• Recent price rally; but still inexpensive

• Dividend yield of 4.6%

• FV of S$28.90; BUY

9 straight days of gains!

UOB’s shares have rallied for 9 straight days, from S$23.96 on 6 Jun 2019 to S$26.14 on 19 Jun 2019. This is a strong 9% gains in nine trading sessions. With the recent selldown in equities, Singapore financial stocks suffered the brunt of selling as investors rotated out of banks into high yielding instrument and stocks, largely on concern over the high probability of interest rate cuts in 2H 2019.

From late April high to current levels, the FTSE Financials Index fell 4.9%, while the FTSE REIT Index bucked the downtrend and gained 3.9% for the same period. Another defensive sector, the FTSE Telecommunications Index, rose 6.0% for the same period.

Weakness in the banking sector was largely due to concern of trade war, weakening global and regional economic outlook and more importantly rising likelihood of further cuts in interest rates. In our report dated 3 May 2019 titled “Time to lock in some profits”, we advocated locking in some profits. Since then, the stock fell some 15.6% to touch a low of S$23.50 recently. With the recent rally, the stock has re gained some of the lost grounds.

Rate cuts and profitability

In the last 10 years, UOB’s Net Interest Margin (NIM) ranged from a quarterly low of 1.65% in 2013 to as high as 2.27% in 2009. In 1Q19, NIM was 1.80%. We expect this level to hold for the rest of this year. With the probability of rate cuts in 2H 2019, this could have an impact on margin, but we expect this to take place only in the later part of 2020. In terms of profitability, and despite relatively flat rate for the large part of the past decade, the compounded annual growth rate (CAGR) for net profit was 7.7%.

Dividend distribution also grew proportionally by about 7.2% for the same period. During periods of prolonged low rates in the last 10 years, Net Interest Income as a percentage of total income was around 60-61% and we expect a reasonable level of around 62-65% (recent high was 68% in 2018).

Valuations are not expensive

With the recent decline in share price, UOB is currently trading at 1.19x price-to-book, just slightly below its 10-year price-to-book average of 1.21x. With a dividend payout of S$1.20, and based on 19 Jun 2019 share price of S$26.14, yield is 4.6%. Our fair value for the stock remains unchanged at S$28.90. BUY.

Source: OCBC Research - 20 Jun 2019