United Overseas Bank - OCBC Investment 2019-11-13: Management Meeting Highlights


United Overseas Bank - Management Meeting Highlights

  • Guidance for growth moderation ahead.
  • Expect NIM compression of 5-10bps in 2020 while the bank continues to focus on prudent costs management and growing non interest income engine (fee income and wealth management).
  • HOLD maintained. Fair value is trimmed to SGD28.40.
  • UOB remains our preferred defensive pick within the sector with diversified geographical exposure in growing ASEAN markets and supportive dividend yield. See UOB Dividend History.

Modest 2020 guidance, continues to focus on non interest income growth

  • UNITED OVERSEAS BANK (UOB, SGX:U11)’s 3Q net interest margin compression of -4bps to 1.77% came on the back of lower policy rates and funding actions taken ahead of tighter liquidity conditions expected in 4Q.
  • 4Q NIM should be fairly stable.

Management guided for 5-10bps NIM compression next year based on their assumption of 2 Fed rate cuts in 2020.

  • In the scenario of no Fed rate cuts in 2020, a smaller potential NIM compression of 0- 5bps may be expected. Other guidance shared include mid-single digit loan growth and 20-25bps credit costs (4Q19 credit costs should be similar to 3Q’s 23bps of loans, no system-wide concerns).
  • The outlook for fee income growth momentum remains constructive, which may help to mitigate some of the expected net interest income pressure.
  • UOB will also start to recognise upfront fees from its bancassurance tie-up with Prudential in 2020, which will support its wealth management fee income stream. Areas of slower growth identified are residential housing loans and some areas of trade related loans.
  • Loans mix wise, UOB plans to lower concentration in the building and construction segment (~quarter of loan book) and expects corporate customers expansion within ASEAN (from China) to support growth. Cost income ratio target is maintained at 43%.
  • With 2020 growth outlook expected to remain weighed down by global economic headwinds, we trim our fair value to SGD28.40 which implies 1.3x price/book, close to its past 10Y historical average multiple of 1.4x. See UOB Share Price; UOB Target Price.

HOLD rating is maintained.

  • UOB remains a relatively more defensive play within the sector with a steady earnings outlook, attractive dividend yield and healthy capital position. While business sentiment is expected to remain weighed down by concerns over global economic headwinds, management believes selective growth opportunities remain and sees itself as well positioned via its regional footprint to benefit from continued investment flows as businesses diversify supply chains.
  • Newly opened branches in Hanoi, Vietnam and Zhongshan, China are expected to add to the extended connectivity for customers across Southeast Asia and China.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-11-13
SGX Stock Analyst Report BUY MAINTAIN BUY 28.400 DOWN 29.400