SINGAPORE (Aug 3): RHB is maintaining its “buy” call on United Overseas Bank (UOB) with a target price of $33.30.
This came on the back of the bank’s strong 2Q18 earnings results, which saw earnings rise to a new high of $1.08 billion, 28% higher than 2Q17.
This brings 1H18 earnings to a record high of $2.05 billion, up 24% from a year ago.
See: UOB 2Q earnings hit high of $1.08 bil on strong overall operating income
The bank’s net interest margin (NIM) for the quarter was 1 basis point (bp) narrow q-o-q, but 8bp wider y-o-y. UOB is also priced competitively, resulting in 4% q-o-q loan growth.
In addition, the bank’s efforts to increase deposits – ahead of the expected interest rate hike – have led to higher funding costs.
Going forward, the group’s management expects NIM to continue rising, with the extent depending on when federal fund rate (FFR) hikes occur.
In a Friday report, analyst Leng Seng Choon says, “We are forecasting 2018 and 2019 NIMs of 1.85% and 1.92%.”
The management also expects 2018 y-o-y loan growth to be in the high single digits after the 6.1% YTD loan expansion.
It also saw little impact on 2018 loan growth following the recent property cooling measures, but this impact should be felt later on.
See: Singapore raises ABSD, tightens LTV after strong property price gains
The analyst forecasts 2018 and 2019 loans growth of 8% and 6.5%, respectively.
Meanwhile, the bank during its results briefing announced the introduction of a digital bank for ASEAN “mobile first” and “mobile only” customers, which is designed to comprehensively address the entire customer life cycle.
UOB aims for this digital bank to see a customer base of about three to five million over the next five years, operating at a cost-income-ratio (CIR) of 35%.
During the quarter, UOB declared an interim dividend of 50 cents. Its commitment is for a dividend payout ratio of 50%, subject to a minimum CET1 capital adequacy ratio (CAR) of 13.5% and sustainable financial performances.
2Q18 saw a CET1 CAR of 14.5%, which was significantly higher than DBS’ 13.6%. The analyst says that this points towards the bank’s potential to pay out more dividends moving forward.
On the other hand, the stock has been trading at an average price-to-book ratio of 1.24 times.
“We believe the higher P/BV target is reasonable, given the improving NIM environment,” says Leng.
As at 4.09pm, shares in UOB are trading 3 cents higher at $26.73 or 1.14 times FY18 book with a dividend yield of 4.3%.
