United Overseas Bank - Phillip Securities 2019-12-16: Respite In Volatile Times

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

United Overseas Bank - Respite In Volatile Times

  • Least exposure to Greater China and Hong Kong loans at 16% (DBS: 30% and OCBC: 25%).
  • Well-poised to benefit from supply chain shift into Southeast Asia.
  • Increasing efforts to grow its wealth management franchise, particularly the mass affluent, bodes well for stable WM fees growth.
  • UOB offers a dividend yield of around 5% which cushions the stock’s downsides.
  • FY20 NIM to contract 5-10bps due to falling interest rate environment.
  • Maintain ACCUMULATE with an unchanged target price of S$27.80.



UOB - Company Background

  • UNITED OVERSEAS BANK (UOB, SGX:U11) was founded in 1935 and is now the third-largest bank by assets in Southeast Asia. Having started out as United Chinese Bank, UOB was renamed in 1965 and it now has over 500 offices across 19 countries and territories.
  • In Singapore, UOB is a market leader in credit and debit cards and loans to SMEs. UOB provides a full suite of financial services: corporate and commercial banking services, investment banking and treasury services, transaction banking services and personal wealth management.
  • See UOB Share Price; UOB Dividend History; UOB Announcements; UOB Latest News.


UOB - 2020 Investment Merits/ Outlook


Trade war sanctuary.

  • UOB’s exposure to trade war effects is relatively muted as compared to its peers. As of 3Q19, UOB’s exposure to Greater China and Hong Kong loans is 16% (DBS: 30% and OCBC: 25%).

Well-poised to benefit from supply chain shift into Southeast Asia.

  • There has been a shift in the supply chain from China into SE Asia to avoid the tariffs imposed by the U.S. A rise in businesses investments and activity in SE Asia could provide greater volume to UOB’s regional franchise. The bulk of UOB’s loan book is anchored out of SE Asia (around 73%), with the majority belonging to Singapore (52%). However, a shift in the supply chain requires more than just a few years to materialise.

Closing the gap in wealth management (WM).

  • UOB has the least contribution from WM as compared to the other two banks. UOB’s WM fees contributed 6%/18% to 9M19 total revenue/ non-interest income, as compared to 9%/26% for DBS (SGX:D05) and 10%/24% for OCBC (SGX:O39). UOB’s increasing efforts to grow its wealth management franchise, particularly the mass affluent, bodes well for stable WM fees growth. UOB's wealth management business could be less affected by market volatility due to its target audience being the mass affluent, which generates a more recurring and stable management fee.

Dividend yield support.

  • UOB offers a dividend yield of around 5% which cushions the stock’s downsides. Strong CET1 ratio of 13.7% which is above UOB’s internal minimum 13.5% requirement and far above regulatory 9.0%, provides visibility on absolute DPS.

NIM to be a drag.

  • UOB guided FY20 NIM to contract 5-10bps due to internal projections of 30-50bps decline in benchmark rates for the whole of FY20. However, the impact of Fed rate cuts could be cushioned with adjustments to funding costs to match the pricing charged on loans. We forecast FY19e/FY20e NIM at 1.80%/ 1.74%.

A potential rise in credit costs.

  • The new Expected Credit Loss (ECL) model requires banks to make adequate provisions as and when there is deterioration in the macro-environment. We expect credit costs to be slightly elevated next year as the risk of slower global growth and sustained domestic unrest in Hong Kong leads to higher ECL.


Recommendation






Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2019-12-16
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 27.800 SAME 27.800



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