UOB still a 'buy' despite target price cut to $29.80 due to slowing mortgage business: RHB

SINGAPORE (Jan 29): RHB is maintaining its “buy” call on United Overseas Bank (UOB) with a lower target price of $29.80 from $30.80 previously.

This is due to the bank’s slowing mortgage business, as a result of the residential property tightening measures, which took effect in Jul 2018.

In a Tuesday report, analyst Leng Seng Choon says, “Nonetheless, with 9M18 YTD loan growth of 8%, we believe a 10% loan growth for 2018 is likely.”

The bank’s 3-month Sibor averaged 1.73% in 4Q18, up from 3Q18’s 1.63%. It is currently at 1.89%, but there is some lag effect for the SIBOR’s rise to filter through to NIM widening.

“As loan drawdown was muted due to the Jul 2018 property cooling measures, UOB deployed its excess funds to lower yielding and lower risk assets – we believe this is likely to have led to lending yields not gaining much despite the 4Q18 rise in Sibor,” says Leng.

On the other hand, UOB had increased its fixed deposits more aggressively in 3Q18, and therefore did not need to compete to secure funding in 4Q18. As a result, cost of funds would have risen at a slower pace.

NIM in 1Q19 also seems to be widening, supported by the recent repricing of home mortgages.

Market uncertainty is seen to be affecting the bank’s non-interest income for 4Q18, due to market uncertainty. The analyst expects investment banking and trading incomes to likely be unexciting.

“We are however, positive on the longer term efficiencies with digitisation initiatives both at the bank level and the national level (eg. PayNow by MAS),” says Leng.

With a CoE assumption of 10.4% and yielding a target price-to-book ratio of 1.37 times, Leng believes that the premium over the counter’s 5-year historical price-to-book ratio of 1.25 is justified, given the rising NIM trend and more efficiencies from its digitisation efforts.

UOB’s management has indicated its intention to lower CET1 CAR (from 3Q18’s 14.1%). The expectation of higher dividends could propel its share price higher.

As at 3.05pm, shares in UOB are trading at $25.61 or 1.19 times FY19 book with a dividend yield of 5.0%.