Like its peer, both banks increased their dividend run-rate, with UOB further sweetening it with a special dividend. More importantly, both banks appear more than adequately capitalised for growth and further upside to payouts.
"We maintain our 'buy' on both stocks," says analyst Krishna Guha.
Net interest income growth was underpinned by broad-based loan growth and rising margins. Net interest income grew in mid-teens for 4Q for both banks, while for the full year UOB achieved a higher growth of 11% compared with 7% growth for OCBC.
See: OCBC Bank reports 31% higher 4Q17 earnings of $1.03 bil; FY17 earnings cross $4 bil mark for first time
See: UOB reports 16% higher 4Q earnings of $855 mil; brings FY17 earnings to $3.4 bil
In constant currency, gross loans grew 11% y-o-y for OCBC while loans grew 5% on the year for UOB unadjusted for currency movements. Margins continue to inch up for both banks. OCBC registered 4bps y-o-y, a 1bp q-o-q increase for the quarter, while UOB registered 12bps y-o-y, 2bps q-o-q in the same period.
"Guidance is for high single-digit loan growth and margins to gradually inch up for FY18," says Krishna.
See also: UOBKH raises TP on SIA to $6.22, FY2026 earnings to see lift on fuel cost savings
Fee income grew 17% and 10% y-o0y for 4Q for OCBC and UOB, respectively. Comparable figures for the full year came in at 19% and 12%, respectively.
Growth was driven by wealth management and capital market-linked areas. UOB also benefited from fees linked to credit cards. OCBC enjoyed strong growth in profits from life assurance.
Including trading income and gains from investment securities, overall non-interest income grew 23% and 8% for OCBC and UOB, respectively.
With SFRS(I) 9 implementation from the start of the year, both banks adjusted general allowances, resulting in writebacks. This was offset by higher specific allowance on account of NPA (non-performing assets) related to oil and gas support services.
Overall credit cost for the full year came in at approximately 27 bps for both banks, which is lower than last year. Banks guided to 4Q as the quarter of peak NPA formation due to accelerated recognition of O&G related stress and haircuts in associated collateral valuation.
Henceforth, OCBC should see special provisions (SP) declining to levels before the O&G crisis. As an indication, in FY15, OCBC had SP of 11bps vs. 62bps last year.
UOB also guided to substantially lower credit costs with new NPA formation normalising to $300-400 million per quarter.
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In line with its peer, both banks raised annual dividend run-rate. OCBC has increased dividend run rate from 36 cents to 38 cents while UOB has increased it from 70 cents to 80 cents. In addition, UOB also declared a special dividend of 20 cents.
While OCBC had the smallest growth in dividend among the three banks, Krishna says the bank is still in the process of optimising internal models for OCBC Wing Hang Bank and Bank of Singapore.
And capital ratios are likely to trend higher once the exercise is done.
Currently, UOB has the highest CET1 ratio at 14.7% followed by OCBC at 13.1% on a fully loaded basis, which leaves room for organic/inorganic growth.
As at 11.04am, shares in UOB and OCBC are up 65 cents and 44 cents at $26.89 and $12.70, surpassing Jefferies' target prices.
