UOB valuations & yield still deemed attractive after share price run-up

SINGAPORE (May 6): Jefferies, DBS Vickers Securities and RHB Research are maintaining their “buy” calls on United Overseas Bank (UOB) with the respective price targets of $31, $29.20 and $30.80 following last week’s release of the bank’s 1Q19 earnings, which grew 8% on-year on higher interest income.

In a report last Friday, Jefferies analyst Krishna Guha says he sees more room for UOB’s share price to run on the back of lower credit costs, adequate capitalising and a supportive yield of 4.3%.

The latest set of results come broadly in line with expectations, says Guha, although margins continue to underwhelm, in his view.

DBS analyst Lim Rui Wen’s dividend yield estimate is slightly higher at about 4.5%, while she sees current valuations as still undemanding as she believes the bank is still poised to deliver mid-single digit earnings growth due to stable lending and provisions.

“UOB tends to outperform in weaker market conditions and has a defensive franchise which is less exposed to volatility in wealth management fees. We believe UOB will continue to leverage on its strong capital position to capture cross-border loan growth opportunities, though overall loan growth is expected to moderate to c.5-6% from c.11% y-o-y in FY18,” says Lim.

RHB analyst Leng Seng Choon similarly believes his long-term ROE assumption of 12.5% is achievable, given stronger net interest income in 2019 and inaddition to longer-term digitisation-driven cost efficiencies.

He highlights UOB as the top country and sector pick, and says the bank is on-track to achieve mid single-digit loan growth in 2019 as loan expansion is likely tpo be driven by the building & construction sector as well as the progressive drawdown of mortgages, which should in turn drive net interest income growth.

Likewise, CGS-CIMB Research analyst Andrea Choong is reiterating her “add” call on the stock with an unchanged target price of $29 as the bank’s latest set of results came in slightly above expectations. She particularly notes that the bank’s NIM expansion was ultimately contained by strong q-o-q deposit growth which helped to offset the q-o-q loan growth.

However, Phillip Capital has downgraded its rating to “accumulate” from “buy” due to the bank’s recent share price performance, with a lower target price of $30.90 compared to $32 previously to account for higher operating expense forecasts.

Its analyst Tin Mei Ying nonetheless believes the stock remains attractive with a healthy FY19E dividend yield of 4.4%, adding there are currently no material concerns about portfolio quality, with housing loans remaining protected by prudent underwriting measures.

“Expect NIM to pick up with more aggressive loan repricing and prudent management of excess deposits. Despite softer loan growth expectations due to market headwinds, UOB’s solid loan growth in 1Q19 sets a positive tone for earnings as the loan book undergoes progressive repricing,” says Tin.

Similarly, OCBC Investment Research has downgraded its rating on UOB to “hold” despite a slightly higher fair value estimate of $28.90 compared to $28.30 previously, given the bank’s recent positive share price performance.

OCBC analyst Carmen Lee recommends to buy the stock at $27.30 or lower, noting a healthy 4.3% yield at current prices although she now expects low single-digit net earnings growth over FY19.

“Despite the mixed operating environment outlook, we are still expecting a fairly good year in FY19 with an 8.8% rise in Non-interest Income for the year supported by a slight improvement in fee income and better trading income,” comments Lee.

In an unrated report on Monday, UOB Kay Hian analyst Jonathan Koh highlights how the bank’s recent set of quarterly results have beat consensus estimates with robust loan growth, higher net trading income and sequential recovery from wealth- and loans-related fees.

Looking ahead, he notes UOB’s management outlook of moderating loan growth, relatively unchanged NIM, and renewed competition for residential mortgages in 2019.

“Management expects loan growth to moderate in subsequent quarters. Expensive fixed deposits would run off, which should result in a recovery for NIM… UOB will stay disciplined in pursuing sustainable growth as global uncertainties persist. It will maintain a risk-focused approach while training its staff to prepare for and seize future opportunities,” says Koh.

As at 11:42am, shares in UOB are trading 4.62% lower at $25.82, implying a FY19F yield of 3.63% according to OCBC estimates.