UOB - DBS Research 2019-05-06: Supported By Strong Dividend Yield


UOB - Supported By Strong Dividend Yield

  • UOB's 1Q19 earnings ahead of consensus estimates, supported by strong lending and trading income.
  • NIM saw a 1-bp q-o-q decline largely on excess liquidity.
  • Stock remains supported by c.4.5% dividend yield.
  • Maintain BUY, Target Price $29.20.

Strong dividend yield offers support.

  • We maintain our BUY call on UNITED OVERSEAS BANK LTD (UOB, SGX:U11) and Target Price of S$29.20 as the stock continues to be supported by a high dividend yield of c.4.5%.
  • We believe that current valuations near 10-year historical mean valuation remain undemanding as UOB is still poised to deliver mid-single-digit earnings growth, backed by stable lending and provisions. UOB tends to outperform in weaker market conditions and has a defensive franchise which is less exposed to volatility in wealth management fees.
  • We believe UOB will continue to leverage on its strong capital position to capture cross-border loan growth opportunities, though overall loan growth is expected to moderate to c.5-6% from c.11% y-o-y in FY18.

Where We Differ:

  • Our earnings forecasts are currently c.2% below market consensus for FY20-21F after factoring in lower loan growth assumptions of c.4-5% and normalised credit costs.

Potential catalyst:

  • Sustained positive deliveries. Further improvement in NIM should support earnings.

Key Risks to Our View:

  • Asset quality trends. Further escalation of trade war may subject some companies to vulnerability. Should asset quality deteriorate, more provisions might be required. In the event that the trade war escalates, it might trigger further risks to loan and fee growth.

WHAT’S NEW - UOB's 1Q19 net profit beat consensus estimates

Earnings grew on strong lending and trading income.

  • UOB’s 1Q19 earnings of S$1,050m (+8 % y-o-y/+15% q-o-q) were above consensus expectations by c.5%. Earnings were driven by strong top-line growth of +8% y-o-y/+9% q-o-q.
  • Expenses grew in line with income growth. Net interest income improved 8% y-o-y/declined 1% q-o-q, with the latter being caused by a 1-bp q-o-q dip in NIM to 1.80% (1Q18: 1.84%) which offset loan growth of 3% q-o-q.

Rebound in non-interest income.

  • Non-interest income improved +8% y-o-y/+35% q-o-q, largely on the back of higher trading income as financial markets rebounded. Notably, net fee income in 1Q19 was 7% lower y-o-y due to lower wealth management and fund management fees seen in 1Q18, but improved +2% q-o-q due to higher loan-related and wealth management fees.

Loan growth saw strong momentum in the quarter.

  • Loan growth of +12% y-o-y/+3% q-o-q was largely led by building and construction loans which saw 22% y-o-y/6% q-o-q growth. Meanwhile, deposits increased 12% y-o-y/5% q-o-q, leading loan-deposit ratio (LDR) to improve q-o-q to 86.6% (1Q18: 86.7%, 4Q18: 88.2%).
  • Growth in deposits was mainly led by Singapore.

Asset quality remains benign.

  • NPL ratio was unchanged at 1.5% (4Q18: 1.5%). New NPL formation stayed at normalised levels of S$230m (1Q18: S$235m, 4Q18: S$370m).
  • Credit costs were in line with expectations at 19bps vs guidance of c.20-25bps (1Q18: 11bps, 4Q18: 20bps), special provisions charges were lower at 13bps (1Q18: 12bps, 4Q18: 22bps) due to lower provisions in Singapore and Indonesia.

Regional performance mixed.

  • With the exception of Thailand which saw 28% PBT growth, performance across Malaysia and Greater China was largely flat while Indonesia saw a 53% decline in PBT, as credit costs spiked for the quarter. UOB continues to build on its Thailand franchise, while seeing moderating growth in Malaysia and Greater China.

Strong capital levels.

  • Capital levels remained strong with CET1 ratio at 13.9%, while Tier-1 CAR and total CAR are at 14.9% and 17.0% respectively, unchanged from the previous quarter.

Key takeaways from analyst briefing

Maintains mid-single-digit loan growth guidance.

  • While 1Q19 saw a 3% q-o-q increase in loan growth in relation to several drawdown of credit facilities approved prior to property cooling measures, loan growth in subsequent quarters are expected to be slower. UOB maintains the mid-single-digit loan growth guidance for the full year, as guided in 4Q18.

Watchful on loan repricing.

  • As 3MSIBOR continues to hold up, there is lag effect in base rate repricing for a portion of loans. However, UOB is seeing some competitive pressures in the last month for mortgages and has stated that it will defend its market share at the right pricing going forward. In the wholesale segment, while UOB has shifted part of the portfolio to FIG customers, which reflects better credit quality, there is also market pressure on pricing.

Still see flattish NIM for FY19F.

  • UOB continues to guide for NIM to be flat for FY19F, despite a 1-bp decline in 1Q19, largely due to excess liquidity. Growth of deposits outpaced that of loans in 1Q19 as a few large government-link corporations placed deposits with UOB.
  • As UOB continues to keep watch on its liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) in the coming quarters and manages excess funds while looking for better opportunities to deploy funds in the markets, the bank continues to be hopeful that NIM may recover slightly in subsequent quarters.

Valuation and recommendation

  • Maintain BUY, Target Price S$29.20. We arrive at our Target Price of S$29.20 based on the Gordon Growth Model (12% ROE, 3% growth, 10% cost of equity). This is equivalent to c.1.2x FY19F P/BV, which is also its average 10-year forward P/BV multiple.
  • We cut our earnings marginally by c.1% on slightly higher cost of funds assumed.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-05-06
SGX Stock Analyst Report BUY MAINTAIN BUY 29.200 SAME 29.200