Here's how UOB plans to raise returns

Its return on equity could only hit 12% if its net interest margin maintains an upward trend.

United Overseas Bank (UOB) is aiming for a higher return on equity (ROE), said UOB Kay Hian analyst Jonathan Koh. 

"NIM is expected to be on an upward trend," Koh said, referring to management. The bank could only achieve a 12% ROE if the net interest margin (NIM) maintains a positive trend of expanding 1-2bps QoQ every quarter.

Meanwhile, the bank also plans to contain increases in staff costs to less than 10%. "The bank has initiated productivity programmes to improve efficiency and to reduce expenses," the analyst added.

UOB also guided for high single-digit growth for loans and fee income for 2018. "Cost/income ratio is expected to remain relatively unchanged compared to 43.7% in 2017. Nonperforming loan (NPL) formation has moderated to levels before the crisis in the oil & gas sector. Management expects asset quality to be benign for the rest of the year and guided for credit costs of 20-25bps for 2018," Koh said.

Moreover, the analyst noted that there is a potential hike in dividend payout ratio. UOB has a robust fully-loaded CET-1 CAR of 14.9% as of March 2018, which is "substantially above" the minimum requirement of 9%.

He said UOB will consider lifting dividend payout ratio to 50% if CET-1 CAR maintains at above 13% and return on risk-weighted assets (RWA) maintains at above 1.65% on a sustainable basis. "Management could improve UOB’s dividend policy by converting the special dividend of 20 cents into a regular interim and final dividends in 2018," the analyst concluded.