SINGAPORE (July 18): RHB is maintaining UOB as its top pick in the Singapore banking sector given future NIM (Net Interest Margin) widening would offset negative effects from the recently-announced government measures to cool Singapore’s residential property market.
In addition, management’s intention to lower its CAR (compound annual rate) could potentially provide investors with more dividends.
“We believe the surge in UOB’s P/BV between 2003-2007 FFR (Federal funds rate) upcycle could be repeated in the current FFR upcycle,” says analyst Leng Seng Choon in a Wednesday report, “We expect 2Q18 earnings to be in line with our expectations, with loan expansion supporting net interest income growth.”
For 2Q18, management has indicated that more focus would be placed on the corporate segment, which generates lower margin on average. In addition, more high quality liquid assets due to the riskier global environment could keep yields subdued. However, the higher Sibor (Singapore Interbank Offered Rate) will be a positive for NIM.
“Overall, we forecast 2Q18 NIM to be marginally wider than 1Q18’s 1.84%, which was 3bps higher than 4Q17’s. We believe 2Q18 loan expansion will be in tandem with management’s guidance of high single-digit for FY18,” says Leng.
On a longer term perspective, the gradual increases in the US FFR will also translate into wider NIM. RHB is forecasting NIM to widen further in subsequent quarters, and are projecting FY20 NIM of 1.97%.
The July 5 announcement by the government on measures to cool Singapore’s residential property market could slow loan growth more obviously by 2020 and beyond.
Over the next 1-2 years, lending to the property segment is likely to be supported by loans already approved in 1H18 and earlier, as drawdown will be gradual over the next few quarters.
“We are forecasting loan expansion of 8% and 6.5% for FY18 and FY19 respectively at UOB,” says Leng.
The trade war between the US and China is expected to impact the wealth management business. Wealth management AUM is likely to be affected as well. However, loan growth in 2Q18 should lead to more loan-related fees.
“Maintain ‘buy’ with $33.30 target price or 1.43 book value, which we apply to our forecast FY19 book value of $23.35. Over the past five years, UOB has traded at an average P/BV of 1.24x. We believe the higher P/BV target is reasonable given the improving NIM environment.
As at 2.58pm, shares in UOB are trading 1 cent higher at $25.93.
