• UOB, having the largest property-related loans exposure, may see slower than expected loans growth
• Stock price may be well-supported in the meantime as it offers c. 3.7% dividend yield; potential dividend upside may be a catalyst
• Downgrade to HOLD, TP S$28.30 Read More
Cooling measures a dampener; downgrade to HOLD. For UOB, cooling measures are set to be a dampener as it may see slower than expected loan growth arising from the recent set of property cooling measures effective 6 July 2018. UOB has the largest property-related loans exposure among the Singapore banks with its mortgage loans accounting for c.28% of total loans in 1Q18. We lower our loan growth forecast for FY18 to c.6% (previously 7.5%) on slowing demand, with earnings cuts of 1-5% through to FY2020F on lower loan growth outlook. However, we believe that NIM uptrend remains in sight alongside lower credit costs assumption of c. 25bps over FY18- 20F (from 26-28bps previously). Capital levels remain strong with fully loaded CET1 ratio at 14.9% as at Mar 18. Although scrip dividends will prevail, the shares would be issued without a discount. We believe a full year dividend of S$1.00 per share is sustainable and that higher dividends are possible on its higher capital levels.
Where we differ. We believe that UOB will be more affected by the newly introduced cooling measures as it has the largest property-related loans exposure among the banks. Potential catalyst: Sustained positive deliveries. Further improvement in NIM should support earnings strongly. Lower credit cost is a new trend for UOB and should be viewed positively. Potential dividend upside may also be a catalyst should higher dividends be effected.
Downgrade to HOLD, TP S$28.30. Our revised TP of S$28.30 following our earnings adjustment is based on the Gordon Growth Model (11% ROE, 3% growth and 9.4% cost of equity), equivalent to 1.3x FY18 P/BV, which is at its 10-year average P/BV multiple.
Key Risks to Our View:
Relapse in NIM and asset quality trends. A relapse in SIBOR movement could also pose risks to our NIM forecast. If NPL issues start to spread further from here, more specific provisions might be required. In the event that trade war escalates, it might trigger further risks to loan growth.
Source : DBS Group Research