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

UNITED OVERSEAS BANK LTD (SGX:U11)

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%.

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).

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.

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%).

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.

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.

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