SINGAPORE (Oct 1): Last Wednesday, the Federal Open Market Committee (FOMC) raised the US federal funds rate (FFR) by 25bps.
The FOMC dot-plot points to another FFR hike in December, with three more following in 2019.
From an average of 1.51% in 2Q18, the three-month SIBOR has risen to an average of 1.63% in 3Q18, representing a 12bps q-o-q rise.
This will help widen the 3Q18 NIM for Singapore banks under its coverage, including United Overseas Bank, says RHB Research in a recent report.
In addition, the historical positive correlation between the FFR and three-month SIBOR is likely to continue driving the three-month SIBOR in the quarters ahead, says RHB.
“From UOB’s 2Q18 NIM of 1.83%, we forecast NIMs of 1.85% for 2018, rising further to 1.92% in 2019,” says RHB analyst Leng Seng Choon in a Friday report.
Then there is the potential for more dividends.
UOB’s CET1 capital adequacy ratio (CAR) of 14.5% is higher than its other two peers’ average of 13.4%. This provides scope for UOB to dish out more dividends ahead.
Its commitment is for a dividend payout ratio of 50%, subject to minimum CET1 CAR of 13.5% and sustainable financial performances.
In addition, recent indications point to the government’s property-cooling measures on mortgages having limited impact.
For example, JadeScape sold 330 units in its September launch.
In any case, RHB says it is conservative on its 2018F-2019F loan growth for UOB of 8% and 6.5% respectively.
Longer term, UOB is pressing on with a digital bank, which it says will be simple, engaging, and transparent.
“We are optimistic on its proposed scale of five countries, 3-5 million customers, and steady-state CIR of 35%,” says Leng who is awaiting more implementation details.
UOB’s share price underperformance relative to DBS over the past 12 months points towards catch-up potential.
RHB is reiterating its “buy” and $33.30 target price. This gives a target P/BV of 1.45x, which is applied to a 2019F BV of $22.94.
“We believe the P/BV premium over the five-year historical average of 1.24x is justified by the improving NIM environment,” adds the analyst.
Year to date, shares in UOB are up 1.7% at $27.08.
