EUR 850.00 For Business Accounts Only

Morningstar | UOB Reports Mixed 1Q Result; FVE of SGD 30 Reaffirmed

Despite United Overseas Bank reported a mixed first-quarter result, our thesis on the bank is unchanged. Our fair value estimate of SGD 30 and our 3-star rating are reaffirmed, requiring a larger margin of safety despite the bank trading a 13% discount to our fair value. Net profit was 15% higher against last quarter and 8% compared with the same period last year, underpinned by stronger trading income. However, net fee and commission income growth was weaker than expected and net interest income also declined on last quarter. The latter was attributable to a 1 basis point decline in net interest margin, or NIM, to 1.79%, dragged lower by its Southeast Asia operation. Peer DBS Group reported stronger NIM and mainly attributable to its larger exposure to Hong Kong.

UOB’s NIM for Singapore was steady at 1.49% and management noted competition in mortgages and wholesale were pressuring margins. The bank was also more aggressive in growing its loan book, which was up 3% against the end of last year or annualised at 12.7%. More moderate growth is expected for the remainder of the year and the bank will focus more on pricing. For the mortgage book, bookings prior to the implementation of restrictive measures by the regulator last year is continuing to flow through. New mortgages are expected to slow in line with the lower transaction post the restrictive measures, and competition could increase in refinancing of mortgages. Still, management is maintaining flat NIM guidance for the full year. Albeit, with some upside if the bank is able to lower cost of funds over the coming quarters, depending on the level of competition. Our NIM forecast is unchanged and we still expect slight increase for the full year.

Net fee and commission income was weaker than last quarter. This was mainly attributable to weaker than expected funds management fees. Despite stronger capital markets for the quarter, management noted lower commission was the driver. Credit card fees were also weaker mainly due to softer sentiment. Credit quality was strong. In line with peers across the region, new nonperforming loans were low and as such, annualised credit cost was at 14 basis points of total loans. This was an improvement on the fourth quarter, which had a few cases requiring specific provisions. We lower our credit cost assumption in fiscal 2019 but we continue to expect this to normalise to long-term range of between 20 to 25 basis points of total loans in the medium term. The bank’s capital position remained solid with common equity Tier 1 ratio largely steady at 13.95%. Liquidity ratios also comfortable exceeded regulatory minimums.