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


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.

Raised 2019F but lowered 2020F earnings.

  • 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.

Management guided 2H19 NIM to remain near current levels.

  • 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.

Wealth management had a good showing.

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

Management guided for 2019 CIR of 44%.

  • 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%.

Attractive 5% dividend yields.

  • 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.

TP based on GGM-derived 1.24x 2020F P/BV.

  • 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