SINGAPORE (Oct 29): Analysts are keeping their “buy” call on United Overseas Bank (UOB) Group following the bank’s 3Q18 results announcement.

During the quarter, UOB reported that its 3Q18 earnings has increased by 17% y-o-y to $1.04 billion.

Net interest income rose 14% to $1.60 billion, from healthy loan growth and a net interest margin uplift of two basis points to 1.81%.

See: UOB reports 17% higher 3Q earnings of $1.04 bil on higher net interest income and lower allowances

Despite the higher earnings and net interest income, last Friday the stock declined as much as 3.8% -- the biggest intraday decline since May 30 after a key gauge of loan profitability fell, overshadowing higher third-quarter net income at the Singaporean lender.

See: UOB falls most since May on surprise lending margin squeeze

Nonetheless, OCBC has kept its “buy” call on UOB after the group’s 3Q earnings came in broadly in line with the research house’s expectations.

However, OCBC has slashed its fair value estimate on UOB to $28.80 from $32.09 with a dividend forecast of $1 due to a rapid drop in peer valuations over the past few months due to recent market weakness.

Despite current market concern over the potential impact of the trade war on Asia, the group’s management is fairly positive about its funding position and its well-placed regional operations.

In a Friday report, OCBC lead analyst Carmen Lee says, “There is uncertainty over the potential flow of manufacturing activities into South Asia, and we have seen cuts in 2019 economic and corporate earnings growth forecasts.”

The analyst also reckons that there could be some margin compression as the cost of funds have increased, while the business environment has become increasingly challenging.

UOB’s management has guided for mid- to high single-digit loans growth and stress-tested its portfolio and is of the view that the overall situation is still manageable currently.

Meanwhile, RHB is reiterating its “buy” recommendation on UOB with a target price of $30.80.

In a Friday report, analyst Leng Seng Choon says, “With the US federal fund rate expected to rise further over the next few quarters, we forecast further rises in 3-month SIBOR, which will raise lending yields. However, the high funding cost is expected to remain. Overall, we forecast UOB’s NIMs at 1.83% and 1.88% for 2018 and 2019.”

However, the US federal fund rate is predicted to rise further over the next few quarters while high funding cost is expected to remain.

Leng forecasts UOB’s NIMs at 1.83% and 1.88% for 2018 and 2019.

Similarly, Jefferies is maintaining its “buy” rating on UOB, but with a lower target price of $32.00 from $34.00.

The group’s growth in 3Q18 on a y-o-y basis was driven by higher business volumes, margins and lower credit costs, but partially offset by weakness in non-interest and negative jaws. The sequential weakness was due to a dip in margins and fall in non-interest income. And the margins were impacted by the liquidity buffer and the research house expects this to trend higher.

In a Friday report, Jefferies analyst Krishna Guha says, “Limited impact from trade frictions but loan growth will slow to mid-to-high single digit as some capex decisions are delayed and en bloc activity slows down. Cost of funding is increasing across the region and 4Q is likely to see year-end effects.”

However, UOB NIMs will trend higher as the excess liquidity is deployed. Thus, Jefferies has lowered FY18 NIM estimates by 2 bps (183 bps) and raise FY19 by 1 bps (185 bps).

Meanwhile, the group’s asset quality has been “well behaved”. Barring new NPA formation from Indonesia, group asset quality remains benign.

NPL ratio was 1.6%, 0.1% point lower q-o-q, while credit cost was 15 bps for 3Q and 12 bps for 9M. Hence, the analyst has lowered credit cost estimations for FY18 to $412 million (from $561 million).

DBS is also keeping its “buy” call on UOB with a lowered target price of $29.50, compared to $31.70 previously.

In a Monday report, analyst Lim Rui Wen says, “We believe UOB will continue to be a beneficiary of the rising rate cycle even as it currently sees pressures from higher deposit costs.”

The group’s strong capital position also continues to provide it opportunities to tap quality loan growth, as broad-based loan growth outlook for the year continues to stand tall, with mid-to-high single-digit growth expected next year.

Meanwhile, it is also less exposed to volatility in wealth management fees as its customers invest mostly in non-leveraged products.

“We continue to like UOB for its strong capital position in current volatile market conditions. UOB has deliberately built up SGD deposits ahead of the curve as it anticipates further increases in cost of deposits. We view this as an appropriate and conservative move,” says Lim.

As at 11.23am, shares in UOB are trading 30 cents or 1.25% higher at $24.37, giving it a FY19 price-to-book ratio of 1.14 times with a dividend yield of 5.0%.