United Overseas Bank Limited - Phillip Securities 2019-08-05: Steady Growth Amidst Uncertainties

UNITED OVERSEAS BANK LTD (SGX:U11) | SGinvestors.io UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank Limited - Steady Growth Amidst Uncertainties

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11)'s 2Q19 revenue/PATMI, were in line with our estimates.
  • NIM fell 2bps y-o-y due to higher cost of funding with an increase in pricier fixed deposits (+7% y-o-y). LDR healthy at 88.5% (2Q18: 85.7%).
  • Loans surprised on the upside by rising 9% y-o-y, led by a broad-based increase across all territories and industries.
  • Fee income rebounded (+6% y-o-y) after two quarters of contraction due to strong wealth management, credit cards and loan-related fees growth.
  • Allowances fell 44% y-o-y due to write-back in allowances on non-impaired assets. NPL ratio healthy at 1.5% (2Q18: 1.7%).
  • Declared a higher interim dividend of 55 cents per share (1H18: 50 cents per share).
  • Maintain ACCUMULATE with a lower target price of S$28.60 (previously S$30.90). Our Target Price is based on target price-to-book of 1.3x, derived from the Gordon Growth model. We toned down terminal growth from 2.5% to 2.0% and raised beta from 1.1x to 1.2x. We lowered our NIM and loan growth forecasts, resulting in a slightly lower ROE assumption of 11.2% (previously 11.4%).



Positives


Recovery in fee income (+6% y-o-y) after two quarters of contraction,

  • due to strong wealth management (+21% y-o-y), credit cards (+12% y-o-y) and loan-related (+10% y-o-y) fees growth. We expect growth to stem from WM as AUM rose 9% y-o-y, reaching $118bn on the back of rising affluence across SEA, with 60% of UOB’s AUM originating from overseas customers.
  • Meanwhile, net trading income grew 14% y-o-y to S$245mn and gains from investment securities rose to $67mn from a low base of $1mn a year ago.

Credit costs for impaired loans stable at 11 bps, unchanged y-o-y.

  • Overall credit costs fell 5bps y-o-y to 8bps due to a write-back in allowances on non-impaired assets. New NPL formation remained at normalised levels at $230mn (2Q18: $252mn, 1Q19: $230mn). Asset quality remained resilient with NPL ratio at 1.5% (2Q18: 1.7%). We forecast FY19e credit costs of 19bps.

Continued momentum in loans growth at 9% y-o-y,

  • led by a broad-based increase across all territories and industries. However, housing loans contracted for the first time in four years at -0.4% y-o-y due to property cooling measures and intense price competition.
  • Geographically, loans growth was mainly contributed by Singapore (+9% y-o-y), Thailand (+15% y-o-y) and Greater China (+12 y-o-y). In the meantime, deposits grew 6% y-o-y, resulting in an improvement in LDR% to 88.5% (2Q18: 85.7%).
  • We forecast a more conservative FY19e loan growth of 5.1% (previously 5.7%) due to slowing economic growth.


Negative


NIM came in at 1.81%, contracting 2bps y-o-y but up 2bps q-o-q.

  • The y-o-y contraction was due higher cost of funding from a 7% increase in pricier fixed deposits. However, NIM expanded on a q-o-q basis, due to loan repricing and the release of excess fixed deposits (- 2% q-o-q) as guided last quarter.
  • UOB guided 2H19 NIM at a similar level to 1H19 with a blended effect of loan repricing and better cost of fund management. We lower our forecast for FY19e NIM by 2bps to 1.80%, comparable to 1H19’s 1.80%. We also lowered our FY20e NIM to 1.78% due to expectations of interest rate cuts.


Investment Actions


Maintain ACCUMULATE with a lower target price of S$28.60 (previously S$30.90).

  • Our Target Price is based on target price-to-book of 1.3x, derived from the Gordon Growth model (long term ROE assumption: 11.2%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%).
  • We toned down terminal growth from 2.5% to 2.0% and increased our beta from 1.1x to 1.2x. We forecast FY19 DPS of $1.22, giving a 4.7% dividend yield support.





Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-08-05
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 28.60 DOWN 30.900



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