4Q18 in Line; Loans, NIMs to Drive Earnings in 2019E

• UNITED OVERSEAS BANK LTD (SGX:U11)'s core 4Q18 earnings (+7% y-o-y) were in line with MKE and consensus estimates.
• 4Q18 NIM was flat y-o-y, but this should turn around once newly repriced asset yields flow through. Loan growth is set to moderate vs 2018’s high base, but should still contribute to positive earnings momentum.
• Management is cautiously guiding for higher credit costs going forward vs our estimate. As a result, we have lowered both 2019/20E core net profit by 8% and marginally reduced our multi-stage DDM Target Price to SGD29.71 (COE 9.7%, 3% terminal), which still offers 16% upside.
• BUY.

Operating Drivers Delivering

• Loans increased 11% y-o-y, supported by construction and mortgages. While momentum is set to ease, management expects rising loans, supported by corporate lending and mortgages – particularly in regional operations, such as Thailand.
• We estimate 2019E loan growth of 6.1% y-o-y. Flat NIM was partially caused by UOB's use of debt instead of deposits (given 89% loan-deposit ratio). 
• UOB has been actively raising deposits since January, which, together with mortgages being repriced higher should support NIMs expanding 5bps y-o-y (we expect 2019E funding costs to rise 75bps y-o-y vs. 34bps 2018).

Credit Costs: One to Watch

• While gross NPLs fell to 1.5% from 1.8% a year ago, credit charges progressively increased over the past year to finish at 21bps. The charges were company specific with no systemic deterioration. Nevertheless, management is guiding for 20-25bps credit costs going forward, given the volatile economic environment, which is still just half the 10-year average.
• Given 95% provisioning cover and a track record of prudent asset quality management, UOB still provides good downside defence.

Solid Regional + Digital Execution

• UOB’s FDI group that helps customers set up businesses regionally has seen deposit flows of SGD137b and SGD365m in direct income in the past seven years. UOB’s strong execution regionally will continue to support ROEs going forward, in our view.
• Separately, UOB’s digital bank in Thailand will launch in 1Q19, while Singapore digital has seen transactions double. We believe these initiatives will drive better opex management and new revenues.

Source: Maybank Kim Eng Research - 25 Feb 2019