• Value is emerging
• Good level to accumulate
• FV of S$31.02

“Buy at S$29.00 or Lower” Is Now!

In our last report dated 3 May 2018, when we downgraded the stock to a HOLD, we recommended investors to buy at S$29.00 or lower. Since then, the stock has dropped below S$28.00 recently, down about 7% in the past one month from the recent high of S$30.14. At current price, value is emerging.

Based on an estimated dividend payout of S$1.00, current yield is at about 3.6% - and we deem this to be a good level. Fundamentally, there is no change in our projections for the group and we are retaining our FY18 net earnings estimate of S$4007m – the highest level in its operating history.

Recent Quarter Showed Broad-based Improvement

For 1Q18, UOB delivered net earnings of S$978m, up 21% YoY and 14% QoQ. Better Net Interest Margin (NIM) together with healthy loans growth of 5% led to a new high of S$1.47b in Net Interest Income, which is a 13% improvement YoY. NIM rose from 1.73% in 1Q17 and 1.81% in 4Q17 to 1.84% in 1Q18.

Net fee and commission income increased 18% YoY to S$517m, supported by growth in wealth management (+30% YoY), fund management (+27% YoY) and loan-related fee income (+24% YoY). Cost-to-income ratio stood at 44.2% this quarter. NPL was at 1.7%, down from 1.8% in the previous quarter. Allowances fell sharply from S$140m last quarter to S$80m this quarter.

Outlook Is Fairly Positive; Possibility of Higher Dividend?

With the improving market outlook, we are generally more optimistic about the operating environment for the Singapore banks. We expect improving NIM to be a key feature this year. While management has earlier indicated the possibility of a special dividend this year, based on what was given out last year, which amounted to a total of S$1.00 (dividend of 80 cents plus special dividend of 20 cents), current dividend yield of 3.6% will complement the potential price upside to our fair value estimate of S$31.02.

Source: OCBC Research - 13 Jun 2018