United Overseas Bank - CGS-CIMB Research 2019-08-03: Will The NIM Expansion Last?


United Overseas Bank - Will The NIM Expansion Last?

  • We expect earnings growth to be supported by resilient (income-protection focused) wealth income and cost control (UOB targets stable 44% CTI).
  • UOB expects two Fed cuts in FY19, but effects likely to be felt in FY20. We adjust for lower NIMs in FY20-21F and raise our market income figures.
  • Maintain ADD on lower GGM-based Target Price of S$29.54.
  • We raise our dividend expectations to S$1.25/share. Valuations inexpensive at 1.1x FY19F P/BV.

Results highlights - stronger wealth and trading, positive NIM

  • UOB (SGX:U11)’s 2Q19 net profit of S$1.17bn was 11% above our forecast of S$1.05bn and 12% above Bloomberg consensus' S$1.06bn. 1H19 net profit made up 51% of our full-year forecast.
  • The beat was mainly due to positive NIM expansion of +2bp q-o-q, even stronger wealth and trading income than the elevated levels seen in 1Q19, as well as lower-than-expected 8bp credit costs on the back of general provision (GP) writebacks. The NIM expansion was driven by its mortgage repricing exercise over 1Q19 and reduced funding costs as fixed deposits shrank 1.8% q-o-q.

2Q19 briefing highlights – FY19 high single digit loan growth

  • UOB remains confident of growth opportunities in the current volatile macroeconomic environment. Although the bank anticipates a more cautious business environment in 2H19, its loan growth expectations were revised to high-single-digit (from mid-single-digit) from pipeline deals and as residual loan drawdowns that were delayed at the height of the trade tensions in 4Q18 come through.
  • In light of ceding housing loan market share over the past year, corrective action to make its mortgage pricing more competitive had stemmed the outflow. Mortgage growth is likely to remain muted in 2H19 given reduced sales volumes in 1H19; Singapore housing loan balances could be flattish y-o-y in FY19.

We cut FY20-21F NIMs on tipping SOR/LIBOR/HIBOR rates

  • UOB’s base case is for two Fed rate cuts in FY19. NIM guidance is maintained at flat for the year at 1.82% as the bank expects a lag in the transmission of the rate cuts into SIBOR. Active management of its funding costs (such as by releasing expensive FDs) is likely to be UOB’s lever to maintain margins.
  • Although UOB could see the largest reduction in funding costs from falling interest rates given its larger 52% proportion of FDs, we cut FY20-21F NIMs by 1bp on account of mounting pressure on asset yields from tipping LIBOR, SOR and HIBOR rates since 2Q19.
  • Key downside risks are sharper-than-expected Fed rate cuts.

We keep our conservative 19bp credit cost in FY19

  • Higher net new NPA formation of S$357m (wholesale and SME, FY18 quarterly avg.: S$283m) stemmed largely from a real estate exposure in the US; provisions taken were minimal given high collaterisation. The S$20m (or 3bp) GP writeback relates to an improvement in the bank’s ECL model validation since the implementation of IFRS 9.
  • UOB expects credit costs to creep up given the slower growth environment.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-03
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