United Overseas Bank - Preserving Value

Date: 04/08/2019

Source  :  Maybank Kim Eng
Stock  :  UOB       Price Target  :  29.13      |      Price Call  :  BUY
        Last Price  :  19.85      |      Upside/Downside  :  +9.28 (46.75%)

Stability Amidst Volatility

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11)’s 1H19 earnings came in well ahead of our/Street estimates. Resilient loan growth, strong trading income were key drivers. Y-o-y NIMs disappointed again, but the q-o-q improving trend as funding costs fall should allow for a better 2H19.
  • Macro weakness in Singapore should be tempered by exposure to higher growth markets where nearly half UOB’s loans are booked. Rising NPL risks are a key concern, but strong provisioning levels following aggressive kitchen sinking in the past opens potential for write-backs.
  • Together with strong capital and liquidity positions, we believe UOB is well placed to face macro volatility, while offering a 4.9% dividend yield with upside risks.
  • We raise our DDM-based Target Price by 1% to SGD29.13. Maintain BUY.

Operationally Sound

  • UOB's 2Q19 net interest income increased 12% y-o-y from strong loan growth. Management is guiding for high-single digit growth for 2019E, likely driven by higher growth in overseas markets and better mortgage bookings in Singapore. Non-interest income rose 22% y-o-y helped by trading and fee income.
  • Falling interest rate expectations should support wealth management fees as clients look for higher returns, while upside surprise potential exists from trading gains as yields squeeze. We have lowered 2019E NIM growth to 1bps y-o-y (vs. +5bps earlier), while we have raised loan growth forecasts to 8.8% y-o-y (vs. 6.3%).

Well Placed to Handle Macro Pressures

  • While 2Q19 new NPA creation increased 1.4x y-o-y, write backs increased 2.1x. Aggressive provisioning during the 2017 O&M crisis may now potentially result in upside surprise to write-backs. NPLs in this segment fell 39% y-o-y in 2Q19 alone.
  • Additionally, UOB has a total provisioning cover of 83% and a high CET1 ratio of 13.9%, giving it significant capital and liquidity headroom to deal with macro volatility, in our view.

Raise Target Price to SGD29.13. Maintain BUY

  • Our post 2Q19 adjustments to take in to account higher loan growth, better non-interest income and higher credit charges has led us to raise 2019E-2021E earnings by 2-3%.
  • Our multi-stage DDM based (COE 9.7%, 3% terminal) Target Price is increased by 1% to SGD29.13.
  • Maintain BUY.

Source: Maybank Kim Eng Research - 4 Aug 2019

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UOB 19.85 -0.23 (1.15%) 1,611 

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