Story: Stronger earnings growth plus ROE expansion coupled
with dividend yield. Regional expansion could provide a further
boost in earnings.
Point: We expect NIM to improve for the rest of the year, mainly
from organic growth while non-interest income is expected to pick
up. UOB made further inroads regionally with a 10% stake in
Southern Commercial Joint Stock Bank in Vietnam, and has started
negotiations for a strategic investment in China’s Evergrowing Bank.
Relevance: We raise our recommendation to a Buy (from Hold)
and target price to $27.50 (from $22.00) based on the Gordon
Growth Model. UOB’s growth and ROE prospects appear relatively
more exciting with earnings driven mainly from Singapore and
Malaysia.
Earnings expansion driven by topline growth. We understand UOB’s
earnings model is driven mainly by margins rather than volume. We note its
NIM has been expanding healthily. Recall in 1QFY07, NIM stood at 2.10% (ex-
recoveries), which increased by 6bps y-o-y and 10bps q-o-q. We expect NIM to
improve for the rest of the year, mainly from organic growth and non-
interest income to pick up for the rest of the year.
Loan growth picks up, especially for housing. We estimate UOB’s total loans
market share at 21% using Singapore currency loans as a proxy. We believe
UOB’s consumer segment focus lies in housing loans and credit cards. SME
segments, mainly building and construction, are equally crucial. We
understand UOB aims to maintain and build customer relationships, the
essence of its growth strength.
Regional expansion. Currently, UOB is active in Singapore and Malaysia. In
Indonesia, via Bank Buana, we understand competition is intense, so margins
may be reduced. Meanwhile, in Thailand, growth is still sluggish. UOB has
recently opened its China branch in Shenyang to leverage on developments
in northeast China. UOB made further inroads regionally with a 10% stake in
Southern Commercial Joint Stock Bank in Vietnam, and has started
negotiations for a strategic investment in China’s Evergrowing Bank.
Dividend yield appeal. Based on our dividend payout assumption of 55%, we
arrive at net DPS of $0.66 and dividend yield of 3%. We do not discount
another round of special dividend - although not as high as previously -
should it continue to dispose its non-core assets.
Raise to Buy with TP at $27.50. We raise our recommendation to a Buy (from
Hold) and revise our target price to $27.50 (from $22.00) based on the
Gordon Growth Model. This translates to 2.1x FY08 adjusted book value,
based on peak valuations.
Earnings expansion driven by topline growth. We understand that UOB’s earnings model is driven mainly by
margins rather than volume. We note that UOB’s NIM has been expanding on a healthy trend. Recall in 1QFY07,
NIM stood at 2.10% (ex-recoveries), which has increased by 6bps y-o-y and 10bps q-o-q. We expect NIM to
remain strong for the rest of the year, mainly from organic growth while non-interest income is expected to
pick up for the rest of the year. However, we note that non-interest income is typically stronger in 4Q of each
financial year - quite common across Singapore banks.
Loan growth picks up, especially for housing. We estimate UOB’s market share in total loans at 21%, higher
than DBS (18%) and OCBC (19%) as at end-December 2007, using Singapore currency loans as a proxy. Housing
loans comprise 25% of UOB’s total while, building and construction loans comprise 11%. We believe UOB’s
consumer segment focus lies in housing loans (more on private rather than public housing projects although
done selectively) and credit cards. UOB is also building its merchant base and replacement card base. With its
credit card base expanding, UOB is able to secure recurring income through fees and commissions. Expansion
for enblock development is expected to drive construction and housing loans further, benefitting UOB. We
understand UOB aims to maintain and build customer relationships, the essence of its strength in this area of
growth. But it’s also cautious not to be too aggressive in its growth for loans as it monitors NPL trends closely
for each sector. Currently, NPL ratios for housing and construction loans are 1.5% and 4.7% respectively.
Deposit growth still burgeoning. Despite the situation of excess deposit in the system, we note that UOB’s
deposit base is still growing. However, we gather that deposits are growing to enhance profitability via cheaper
cost of funds. In addition, we understand UOB actively monitors its balance sheet to ensure healthier yields.
UOB invests in higher duration government bonds and private debt securities to fund its lending business to
ensure better yields.
NPL ratios are generally sticky downwards. As UOB runs on customer relationship, it generally maintains
customer relationships through thick and thin. In bad times, UOB continues to service its customers, which is the
reason why its NPL ratios do not show a significant downtrend. In its recent 1QFY07 results, UOB announced the
sale of NPLs for its Thailand bank, UOB Thailand (previously Bank of Asia, which UOB acquired in Sept 2005).
Provisions were accelerated for this portfolio of NPLs, which was the reason behind the weaker 1Q results vis-à-
vis the two other local banks. However, in 2Q, we understand that the impact of the NPL sale would be visible
and its NPL ratio is expected to reduce to c. 3%. We gather that there would be another round of NPL sale but
smaller in scale compared to that incurred in 1Q and is expected to impact NPL ratios positively by less than
50bps.
Non-core assets cleared up. With its sale of Overseas Union Enterprise and Hotel Negara in 2Q06, UOB is almost
done in clearing up non-core assets in its books. It currently has $1.5bn in its revaluation surplus which it could
dispose of at a later date. We believe that surplus funds from the proceeds of its sale of non-core assets would
be better used to garner yields in its business operations as well as paying special dividends to shareholders (as it
did in 2Q06). A special dividend of $0.20 and $0.10 was paid in 2Q06 and 4Q06 from proceeds of the sale of
$689m.
Dividend yields are appealing. Based on our dividend payout assumption of 55%, we arrive at net DPS of $0.66
and dividend yields of 3% for FY07. In addition, we do not discount the possibility of another round of special
dividend, although not as high as before, should it continue to dispose its non-core assets. However, we are not
incorporating any special dividend payout in our assumptions. We understand that there is still a small portion
of s.44 tax credits which have not been utilised. This could provide an upside surprise to our dividend
assumptions.
Maintaining Tier-1 CAR above 9%. We understand UOB would maintain its Tier-1 CAR above 9% (MAS’ min of
6%). As at end-1Q07, UOB’s CAR was 11.1%. We understand it would need the additional capital to build
infrastructure for its Indonesia and Thailand operations as well as its soon-to-be locally incorporated subsidiary
in China. UOB’s CAR stood at 16.2% as at end-1Q07 above MAS’ minimum of 10%
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