United Overseas Bank - Maybank Kim Eng 2019-05-15: Waiting For The Inflection


United Overseas Bank - Waiting For The Inflection

NIMs disappointed in 1Q19. This will change.

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11)’s NIMs disappointed - again. While we expected that margins will finally begin to move higher, like its peers, NIMs fell 5bps. This was primarily driven off pre-funding efforts by management as a means to mitigate rising interest rates.
  • With the US Fed subscribing to a more dovish rate outlook, we believe UOB may curtail further pre-funding. This should provide the catalyst UOB needs to see a NIM inflection going forward.
  • Following 1Q19 results, we lowered 2019-2021E core-earnings by 1-2% to reflect actual results and higher macro risks.
  • Our multi-stage DDM (COE 9.7%, 3% terminal) based target price has been lowered 2.5% to SGD28.97. With 15% upside, maintain BUY.

NIM inflection

  • UOB’s funding costs increased 49bps y-o-y in 1Q19. An 8.4% q-o-q increase in higher cost FDs vs just a 1% q-o-q increase in lower-cost CASA was a primary contributor here as it sought to build liquidity ahead of rising interest rates. With the current interest rate outlook more benign we don’t expect a repeat in 2Q19.
  • In fact, management claims it has sizably reduced new deposit acquisitions so far this quarter. As a result, we believe UOB’s NIM should start to see positive momentum going forward. We estimate overall NIMs will rise 4bps y-o-y in 2019E (down from earlier estimate of 5bps y-o-y, following adjustment for actual results).

Digital potential

  • UOB launched its branchless, digital bank “TMRW” in Thailand in 1Q19. Management claims 290k App downloads so far with significant customer engagement. We believe a successful execution of this platform will enable UOB to scale in other, similar under-banked markets, such as Indonesia and Vietnam quickly and effectively providing a new avenue for revenue generation at a lower cost base.

Slightly lower Target Price. Maintain BUY

  • While credit charges came in at the lower end of guidance, we have raised provisioning costs by 5-11% given increased macro uncertainty. Together with adjustments for 1Q19 actual results, we have lowered 2019-2021E earnings by 1-2%.
  • We remain positive on the shares with 15% upside to our revised Target Price, reiterate BUY.
  • See also sector report: Singapore Banks - Through the Fog Of War

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-15
SGX Stock Analyst Report BUY MAINTAIN BUY 28.97 DOWN 29.710