Leveraging Competencies; Initiate at BUY

• UNITED OVERSEAS BANK LTD (SGX:U11, UOB)’s strategy of helping clients from its strong SME franchise to expand regionally should enable it to unlock value across the value chain. Its wide SE Asian footprint is fully integrated, allowing easier cross border flows, creating a strategic advantage over competitors.
• UOB’s historically conservative approach to provisioning and capital places it in a solid footing for any shocks. The company’s low cost CASA base should support NIMs to grow 6bps y-o-y in 2019E following a 14bps increase in 2018E.
• UOB’s shares are undervalued, trading at a 16% discount on FY19E P/B vs. the historical 1.2x and below our multi-stage DDM-based Target Price of SGD30.50.
• BUY.

Focused on Higher Margin Segments

• UOB has a 30-40% market share for primary SME bank accounts. These accounts typically generate higher yields than for large corporates.
• UOB is facilitating its Singapore customers as they look to expand regionally by seamlessly providing market access, and in doing so is capturing additional income streams from cash management, working capital, and trade facilities, etc. This will enable UOB to capture higher returns per customer going forward.

Digital Investments Should Lower Opex

• UOB has been investing heavily on automation to allow faster, cheaper and compliant transactions, which will also lower opex going forward. The group is now investing in technologies to enhance revenues, such as by launching a mobile App based digital bank and platform in partnerships with several Fintechs. We believe these initiatives will contribute to a fall in its cost-to-income ratios from 46% in 2017 to 43% in 2020E.

Strong Capital Ratios. Undemanding Valuations

• Historically, UOB has taken a cautious approach to provisions and capital. The Group’s CAR at 17.9% (F18E) is the highest in the sector and its provisioning cover of 95% is amongst the highest. These will provide cushioning to better manage volatility through the cycle, as well as good earnings visibility.
• UOB's shares are undervalued vs. historical P/B and P/E and our multi-stage DDM-based Target Price (COE 9.7%, 3% terminal growth) which indicates 18% upside. Accordingly, we initiate at BUY.

Source: Maybank Kim Eng Research - 30 Jan 2019