UNITED OVERSEAS BANK LTD (SGX:U11)
United Overseas Bank - Resilience In A Volatile Environment
- We expect UOB’s mortgage rate repricing to support NIM expansion.
- Potential Fed rate cut should not have a material impact on FY19’s NIM due to the lagged effect of loan repricing
- Least exposed to trade war effects from Greater China and Hong Kong.
- Maintain ACCUMULATE with an unchanged target price of S$30.90.
Company Background
- UNITED OVERSEAS BANK LTD (UOB, SGX:U11) was founded in 1935 and has a well-established regional presence in Singapore, Malaysia, Indonesia, Thailand and China.
- In Singapore, UOB is a market leader in credit and debit cards and loans to SMEs. UOB provides a full suite of financial services: corporate and commercial banking services, investment banking and treasury services, transaction banking services and personal wealth management.
Investment Merits/Outlook
End of interest rate cycle.
- We believe the pause in interest rate hikes from the U.S. will limit the upside for NIM expansion. As we reach the end of the interest rate cycle, 2Q19 results may be the last NIM rally for the year. Nonetheless, we expect UOB’s mortgage rate repricing to support NIM expansion. We forecast full-year NIM of 1.82%, in line with flat NIM guidance.
Lagged impact from higher interest rates.
- If the fed starts cutting rates this year, there should not be material impact on FY19’s NIM due to the lagged effect of loan repricing but FY20’s NIM may be cut back as a result. We maintain NIM for FY19e at
Tepid loans growth expectations.
- Latest statistics from MAS showed sluggish domestic loans growth of 2.08% y-o-y for May. One caveat would be mortgage shrinkage in Singapore. The property cooling measures creates a risk of intensifying mortgage competition amongst banks which may result in NIM disappointment.
- UOB’s proportion of mortgage loans to total loans stands is the largest at 25% (DBS: 21% and OCBC: 25%). We pen in FY19e loans growth estimate at 5.9%, in line with the mid-single-digit guidance.
Least exposed to trade war repercussions.
- UOB’s exposure to trade war effects is relatively muted as compared to its peers. As of 1Q19, UOB’s exposure to Greater China and Hong Kong loans is 16% (DBS: 30% and OCBC: 24%).
- UOB's wealth management business could be less affected by market volatility due to its target audience being the mass affluent, which generates a more recurring and stable management fee.
Long term beneficiary of the potential shift in supply chain investment and capacity strategy into SEA.
- There has been widespread sentiment that businesses’ supply chain may shift from China into ASEAN to avoid trade war repercussions as well as to ride on the back on the region’s growth. A rise in businesses investments in SEA could provide greater volume to UOB’s regional franchise. The bulk of UOB’s loan book is anchored out of SEA, with the majority belonging to Singapore (52%). However, a shift in requires more than just a few years.
Recommendation
- Maintain ACCUMULATE rating with an unchanged target price of S$30.90 based on Gordon Growth Model. We like UOB because of
- NIM support as interest rates remain elevated in its key markets,
- attractive yield, and
- least exposed to trade war effects from Greater China and Hong Kong.
Tin Min Ying
Phillip Securities Research
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https://www.stocksbnb.com/
2019-07-12
SGX Stock
Analyst Report
30.900
SAME
30.900
