Analysts from CGS International, Citi Research, DBS Group Research and PhillipCapital have kept their “add” and “buy” calls on United Overseas Bank U11 (UOB) after the bank’s results for the 1QFY2024 ended March 31 exceeded the expectations of the consensus.
To CGSI analysts Andrea Choong and Lim Siew Khee, UOB’s 1QFY2024 core net profit of $1.57 billion, which rose by 5% q-o-q but fell by 1% y-o-y, stood in line with their estimates.
The earnings beat was mainly due to the stronger-than-expected net interest margin (NIM), which stood flattish q-o-q compared to the consensus’ estimate of a drop in NIM by one to two basis points (bps).
UOB also reported a robust treasury income from increased customer-related retail bond sales and hedging demand. It also saw a strong performance from trading and liquidity management activities, note Choong and Lim in their May 8 report.
With the bank’s fixed rate hedges to offset the impending interest rate decline, the analysts see the possibility of its sequential NIMs remaining stable or “inflecting upwards”, although that depends on the trajectory of the US Federal Reserve fund rates.
UOB is optimistic that its NIMs will remain above 2% in FY2024 and is expecting to see two rate cuts in the 2HFY2024 – once in September and the other in December this year.
“With the integration of newly acquired Citi franchises in Malaysia, Indonesia, Thailand, and Vietnam underway, we look forward to earnings synergies between the two franchises,” the analysts write.
Keeping their target price unchanged at $33.30, Choong and Lim are expecting to see positive share price momentum following UOB’s results.
Citi analyst Tan Yong Hong has also kept his target price at $33.20 with UOB meeting the market’s expectations on NIM recovery, albeit driven by the more “volatile” interbank and securities business.
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UOB’s average interest earnings assets (AIEA) base also appears to be 2% lower q-o-q.
“As we have highlighted as our key negative in our initial take, loans margins [fell by]- 8 bps q-o-q to 2.47%, driving loans net interest income (NII) -5%,” he writes in his May 8 report. “However during the call, management upgraded [its] NIM guidance, and guided that margins should improve sequentially from managing funding cost (4QFY2023: wholesale, 1QFY2024: Singapore dollar or SGD fixed deposit rates, 2QFY2024: SGD current account savings account or CASA rates).”
On this, Tan notes that a recovery in NIM should provide room to upgrade his NII estimates for FY2024 closer to $10 billion.
To DBS Group Research analyst Lim Rui Wen and the Singapore research team, UOB’s net profit came “largely in line” with the brokerage’s estimates.
Like her peers, Lim has kept her target price unchanged at $34.50, which represents 1.1 times FY2025 at the average of UOB’s 15-year historical forward P/BV multiple. At this point, UOB’s valuations are “undemanding”, she says.
“We believe there is further earnings upside and the share price will be well supported by its strong provisions buffer of 101% and forward dividend yield of [around] 6%. We pencil in an earnings revision of 1% - 6% through FY2026,” she writes in her May 8 report.
While UOB’s asset quality continues to be stable, Lim is mindful that risks remain amid the uncertain macroeconomic and high-interest rate environment, especially for commercial real estate (CRE) exposures.
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“UOB’s average loan-to-value (LTV) for office CRE continues to be [around] 50%, providing a buffer in the event underlying collateral valuations collapse,” she says.
PhillipCapital analyst Glenn Thum has also kept his target price unchanged at $34.90, at 1.41 times FY2024 P/B and a return on equity (ROE) estimate of 13.9%.
“1QFY2024 adjusted earnings of $1.57 billion met our estimates as higher fee income and other non-interest income were offset by lower-than-expected NII and higher expenses. 1QFY2024 adjusted patmi was 25% of our FY2024 forecast,” says Thum in his May 9 report.
“Positives include fee income growth of 5% y-o-y, trading and investment income rising by 10% y-o-y, and allowances dipping 3% y-o-y, while negatives were NII declining by 2% y-o-y as NIMs fell 12bps,” he adds.
In FY2024, the analyst expects total earnings to grow by 8% from stable margins, a recovery in loan growth, stronger fees as well as stable provisions.
“We expect credit costs to come in around the guidance of 25bps. UOB has guided for loans growth of low single digits, NIM to hold above 2% for the rest of FY2024, and cost-to-income ratio (CIR) to remain stable at around 41% to 42% as the one-time costs from the Citigroup acquisition will roll off substantially,” he says.
The ‘hold’ calls
Analysts from Maybank Securities, OCBC Investment Research (OIR) and RHB Bank Singapore have kept their “hold” and “neutral” calls although they have all raised their target price estimates.
Maybank’s Thilan Wickramasinghe likes UOB’s “slow, steady growth” as its core earnings stood “marginally ahead” of his expectations.
“This was bolstered by trading income which is volatile,” he writes in his May 8 report.
Wealth management is also a bright spot, although that needs to watched with higher-for-longer interest rates keeping UOB’s NIM supported, he notes.
At the same time, the analyst sees growth in NII to be limited due to peaking loan yields and slow loan growth.
There may also be limited upside to UOB’s dividend payout, with the bank’s common equity tier 1 (CET-1) ratio of 13.9%, while high, is “not excessive” given the current uncertainty.
