• NIM contraction of 1bp q-o-q in 4Q18 was disappointing as the 2.7% q-o-q loan growth came from lower-yielding segments. We estimate 5% FY19 growth.
• UOB’s Final DPS of 50 Scts/share and special DPS of 20 Scts/share bring FY18 full-year payout to 50%. Absolute DPS likely to be maintained at 120 Scts in FY19.
• Reiterate ADD with a lower Target Price of S$29.00. 12% ROE target in FY19 may be challenging. Excess capital to be retained for regional business expansion.

We Lower Our NIM Expansion Expectations to 2bp Y-o-y in FY19

• We were on the needle with UNITED OVERSEAS BANK LTD (SGX:U11, UOB)’s 4Q18 core net profit coming in at S$916m, although this was 3% below consensus (FY18 was 100% of our forecast).
• We think FY19 NIM could further expand 2bp y-o-y (prev 3bp) to 1.84% (FY18: +5bp y-o-y) as mortgage loan yields are repriced on continued momentum from previous Fed rate hikes; the bank conservatively guides for stable NIMs in FY19 with an upward bias.
• The continued lagged repricing of loan yields resulted in a contraction in 4Q18 NIMs. While margins of Singapore exposures held steady over FY18, NIMs in Malaysia, Thailand and Indonesia have largely been supported by leveraging up – an unsustainable practice, in our view.

FY19 Loan Growth Likely to Taper to 5% Y-o-y (from 11.4% in FY18)

• We believe that FY19 loan growth will come within management’s guidance of mid-single digits. We cut our loan growth expectations to +5.4% in FY19 (from +6.3% previously) as we take into account the generally cautious sentiment since the property cooling measures kicked in in Jul 2018; FY19 mortgage could be weaker than the +4% y-o-y seen in FY18.
• We believe that UOB could benefit from the displacement of production lines out of Greater China into ASEAN in the event of worsening discourse.

Sustaining LDR at 88% Could Lift NII

• UOB’s LDR jumped to 88.2% (3Q18: 85.7%) as the strong 2.7% q-o-q loan growth in 4Q18 was funded by issuing commercial papers rather than deposits (-0.2% q-o-q); recall that fixed deposit rates have been escalating since 2H18. Sustaining its LDR at 88% is viewed positively as this would relieve some of the pressure on NII from slower growth.

Credit Cost Guidance Kept at 20-25bp in FY19

• UOB’s mid-single digit fee income target in FY19 (FY18: +5%) is likely to be sustained by resilient bancassurance income, although trading income from its private banking arm may remain subdued due to the macroeconomic uncertainty. The renewal of UOB’s bancassurance agreement with Prudential could provide a boost of S$77m in fees per year up until 2034.
• Credit cost guidance is retained at 20-25bp in FY19.

Maintain ADD With a Lower GGM-based Target Price of S$29.00

• We think that UOB’s FY19 ROE target of 12% (FY18: 11.3%) may be challenging due to the lack of catalysts.
• We lower our Target Price, based on implied 1.3x FY19F P/BV to reflect continued NIM pressures.
• We cut FY19-20F EPS due to slower regional loan growth.

Stronger Loan Growth, But Lower NIMs

• UOB’s NIMs contracted further for a third consecutive quarter despite loan growth picking up strongly in 4Q18. We think that most of this likely originated from the lower-yielding corporate segment vs. its stronghold of SME clients; as a result, the small +4bp qoq rise in loan yields in 4Q18 reflects this.
• Although deposit costs increased by only +8bp in 4Q18, total funding costs were still impacted by higher interest expenses owing to its issuance of commercial papers in place of fixed deposits.
• UOB’s LDR may well taper off from its desired 88% as it re-enters the market to shore up deposits in 1Q19 – possibly at the expense of NIMs again.

Upside/ Downside Risks

• Catalysts include stronger-than-expected NIM expansion and a pick-up in regional growth.
• Downside risk is weaker-than-expected loan growth due to macro uncertainties.

Source: CGS-CIMB Research - 23 Feb 2019