United Overseas Bank - Maybank Kim Eng 2019-11-04: Prudent Navigation; BUY


United Overseas Bank - Prudent Navigation; BUY

Defensive shelter amidst volatility

  • UNITED OVERSEAS BANK (UOB, SGX:U11)’s 9M19 core-earnings beat MKE/Street estimates. 3Q19 earnings were supported by strong fee income – particularly wealth management – and trading, which took advantage of falling rates. See UOB Announcements; UOB Latest News.
  • While credit charges rose, this was expected. Interestingly, new NPL formation declined despite ongoing issues in Hong Kong. However, we do not believe this is structural and remain cautious on asset quality for the sector going into 2020E given the slowing macro environment. In this backdrop, we believe UOB’s best placed to navigate this volatility with strong capital & provision levels, as well as a historical track record of prudent management.
  • Additionally, their integrated regional network may benefit from the ongoing capacity relocation from China to ASEAN providing potential to surprise on the upside.
  • We raise our Target Price 5% to SGD30.50 (vs SGD29.13) after adjustments. Maintain BUY.

Delivering operationally

  • UOB delivered 8% y-o-y loan growth despite slower economic growth in S’pore, which points to their strong overseas integration efforts.
  • Management expect positive momentum to remain in 2020E with mid-single digit lending expansion. Their focus on the mass-affluent in the wealth segment (fees up 38% y-o-y) should support fee income momentum, especially as clients look for higher yields in the midst of falling rates and bancassurance.

Credit charges higher, but manageable

  • Credit charges rose 6bps y-o-y mostly from higher provisions on existing NPLs. However, this is less than our more cautious outlook.
  • Sectorally, there does not seem to be any sustained distress so far. As a result, we have lowered 2019E-2020E credit charges by 10-15%, but still remain at the upper end of management guidance – which UOB claims have been stress tested for weaker economic growth regionally and HK volatility.

Raise Target Price to SGD30.50. Maintain BUY

  • Our post 3Q19 adjustments, specifically 2019E-2020E core-earnings raised by 2-5%, take into account higher non-interest income, lower NIMs, as well as asset quality. We roll forward our multi-stage DDM (WACC 9.7%, 3% terminal) valuation to 2020E to arrive at the new Target Price of SGD30.50. See UOB Share Price; UOB Target Price.
  • With 14% upside, maintain BUY.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 30.50 UP 29.130