Following UOB’s results, Wickramasinghe has raised his earnings per share (EPS) estimates for FY2024 to FY2025 by 1% to 2%. Accordingly, his target price has also been increased to $31.03.
OIR’s Carmen Lee has raised her fair value estimate to $33.50 from $32.50 as UOB’s 1QFY2024 results stood above her expectations. Lee has also increased her FY2024 estimates after the bank’s trading income surpassed her estimates.
Her May 8 report is more positive as she applauds UOB’s strong contributions from its wealth and credit card segments, as well as trading income.
The current higher-for-longer interest rate environment should also support margins, she adds.
In Lee’s view, UOB is “well-positioned” to grow its Asian franchise thanks to its well-diversified loan portfolio across sectors and regions.
“Except for building and construction (27% of loans) and housing (24%), its exposure is well-spread across several key industries. Singapore is its key market and accounted for 49% of its loan portfolio,” she writes.
“While the global economic outlook is still cloudy, we continue to expect that the Asean region is likely to stay fairly resilient, despite heightened geopolitical risks in other parts of the world. UOB’s focus on its Southeast Asia franchise should provide opportunities to tap into the rising affluence in this region with a combined population of more than 60 million people,” she adds.
The Singapore research team at RHB Bank Singapore has increased its target price estimate to $30.10 from $29 after UOB’s “very decent start” to the year. The higher target price is also based on a lower equity risk premium (ERP) in line with the brokerage’s recent revisions for the bank’s peers.
The bank’s 1QFY2024 results stood in line with the team’s expectations.
While the team likes UOB’s optimism on its near-term outlook for its NIM, it notes that its preference to retain capital for growth may “dampen hopes” for a higher dividend payout.
“While valuation appears decent, we note that it lags peers on asset quality metrics, leading to higher earnings risks if economic conditions pan out worse than expected,” says the team in its May 9 report.
RHB’s target price also comes with a 2% environmental, social and governance (ESG) premium.
‘Overweight’ for Morgan Stanley and ‘underperform’ for BofA
Morgan Stanley analysts Nick Lord, Selvie Jusman, Aitong Li and Yvonne To have kept their “overweight” call as UOB’s 1QFY2024 results beat their estimates from non interest income and lower expected credit losses (ECL). The analysts have kept their guidance for the FY2024 unchanged.
However, they note that UOB’s earnings surpassed expectations on a smaller basis with y-o-y trends “softer” than that of DBS’s. This is despite the bank’s growth drivers being similar to its peer’s.
The analysts have kept their target price unchanged at $33.40.
“[The target price is] probability-weighted (bull 15%, base 70%, bear 15%) to reflect upside risks in the global economy and likelihood of completing the Citi retail acquisition, while noting the downside risk related to Chinese loan book exposure,” say the analysts in their May 8 report.
BofA Securities analyst Anand Swaminathan has kept his “underperform” rating with an unchanged target price of $30.55 for UOB even though its 1QFY2024 results were “operationally in line”.
While the analyst likes UOB’s strong trading figures and benign asset quality, he is more cautious on its weak loan and fee momentum as well as loan margins, which fell from loan pricing competition and backbook deposit repricing.
Meanwhile, he sees the bank’s deposit rate revisions to start benefitting its NIMs in the next quarter.
Bloomberg Intelligence analysts Sarah Jane Mahmud and Alison Hor see UOB’s integration of its Citi retail businesses to extend its Southeast Asian footprint and boost its deposit base, loan book and wealth business.
“With the full impact of the Fed's rate hikes past its peak, UOB might face further margin pressure on higher funding costs and as credit competition keeps lending rates low,” the analysts write in their May 8 report.
“Yet, we see signs of stabilization ahead of the Fed's rate cuts,” they add.
Meanwhile, the analysts see UOB’s NII gains could be limited on the back of weak loan growth, although tailwinds from an 11% boost in its wealth assets managed could help drive double-digit growth in fee income.
Analysts Rena Kwok and Sheenu Gupta note that the bank’s funding strategy and active management of its deposit costs could help to contain costs and liquidity risks in the midst of the higher-for-longer interest rate environment.
The analysts also like UOB’s Casa ratio, which crossed the 50% mark from healthy growth in low-cost deposits.
“UOB was the first among Singapore's banks to announce cuts to its flagship One account's interest rates,” they note.
UOB Kay Hian notes continued cost discipline in unrated report
In an unrated report dated May 9, UOB Kay Hian analyst Jonathan Koh notes that UOB has continued to exercise cost discipline with its CIR healthy at 41.9%. During the quarter, the bank’s operating expenses were up slightly by 2% y-o-y while staff costs increased by 4% y-o-y.
Koh also notes the bank’s stabilised NIM on a q-o-q basis, higher fees and record trading and investment income, which stood at an all-time high of $521 million in the 1QFY2024.
In a separate sector report dated May 13, Koh has named Oversea-Chinese Banking Corporation (OCBC) as his top pick due to the bank’s potential to deploy surplus capital to generate inorganic growth.
The analyst has kept his “buy” calls on DBS and OCBC with target prices of $40.70 and $18.10 respectively.
As at 1.35pm, shares in UOB are trading 16 cents lower or 0.53% down at $30.18.
