UOB - DBS Research 2019-08-05: Strong And Steady

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

UOB - Strong And Steady


Strong dividend yield offers support.

  • We maintain our BUY call on UNITED OVERSEAS BANK (UOB, SGX:U11) and Target Price of S$29.20. The stock remains supported by a high dividend yield of c.4.8%.
  • UOB continues to deliver strong broad-based growth across net interest income and non-interest income to achieve record 1H19 earnings. We believe that current valuations near 10-year historical mean valuation remain undemanding as UOB is still poised to deliver above mid-single-digit earnings growth, backed by stable lending and provisions.
  • UOB tends to outperform in weaker market conditions and has a defensive franchise which is less exposed to volatility in wealth management fees. We believe UOB will continue to leverage on its strong capital position to capture cross-border loan growth opportunities as it continues to see strong broad-based lending pipeline into 2H19 and look into opportunities to reprice its loans and lower cost of deposits.



Where we differ:

  • We continue to believe that UOB’s earnings growth will be more than supported by strong non-interest income growth.


Potential catalyst:

  • Sustained positive deliveries. For FY19, lower– than-expected credit costs could drive 2H19 earnings. Sustained ROE improvement will continue to drive UOB’s share price.


Valuation:

  • Maintain BUY and Target Price of S$29.20.
  • We arrive at our Target Price of S$29.20 based on the Gordon Growth Model (12% ROE, 3% growth, 10% cost of equity). This is equivalent to c.1.2x FY19F P/BV, which is also its average 10-year forward P/BV multiple.
  • Our earnings revision of c.1% is largely on the back of higher loan growth guidance for FY19F.


WHAT’S NEW - Record 1H19 earnings


Broad-based earnings growth.

  • UOB’s 2Q19 net profit of S$1,168m (+8% y-o-y/+11% q-o-q) was within our expectations but ahead of consensus by c.10%. Operating income and net profit were driven by strong net interest income and non-interest income while expenses grew 11% y-o-y. Cost-to-income ratio was at 43.7% (1Q19: 44.6%), in line with full-year guidance of c.44%.

First uptick in NIM in four quarters.

  • Net interest income of S$1,653m rose 7% y-o-y/4% q-o-q, as NIM improved for the first time in four quarters to 1.81%, largely on the back of loan repricing (1Q19: 1.79%) and lower cost of funds. NIM improvement was largely on the back of Singapore and Hong Kong, as other countries saw margin pressures on NIM.

Strong growth in non-interest income continues.

  • Non-interest income of S$930m improved 16% y-o-y/13% q-o-q which was broad-based, on the back of wealth management income, on top of higher credit cards and loan-related fees, as well as higher trading income and gains from investment securities.
  • Notably, UOB continued to see strength in wealth management income in July, and expects fee income to grow by a mid-single digit in FY19.

Loan growth momentum continues.

  • Loan book grew 9% y-o-y/1% q-o-q, led by loans to financial institutions, investment and holding companies. In Singapore, loan growth continued to be driven primarily by en-bloc drawdown. Meanwhile, customer deposits were 6% higher y-o-y but 1% lower q-o-q, and hence LDR increased q-o-q to 88.5% (1Q19: 86.6%).

Asset quality remains benign.

  • Credit costs for 2Q19 were lower at 8bps (1Q19: 19bps), while special provisions charges were at 11bps (1Q19: 13bps). UOB saw write-back in allowances for non-impaired assets coupled with recoveries, of which a portion is in relation to oil and gas provisions taken in 2017, and believes that the lower credit costs reflect the stabilising credit environment. For 1H19, total credit costs came in at 13bps vs guidance of c.20-25bps.

Slight uptick in new NPA formation.

  • Absolute NPLs were largely flat, while NPL ratio was unchanged from 1Q19 at 1.5%. New NPL formation was slightly higher at S$357m (1Q19: S$230m), compared to an average of S$272m for the last five quarters.
  • According to UOB, new NPL uptick relates to a real estate-related NPL in the US. However, given that the NPL is well-collateralised, minimal provisions were needed.

Strong capital levels; higher dividends.

  • Capital ratios stood strong with CET1 ratio unchanged from 1Q19 at 13.9%, total CAR at 17.2% (1Q19: 17.0%). ROE for 1H19 was 12.0% (FY18: 11.3%). An interim dividend of 55 Scts was declared (2Q18: 50 Scts/FY18: 120 Scts inclusive of a 20-Sct special dividend), representing c.48% dividend payout ratio for 2Q19. UOB reaffirms its dividend policy of having a 50% payout ratio subject to a minimum CET1 ratio of 13.5% and sustainable financial performance. See UOB's dividend history.


Key takeaways from analyst briefing


Higher loan growth guidance for FY19.

  • UOB has increased its loan growth guidance for FY19 to a high-single digit, from a mid-single digit previously, on the back of strong loan pipeline. Year-to-date, loan growth was 4.3% (from December 2018) and UOB continues to expect broad-based loan demand from real estate and non-real estate sectors regionally.

Stable NIM for FY19, sees impact from Fed cut to come through in FY20.

  • UOB is looking at maintaining NIM for FY19, though the bank continues to embark on loan repricing opportunities in Singapore and Hong Kong. In 2Q19, UOB managed to let some expensive deposits roll off.

Slowing economy, credit costs to normalise.

  • While UOB’s asset quality remains benign, it is cautious that credit costs may rise slightly amidst a slower global growth environment and that NPL ratio may inch up slowly.

Updates on Evergrowing bank.

  • According to UOB, UOB still intends to divest its stake in Evergrowing bank and is currently awaiting the audited accounts. UOB reaffirms its confidence as mentioned in previous quarters that it does not expect to see a significant impact on its books as the bank took a significant discount to Evergrowing’s net tangible assets when valuing the investment in its books.





Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 29.200 SAME 29.200



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