• UOB’s strong capital position continues to provide opportunities to tap quality loan growth via competitive pricing. Broad-based loan growth outlook for the year continues to stand tall, supported by strong traction in non-loan and transaction banking income.
• Capital levels remain strong with fully loaded CET1 ratio at 14.5% as at June 2018. We believe a full-year dividend of S$1.00/share is sustainable and that higher dividends are possible on its higher capital levels with UOB’s new dividend policy as the bank continues to deliver sustained growth.
• UOB will also be launching its Digital Bank in 2H18 as it aspires to build a customer base of 3-5m across ASEAN over the next few years.

Where we differ

• We have assumed lower credit costs to UOB’s guidance. We believe that there might be potential upside to UOB’s earnings as it is the key beneficiary from the introduction of IFRS9/SFAS109 as UOB will no longer be able to continuously build up general provisions.

Potential catalyst

• Sustained positive deliveries. Further improvement in NIM should support earnings strongly. Lower credit cost is a new trend for UOB and should be viewed positively. 
• Potential dividend upside may also be a catalyst should higher dividends be effected.

Valuation

• Upgrade to BUY, Target Price S$31.70.
• We roll over our valuation base to FY19F and arrive at our revised Target Price of S$31.70 following our earnings adjustment, based on the Gordon Growth Model (12% ROE, 3% growth and 9.4% cost of equity), equivalent to 1.4x FY19 P/BV, which is above its 10-year average P/BV multiple.

Key Risks to Our View

• Relapse in NIM and asset quality trends. A relapse in SIBOR movement could also pose risks to our NIM forecast. If NPL issues start to spread further from here, more specific provisions might be required. 
• In the event that trade war escalates, it might trigger further risks to loan growth.