United Overseas Bank - RHB Invest 2019-08-02: Strength Across The Board In 2Q19; BUY

UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank - Strength Across The Board In 2Q19; BUY

Maintain BUY with new GGM-derived Target Price of SGD29.50 from SGD30.80 (12% upside plus 5% yield), based on 1.24x 2020F P/BV. Our long-term ROE assumption of 12.7% vs 1H19’s 12% is premised on digitisation-driven cost efficiencies with marginally narrowing NIM ahead.
UNITED OVERSEAS BANK LTD (UOB, SGX:U11)'s 1H19 net profit rose 8% y-o-y and was in line with expectations.

UOB remains our Top Pick among Singapore banks. This report is an update post analyst briefing.

UOB's 2Q19 net profit rose 8% y-o-y and 11% q-o-q. The sequential improvement was broad based, with gains in net interest income (both NIM and loan expansion) and a 10% q-o-q rise in net fee and commission income.
Management guided for single-digit 2019 fee income growth. We raised our 2019F net profit by 1%, but lowered our 2020F net profit by 5% on weaker NIM assumption.

UOB's 2Q19 NIM of 1.81% was 2bps wider q-o-q but 2bps narrower y-o-y. The sequential improvement was due to higher mortgage rates and the release of some high-cost deposits (fixed deposits fell 2% q-o-q). Lower cost of funds is a contributing factor for management’s expectation of flat 2H19 NIM. We forecast 2019 NIM of 1.81% vs 1H19’s 1.8%.
Management sees uncertainty for 2020F NIM depending on the FOMC’s stance on interest rates. We have factored in some squeeze in 2020F NIM.

2Q19’s wealth management income of SGD160m was up 18% q-o-q. Indications point to continued strength in July.

Sequential strength in total income, accompanied by a milder q-o-q growth in expenses led to CIR falling 0.9ppts q-o-q to 43.7%.

UOB declared an interim one-tier tax-exempt dividend of SGD0.55/share – the scrip dividend scheme will not apply. Management guided for a 2019F dividend payout ratio of 50%. We forecast 2019 dividend of SGD1.30/share. See UOB's dividend history.
The current 2020F P/BV of 1.1x is also lower than the 6-year average of 1.24x.

UOB's 2Q19 ROE of 12.5% was higher than 2Q18's 12.1%. Our valuation for UOB is based on long-term ROE assumption of 12.7%. This yields a 2020F target P/BV of 1.24x, from which we derive our Target Price of SGD29.50.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-02

SGX Stock Analyst Report BUY MAINTAIN BUY 29.50 DOWN 30.800