SINGAPORE (Aug 6): DBS is upgrading its call on United Overseas Bank (UOB) to “buy” from “hold” previously with an increased target price of $31.70.

This came on the back of the bank recording record earnings for 2Q18, as loan growth and fee income continues to drive its growth amid lower credit costs.

UOB’s 2Q18 earnings reached a new high of $1.08 billion, 28% higher y-o-y than 2Q17. This brings 1H18 earnings to a record high of $2.05 billion, up 24% from a year ago.

See: UOB 2Q earnings hit high of $1.08 bil on strong overall operating income

In a Monday report, analyst Lim Rui Wen says, “UOB’s strong capital position continues to provide opportunities to tap quality loan growth via competitive pricing.”

In addition, the analyst reckons that the bank’s broad-based loan growth outlook for the year remains standing tall, supported by strong traction in non-loan and traction banking income.

During the quarter, the bank’s broad-based loan growth grew 4% q-o-q and 10% y-o-y, as it continues to benefit from the Singapore housing loan market and has maintained market share in new sales for the quarter.

UOB also introduced a digital bank for Asean’s “mobile first” and “mobile only” customers, in Singapore, Malaysia, Indonesia, Thailand and Vietnam. It intends to build a customer base of three to five million, operating at a steady-state cost-to-income ratio of about 35%, while leveraging process redesign and digitisation.

The bank will also continue to invest in technology-related capabilities as it rolls out its Digital Bank, which is expected to be launched in the later part of the year.

On the other hand, the bank has guided for a high single-digit loan growth for FY18, alongside a flattish net interest margin (NIM) for 2H18, as it continues to grow its loan book.

“Credit costs were guided at about 20bps for FY18, but we have assumed 15bps for FY18 as we believe that there is potential earnings upside from lower credit costs,” says Lim.

The analyst assumed lower credit costs to the bank’s guidance, as she believes that there might be potential upside to earnings. This is due to it being the key beneficiary from the introduction of IFRS9/SFAS109 as UOB will no longer be able to continuously build up general provisions.

Furthermore, the group is looking at a new dividend payout ratio of about 50% of its net profit, subject to minimum CET1 ratio of 13.5% and sustainable business performance.

“We believe there is a possibility of higher dividends above our current assumption of $1.00/share,” adds Lim.

As at 11.11am, shares in UOB are trading 53 cents higher at $27.12 or 1.2 times FY18 book with a dividend yield of 3.8%.