UOB - OCBC Investment 2019-05-03: Time To Lock In Some Profits


UOB - Time To Lock In Some Profits

  • Guiding for mid-single digit loans growth.
  • Stock has done well YTD.
  • Buy at lower levels.

UOB's 1Q19 net earnings of S$1.05b

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11) posted 1Q19 net earnings of S$1.05b, up 15% q-o-q and 8% y-o-y, and slightly higher than Bloomberg consensus estimates of S$1.0b.
  • Although Net Interest Income rose 8% y-o-y, it was down 1% q-o-q to S$1.59b. Net Interest Margin (NIM) fell from 1.84% in 1Q18 and 1.80% in 4Q18 to 1.79% in 1Q19. Non-interest Income mitigated this with an 8% y-o-y and 35% q-o-q increase to S$819m. This was largely due to higher trading and investment income.
  • Total income rose 8% y-o-y and 9% q-o-q to S$2.41b. Cost-to-income ratio stayed relatively flat at 44.6%. Allowances rose 17% y-o-y to S$93m, but were down 27% q-o-q.

Guiding for flat margin

  • Management has guided for mid-single digit loans growth and flat margin. While there were opportunities to re-price some mortgage loans earlier in 2019, the situation is still fairly competitive as the mortgage loans market has contracted.
  • With the projected softness in the property market in the months ahead, competition could intensify and the opportunity to re-price would likely diminish.
  • Despite the mixed operating environment outlook, we are still expecting a fairly good year in FY19 with a 8.8% rise in Non-interest Income for the year supported by a slight improvement in fee income and better trading income.

Slight increase in Fair Value to S$28.90; buy at lower levels

  • 1Q19 accounted for about one-quarter of our FY19 estimates (24.4% in 1Q18), and after fine-tuning our projections, we are expecting low single digit net earnings growth.
  • UOB’s share price has done well this year, up 13.3% YTD and up 11.4% (based on 2 May 2019 closing price of S$27.85) since our last update about a month ago on 26 March 2019. See report: SG Banking Sector - It Still Sparks Joy.
  • With the good UOB’s share price performance and as the shares are currently trading close to our revised fair value estimate of S$28.90 (based on the same 1.2x book), up from S$28.30 previously, we are downgrading the stock to HOLD (based on 2 May 2019 closing price).
  • At current UOB’s share price, dividend yield is a healthy 4.3%.
  • We will look to turn buyers at S$27.30 or lower. Please note the shares trade ex-dividend of 70 cents on 6 May 2019.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2019-05-03
SGX Stock Analyst Report HOLD DOWNGRADE BUY 28.90 UP 28.300