Analysts shave UOB forecasts on operating challenges & limited upside, but remain positive at 'buy'

Analysts shave UOB forecasts on operating challenges & limited upside, but remain positive at 'buy'

By: 
Michelle Zhu
25/02/19, 12:18 pm

SINGAPORE (Feb 25): Jefferies and OCBC Investment Research are maintaining their “buy” calls on United Overseas Bank (UOB) with a target price and fair value of $30 and $28.30, respectively, even after the bank’s recently reported set of 4Q and FY18 financials came in slightly below both research houses’ expectations.

While Jefferies has lowered FY19-20 EPS estimates by 3.6% and 4.5%, respectively, to account for lower loan growth and margin assumptions, OCBC cuts its net earnings estimates for FY19 to $4.26 billion from $4.36 billion on expectations of continued volatility for the bank’s operating environment.

In a Monday report, Jefferies analyst Krishna Guha highlights the possibility of continued disappointment in UOB’s margin going forward, as mortgage refinancing may see a price/volume trade-off, with limited upside to grow loan/deposit ratios (LDR).

His lower price target of $30 compared to $31 previously implies 12.3 times FY19F EPS, which implies 4.2% growth and 4.6% yield.

“We price in 1 bp increase in margin for FY19. We maintain the view that credit cost will continue to normalise and come in at higher end of the guidance range. That said, it is unlikely to exceed 30 bps that we saw in 2017,” says Guha.

Nonetheless, the analyst sees a possible upside to UOB’s dividend as its profitability improves.

He estimates 60 bps capital accretion assuming 5% loan growth, unchanged dividend and 11.5% return on equity (RoE).  

Separately, OCBC analyst Carmen Lee’s revised estimates comes as she rolls its valuation into FY19 based on an unchanged 1.2 times book.

Based on a 42% payout ratio, Lee’s dividend per share (DPS) estimate is $1.30, which implies a dividend yield of 5.1% at its last closing price of $25.58.

The analyst continues to remain positive on UOB for its fairly stable outlook, and believes its growth fundamentals remain intact.

“While challenges remain in the regional operating environment, management is confident of growing its loans by mid-single-digit in 2019. There is also room for NIM to improve from current level, largely due to the re-pricing of mortgage loans this year,” notes Lee.

“In terms of cost-to-income, it went up slightly to 43.9% in FY18 and management is aiming to maintain this at 44%. It will also continue to invest in technology, especially in cash management, wealth and trade. For ROE guidance, this is expected to be 12% this year versus 11.3% in FY18,” she adds.

Shares in UOB last traded 20 cents or 0.8% lower at $25.38 before the midday break, which implies a 5.06% FY19F dividend yield based on OCBC estimates.

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