Five buys out of five as UOB continues to deliver steady growth amid uncertainties

SINGAPORE (Aug 6): United Overseas Bank reported 2Q19 earnings of $1.17 billion, 12% above Bloomberg forecast of $1.06 billion, led by resilient loan growth and strong trading income.

Net interest income for 2Q19 increased 7% y-o-y to $1.65 billion from strong loan growth. Net fee and commission income increased 6% to $527 million.

Total expenses increased 11% to $1.13 billion in line with operating income growth, while cost-to-income ratio was maintained at 43.7%.

Total allowances decreased 44% to $51 million, due to a write-back in allowances on non-impaired assets.

UOB has declared an interim one-tier tax-exempt dividend of $0.55 per share and management has guided for a 2019 dividend payout ratio of 50%.

See: UOB 2Q earnings up 8% to $1.17 bil; declares interim dividend of 55 cents per share

Phillip Capital is one of the research houses forecasting steady growth for UOB amid economic uncertainties.

In an Aug 5 report, analyst Tin Min Ying says UOB’s loans surprised on the upside by rising 9% y-o-y, led by a broad-based increase across all territories and industries.

In addition, there was a recovery in fee income after two quarters of contraction, due to strong wealth management, credit cards and loan-related fees growth.

Meanwhile, credit costs for impaired loans were stable at 11 bps while asset quality remained resilient with NPL ratio at 1.5%.

There was also continued momentum in loans growth at 9% y-o-y, led by a broad-based increase across all territories and industries.

Phillip is forecasting a more conservative FY19E loan growth of 5.1% due to slowing economic growth. The house has also lowered its FY20E NIM to 1.78% due to expectations of interest rate cuts.

“Maintain ‘accumulate’ with a lower target price of $28.60 from $30.90,” says Tin.

Elsewhere, CGS-CIMB Research says UOB returned a good set of results in 2Q19 as earnings came in 11% above its forecast of $1.05 billion.

The house was also surprised that 2Q19 net trading income came in at $245 million which was as strong as in 1Q19 and credit cards saw 14.2% q-o-q growth to $121 million while credit cost was kept low at 8bp instead of the expected 19bp.

CGS-CIMB is maintaining its “buy” on UOB with target price of $29.58, implying 1.3 times book value.

“We expect positive movement on its share price due to the strong 2Q19 results,” says CGS-CIMB lead analyst Andrea Choong in a Aug 2 report.

According to DBS Group Research, UOB tends to outperform in weaker market conditions and has a defensive franchise which is less exposed to volatility in wealth management fees.

DBS also expects UOB to continue to leverage on its strong capital position to capture cross-border loan growth opportunities in 2H19 and look into opportunities to reprice its loans and lower cost of deposits.

In an Aug 5 report, DBS analyst Lim Rui Wen says UOB remains supported by a high dividend yield of 4.8% and UOB continues to deliver strong broad-based growth across net interest income and non-interest income to achieve record 1H19 earnings.

“We maintain our ‘buy’ call on UOB and target price of $29.20,” says Lim, “We believe that current valuations near 10-year historical mean valuation remain undemanding as UOB is still poised to deliver above mid-single- digit earnings growth, backed by stable lending and provisions.”

Maybank KimEng says UOB’s 1H19 earnings also came in well ahead of its estimates with resilient loan growth and strong trading income the key drivers.

Although y-o-y NIMs disappointed again, the q-o-q improving trend as funding costs fall should allow for a better 2H19, says Maybank analyst Thilan Wickramasinghe in an Aug 4 report.

Looking ahead, Wickramasinghe says macro weakness in Singapore should be tempered by exposure to higher growth markets where nearly half UOB’s loans are booked.

And although rising NPL risks are a key concern, strong provisioning levels following aggressive “kitchen sinking in the past” offers potential for write-back, adds the analyst.

“Together with strong capital and liquidity positions, we believe UOB is well placed to face macro volatility, while offering a 4.9% dividend yield with upside risks. We raise our DDM-based target price by 1% to $29.13. Maintain ‘buy’,” says Wickramasinghe.

Finally, RHB Research says UOB remains its top pick among Singapore banks after 1H19 net profit came in line with its expectations.

“Our long-term ROE assumption of 12.7% vs 1H19’s 12% is premised on digitisation-driven cost efficiencies with marginally narrowing NIM ahead,” says analyst Leng Seng Choon in a Aug 2 report.

“We raised our FY19F net profit by 1%, but lowered our FY20F net profit by 5% on weaker NIM assumption,” says Leng, adding that management sees uncertainty for FY20F NIM depending on the FOMC’s stance on interest rates.

RHB is maintaining UOB at “buy” with new GGM-derived target price of $29.50 based on 1.24 times 2020F book value.

As at 12.54pm, shares in UOB are trading 30 cents lower at $25.61.