United Overseas Bank - CGS-CIMB Research 2019-12-09: Underpinned By Solid Asset Quality


United Overseas Bank - Underpinned By Solid Asset Quality

  • Weakest NIM performance among its peers but the stability in asset quality metrics, particularly amid turbulent operating conditions, makes up for this.
  • We like the defensive trait of UOB’s wealth franchise; fee income from its mass affluent customer profile should keep fee income steady into FY20F.
  • Maintain ADD. Valuations are attractive; UOB trades at 1.0x FY20 P/BV, which is 1 s.d. below its long-term mean. Solid capital position cements c.5% yield.

Funding-cost savings from lower SGD rates could cushion NIM dip

  • UOB (SGX:U11)’s NIM expansion track record had been the weakest among its peers during the period of the Fed rate hikes in FY17-18, and this softer trend continued following the policy rate cut in Jul 19 (4bp compression in 3Q19 vs. peers’ 1- 2bp dip). However, we are optimistic that the eventual savings in funding costs (given UOB’s larger 52% FD proportion vs peers’ 41-45%) and the bank’s strategy to fund ahead of the year-end’s tighter liquidity conditions may cushion some of the compression. The bank cautions for a 5-10bp NIM compression over FY20F.
  • We expect steady non-interest income drivers to support earnings going forward. In particular, the sustained wealth income, on the back of Singapore’s increasing significance as the region’s safe haven, could offset loan growth sluggishness (c.4% in FY20F) amid dissipating pessimism from the continued NIM compression.

Stable credit quality is a key positive

  • While management expects some uptick in NPLs over the course of 2020 from more challenging operating conditions, the asset quality of its portfolio has stayed resilient through the US-China trade tensions and recent geopolitical events.
  • This was most recently exhibited in 3Q19, where local peers set aside precautionary provisions for their HK portfolios. On this front, UOB has the smallest HK franchise among its peers; the bulk of its exposure is to wholesale corporates (with more resilient cashflows compared with SMEs) and real estate loans (4% of total loans), most which are well-collaterised. Its HK exposure to more vulnerable industries (such as hospitality and consumer discretionary) amounted to less than 2% of its total loans (or S$5bn). We do not expect additional macro provisions to be made for this portfolio.

Maintain ADD with GGM-based Target Price of S$29.10

  • We like UOB for its steady earnings momentum in spite of its weaker NIM performance. Resilient wealth income from the churn of its S$122bn AUM base should offset some of the margin pessimism. Its firm capital position, with CET-1 ratio of 13.7%, provides visibility for a 50% dividend payout ratio over FY19-21F.
  • We also like that UOB stayed ahead of the curve with its digital offering in Thailand, TMRW Bank; it aims to incorporate this initiative in one other SEA market in FY20. We believe this digital progression is particularly significant, especially with up to five new pure-play digital banks coming on stream in Singapore in 2020.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
  • A downside risk is escalation of HK uncertainties.
  • A re-rating catalyst is the neutralisation of trade tariffs.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 29.100 SAME 29.100