United Overseas Bank - CGS-CIMB Research 2019-05-04: Deposit War Chest


United Overseas Bank - Deposit War Chest

  • FY19-21F EPS raised 2-3% on lower impairment provisions and stronger trading income. FY19F credit costs lowered to 19bp on better asset quality.
  • Despite a 1bp q-o-q NIM compression, we think 8% income growth is decent.
  • We forecast UOB's FY19F loan growth to be slightly above its mid-single digit guidance of 5.5%, but expect flattish NIM (vs. 2bp previously).
  • Maintain ADD with higher GGM-based Target Price of S$29.58. Valuations are attractive at 1.2x P/BV (below 12yr mean of 1.3x) with dividend yield of 4.3%.

Lower specific provisions, NPA formation down q-o-q, y-o-y

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11)'s 1Q19 asset quality was better as new NPA formation was lower at S$230m (vs. quarterly average of S$283m in FY18).
  • Credit costs improved from 16bp in FY18 to 14bp in 1Q19, thanks to write-back in provisions owing to a non-loan contingent exposure; excluding this, credit costs would have been 19bp. Management thinks 1Q19 credit cost could be a norm but keeps its conservative target of 20-25bp for FY19.
  • With specific provisions trending lower to 13bp (FY18 quarterly average: 15bp), we reduce our FY19 credit cost assumption to 19bp (from 21bp).

We project FY19 loan growth of 5.5%, vs. mid single-digit guidance

  • UOB’s strong 3% q-o-q loan growth in 1Q was supported by drawdowns of committed property-related loans prior to the cooling measures introduced mid-2018.
  • Demand for new mortgages and refinancing has since slowed down, but we think full-year growth may exceed the bank’s mid-single digit expectations from corporate pipeline loans. This can be seen from the off-balance sheet commitments (+S$4bn q-o-q) over the past year.

NIM compressed 1bp q-o-q on the back of 8.4% q-o-q FD growth

  • Although the rise in loan yields (+12bp) edged over that of deposit costs (+11bp) in 1Q19, NIM expansion was ultimately limited by the robust 5% q-o-q deposit growth. LDR dropped to 86.6% as UOB replaced commercial papers issued in 4Q18 with fixed deposits (FDs).
  • Most of the FDs were placed by Singapore government linked companies, which have short 3-6mth tenures; we believe that there is NIM upside in 2H19 as the FDs run off.
  • NIM was flat in Singapore, rose 7bp in Indonesia, and contracted in Malaysia, Thailand and Greater China. We tone down our FY19-21F NIM to 1.82% (from 1.84-1.85%).

Need another +4bp to reach guidance of flat NIM y-o-y

  • With the anticipated lower q-o-q loan growth (c.+1%/quarter) from 2Q19F, we believe upcoming deposit growth need not be as aggressive. The pick-up in industry CASA may also cap funding pressures. Management still hopes to reprice mortgages despite the increasing competitive pressure to maintain market share amid reducing volumes.

Maintain ADD, with a higher Target Price of S$29.58

  • With our EPS revision, our Target Price rises to S$29.58; implied 1.3x P/BV, 11.5% ROE.
  • Potential catalyst is a sustained increase in NIMs. Downside risk is a Fed rate cut.

Strong non-II from SG, but a slight dent in profits from regional ops

  • UOB’s 8.6% q-o-q and 7.9% y-o-y increase in total income was supported by a very strong rebound in treasury income and lower credit costs, which offset the 1.3% q-o-q dip (+8% y-o-y) in NII. Wealth and trading income lines benefited from improved customer sentiment and buoyant markets.
  • UOB’s strong loan growth consequentially drove up loan-related income (1Q19: S$154m), boosting non-II as a whole. That said, contributions to net fee income (both loan-related and from wealth management) from the bank’s Malaysian operations were visibly affected by lower transaction volumes amid weak sentiment sustained since the nation's general elections.
  • In 1Q19, UOB had also incurred higher impairment provisions for its Indonesian operations, i.e. stage 1 and 2 provisions under IFRS 9. Although denting Indonesian profits slightly, this exercise aligns its provisioning practices closer to the group's average – thus smoothening out its credit costs going forward.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-04
SGX Stock Analyst Report ADD MAINTAIN ADD 29.58 SAME 29.000