United Overseas Bank - OCBC Investment 2020-03-05: Weighed By Lower Rates

UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank - Weighed By Lower Rates

Following the Fed’s emergency rate cut of 50bps this week, our house expects a bias for further rate cuts if the viral outlook deteriorates.
With the latest cut in rate expectations amidst a more prolonged than previously expected viral outbreak situation globally, we lower our estimates and fair value for the stock to SGD26.30, which implies ~1.2x price/book.

UOB (SGX:U11) remains a preferred regional sector pick with diversified geographical exposure in growing ASEAN markets and supportive dividend yield ~5%.

Following the Fed’s recent emergency rate cut of 50bps from the previous range of 1.5%-1.75% to 1%- 1.25% range and messaging which suggested the inter-meeting cut is not ―"50bps and done".
Our house now expects a bias for further rate cuts if the viral outlook deteriorates sharply in the weeks ahead, with possibility for the Fed to make one to two more 25bp cuts in its scheduled meetings in March and April 2020.

With the lowered rate expectations amidst a more prolonged viral outbreak situation globally, we have reduced our estimates and fair value for UOB (SGX:U11) to SGD26.30, which implies ~1.2x price/book (at a discount to its past 10-year historical average valuation multiple of 1.33x).
Compared to DBS (SGX:D05), UOB is expected to be relatively less rate sensitive, helped by its lower proportion of loans in USD rate-related currencies (~64% of UOB’s total loans exposure, vs DBS’ ~80% of total loans).

Capital position remains robust with CET1 ratio of 14.3% (+60bps q-o-q in 4Q), which is supportive of continued dividend payouts (2020E DPS is estimated at $1.20/share, which implies ~5% forward dividend yield).

Constructive on Southeast Asia franchise and more cautious stance on North Asia in 2020 – Slight uptick in credit costs is expected this year due to front loading of credit loss projections under FRS9 (vs stable credit costs in FY19 of 18bps), with margins to see further pressure although fee income (driven by wealth management) should remain supportive.
To mitigate uncertainties, UOB had reduced its North Asia loan exposure in 2H19 to 15% of gross loans as of Dec-19, with the loans in Singapore and Southeast Asia accounted for 51% and 23% of gross loans respectively.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-03-05

SGX Stock Analyst Report HOLD MAINTAIN HOLD 26.30 DOWN 28.400