• 2Q19 revenue/PATMI, were in line with our estimates.
• NIM fell 2bps YoY due to higher cost of funding with an increase in pricier fixed deposits (+7% YoY). LDR healthy at 88.5% (2Q18: 85.7%).
• Loans surprised on the upside by rising 9% YoY, led by a broad-based increase across all territories and industries.
• Fee income rebounded (+6% YoY) after two quarters of contraction due to strong wealth management, credit cards and loan-related fees growth.
• Allowances fell 44% YoY due to write-back in allowances on non-impaired assets. NPL ratio healthy at 1.5% (2Q18: 1.7%).
• Declared a higher interim dividend of 55 cents per share (1H18: 50 cents per share).
• Maintain ACCUMULATE with a lower target price of S$28.60 (previously S$30.90). Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model. We toned down terminal growth from 2.5% to 2.0% and raised beta from 1.1x to 1.2x.  We lowered our NIM and loan growth forecasts, resulting in a slightly lower ROE assumption of 11.2% (previously 11.4%).

Positives

+ Recovery in fee income (+6% YoY) after two quarters of contraction, due to strong wealth management (+21% YoY), credit cards (+12% YoY) and loan-related (+10% YoY) fees growth. We expect growth to stem from WM as AUM rose 9% YoY, reaching $118bn on the back of rising affluence across SEA, with 60% of UOB’s AUM originating from overseas customers. Meanwhile, net trading income grew 14% YoY to S$245mn and gains from investment securities rose to $67mn from a low base of $1mn a year ago.

+ Credit costs for impaired loans stable at 11 bps, unchanged YoY. Overall credit costs fell 5bps YoY to 8bps due to a write-back in allowances on non-impaired assets. New NPL formation remained at normalised levels at $230mn (2Q18: $252mn, 1Q19: $230mn). Asset quality remained resilient with NPL ratio at 1.5% (2Q18: 1.7%). We forecast FY19e credit costs of 19bps.

+ Continued momentum in loans growth at 9% YoY, led by a broad-based increase across all territories and industries. However, housing loans contracted for the first time in four years at -0.4% YoY due to property cooling measures and intense price competition. Geographically, loans growth was mainly contributed by Singapore (+9% YoY), Thailand (+15% YoY) and Greater China (+12 YoY). In the meantime, deposits grew 6% YoY, resulting in an improvement in LDR% to 88.5% (2Q18: 85.7%). We forecast a more conservative FY19e loan growth of 5.1% (previously 5.7%) due to slowing economic growth.

Negative

– NIM came in at 1.81%, contracting 2bps YoY but up 2bps QoQ. The YoY contraction was due higher cost of funding from a 7% increase in pricier fixed deposits. However, NIM expanded on a QoQ basis, due to loan repricing and the release of excess fixed deposits (-2% QoQ) as guided last quarter. UOB guided 2H19 NIM at a similar level to 1H19 with a blended effect of loan repricing and better cost of fund management. We lower our forecast for FY19e NIM by 2bps to 1.80%, comparable to 1H19’s 1.80%. We also lowered our FY20e NIM to 1.78% due to expectations of interest rate cuts.

Investment Actions

Maintain ACCUMULATE with a lower target price of S$28.60 (previously S$30.90).  Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model (long term ROE assumption: 11.2%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%). We toned down terminal growth from 2.5% to 2.0% and increased our beta from 1.1x to 1.2x.  We forecast FY19 DPS of $1.22, giving a 4.7% dividend yield support.

Source: Phillip Capital Research - 5 Aug 2019