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

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - Time To Lock In Some Profits

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.

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.

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