expand. We believe our long-term ROE assumption of 12.5% (vs 2018’s 11.3%) is achievable given stronger net interest income in 2019 in addition to longer-term digitisation-driven cost efficiencies.
  • Still a Country and Sector Pick (see report: Singapore Equity Strategy - Headwinds Persist; Stick With Quality!); BUY with higher SGD30.80 Target Price from SGD29.80, based on 2020F P/BV of 1.29x, giving 14% upside plus 5% yield.
  • We spoke with UNITED OVERSEAS BANK LTD (UOB, SGX:U11) management and highlight the takeaways here.

Lending yields helped by higher home mortgage interest rates, but offset by competition in corporate space.

  • Riding on a rising SIBOR, home mortgages linked to the board rate were raised by 50bps in batches from Jan 2019 onwards – which will help strengthen 1Q19 lending yields. However, in the corporate space, very strong competition offset this gain. UOB also took in more deposits in the later part of 2018, which has kept cost of funds high.
  • Overall, management expects 1Q19 NIM to be flattish q-o-q. UOB sees limited room for NIM enhancement in 2Q19, due to loan competition and UOB’s preference for high-quality, lower yielding loans.

2019 mid single-digit loan growth on target.

  • In 1Q19, loan expansion will likely be driven by the building & construction sector and progressive drawdown of mortgages – this should drive net interest income growth.
  • Loan-related fees grew – on the back of 1Q19 loan expansion. Wealth management fees should also have expanded q-o-q. Customer flows helped the expansion in 1Q19 trading & investment income.

Our long-term ROE assumption is 12.5%.

  • In February, management guided for 2019F ROE of 12% vs 2018’s 11.3%. Digitisation efforts should contribute to further ROE enhancement over the next few years. We have assumed a long term ROE of 12.5%.
  • Our Target Price is raised by 3% to SGD30.80 as we roll over our P/BV valuation to 2020F.
  • 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/ 2019-04-24
SGX Stock Analyst Report BUY MAINTAIN BUY 30.80 UP 29.800