United Overseas Bank - Sequential Earnings Driven by Trading Income; QoQ Earnings Growth From Non-II; Still a BUY

Date: 03/05/2019

Source  :  RHB
Stock  :  UOB       Price Target  :  30.80      |      Price Call  :  BUY
        Last Price  :  19.64      |      Upside/Downside  :  +11.16 (56.82%)

  • Keep BUY with unchanged SGD30.80 Target Price based on 1.29x 2020F P/BV, giving 11% upside plus 5% FY19F yield.
  • Our long-term ROE assumption of 12.5% vs 1Q19 and 2018’s 11.4% and 11.3% is premised on net interest income growth from loan expansion and NIM stabilisation, plus digitisation-driven cost efficiencies.
  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11)’s 1Q19 results are in line with our expectations. This report is an update post the bank’s analyst teleconference.

UOB' 1Q19 Results in Line With Expectations

  • UOB's 1Q19 net profit of SGD1.05bn was up 8% y-o-y (+15% q-o-q) – representing 25% of our and consensus’ FY19 expectations.
  • UOB's 1Q19 net profit rose 8% y-o-y, and was up 15% q-o-q. The y-o-y improvement was driven by an 8% y-o-y rise in net interest income. The sequential expansion was boosted by a doubling of trading income.
  • UOB's 1Q19 NIM of 1.79% was 1bps narrower q-o-q and 5bps lower y-o-y. Asset yields expanded as interest rates increased but cost of funds rose faster, thereby leading to the narrower NIM. Loans expanded by 3% q-o-q, helping to support net interest income. Building & construction loans (25% share of total loans) expanded the most sequentially, up 6%.
  • Whilst net fee and commission income was up a marginal 2% q-o-q, net trading income doubled sequentially, as financial markets rebounded.

UOB Guides for Flat 2019 NIM

  • UOB's 1Q19 NIM of 1.79% was 1bps narrower q-o-q and 5bps lower y-o-y. Sequentially, whilst Singapore NIM was unchanged at 1.49%, Malaysia NIM contracted by 2bps to 1.99%. UOB was more aggressive in its fixed deposit expansion due to Net Stable Funding Ratio (NSFR), but will likely run off part of it as loans slow in subsequent months.
  • Management guided for 2019 NIM to be unchanged from 2018’s 1.82%, which factors in UOB’s intention to defend its mortgage market share amidst competition.

2019 Loan Growth Guidance Maintained at Mid-single Digit

  • With 1Q19 loans having expanded 3% q-o-q, loan growth in the subsequent three quarters of 2019 is likely to be muted. Management said that the slowdown of new residential property launches will likely soften the mortgage book. We forecast 2019 loan expansion of 5%.
  • Wealth management income saw 19% q-o-q growth, as the stabilisation of macro outlook led to improved customer confidence. Management guided for 2019 wealth management income growth of ~5%. The sequential doubling of net trading income is another key contributor to non-II expansion.

Management Guided for CIR to be Around 44% for 2019

  • UOB's 1Q19 CIR was 44.6% vs 1Q18’s 44.2% as total expenses rose 9% y-o-y due to higher performance-related staff costs and IT-related expenses.

Our Long-term ROE Assumption Is 12.5%

  • UOB's 1Q19 ROE was at 11.4%, higher than 1Q18’s 11%. We have assumed 12.5% long-term ROE, as we factor in gains from digitisation efforts.
  • Downside risks to our forecasts include higher impairment

Source: RHB Invest Research - 3 May 2019

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