Analysts keep ‘buy’ and ‘neutral’ calls on UOB after FY2023 results

The ‘hold’ and ‘neutral’ calls

DBS Group Research analysts Lim Rui Wen and Ng Jia Hui have kept their “hold” call on the bank as they see limited catalysts for now due to the expectations of rate cuts later this year. Furthermore, the bank’s net interest margin (NIM) for the 4QFY2023, at 2.02%, saw a sharper contraction of 7 basis points (bps) q-o-q on loan yields due to competition for high quality credits.

“Going forward, UOB is looking to manage deposit costs more actively as it recently adjusted its fixed deposit rates downwards. Management now expects FY2024 loan growth to be slower at low-single digits (previous guidance: mid-single digits),” the analysts write in their Feb 23 report.

“We remain watchful of asset quality risks in the uncertain macroeconomic and high-interest rate environment, especially for commercial real estate exposures,” they add.

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Lim and Ng have also kept their target price unchanged at $30.30, which represents about 1 times FY2024 and close to 0.5 standard deviations (s.d.) of UOB’s 12-year forward P/BV multiple. The valuation is “fair”, note the analysts.

“We see limited catalysts ahead for UOB’s share price as NIM peaks, as well as rising asset quality risks. Nonetheless, we believe the downside to UOB’s share price will be supported by its strong provisions buffer of 101% and forward dividend yield of 6%,” they say.

Maybank Securities analyst Thilan Wickramasinghe has also kept his “hold” call on UOB as he sees a mix of upsides and downsides. He has, however, raised his target price slightly to $30.88 from $30.86 previously.

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In his Feb 22 report, the analyst notes that the bank’s FY2023 earnings stood above his expectations helped by better net interest income (NII) as well as lower provisions for bad loans. However, the analyst also notes the pressure on NIM with 4QFY2023’s NIM which was down by 20 bps y-o-y. December exit NIMs also stand at similar levels, pointing to a further softening in the 1QFY2024, he says.

Loan margins also seem to be moderating quickly due to competition for a narrow pool of high quality customers. Funding costs also increased by 38 bps h-o-h in the 2HFY2023 while asset yields were up by just 28 bps.

“Management claims they have taken steps to lower fixed deposit rates,” says Wickramasinghe.

Low-cost current accounts savings accounts (CASA) to total deposits were up by 1.4 percentage points y-o-y to 48.9% in the 4QFY2023, which is positive, in the analyst’s view. That said, this might not be enough to offset the loan yield declines.

On the other hand, 4QFY2023 fees expanded +17% y-o-y led by credit cards and recovering wealth.

“With the integration of the Citi franchise almost complete, there should be further growth synergies, in our view. We have raised FY2024 – FY2025 non-interest income by 13% each,” says the Maybank analyst.

In addition, the group’s regional franchise, especially with the integration of Citi, is set for expansion, especially as Asean economic growth takes off, he adds.

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That said, with limited upside for potential dividend surprises, the analyst thinks that the bank’s risk-reward is currently balanced.

In the FY2024 to FY2025, Wickramasinghe has upped his earnings per share (EPS) estimates by 4% to 9%.

The Singapore research team at RHB Bank Singapore has kept its “neutral” call with a lower target price of $29 from $29.10 previously.

While UOB’s 4QFY2023 results were in line and the bank’s 2023 guidance mostly met, the team notes that fee income growth fell slightly short of its target.

Other key positives included the bank’s healthy and liquid balance sheet, healthy asset quality and higher CASA ratio. Absolute gross non-performing loans (NPL) were lower by 4% q-o-q, which helped keep specific provisions muted at 26 bps. That said, NIM was a concern to the RHB team. Loan growth and non-interest income, which were seen as “muted” were partly attributed to the seasonality.

Looking ahead, the RHB team feels that UOB’s share price is likely to be rangebound with 2024’s loan growth and NIM guidance downgraded.

“Management highlighted that there could be some near-term NIM pressure and prefers to keep its 50% dividend payout ratio for now,” says the team.

That said, the bank’s “decent valuation” and yield may provide downside support.

The ‘buy’ calls

CGS International analysts Andrea Choong and Lim Siew Khee have kept their “add” call on UOB with an unchanged target price of $33.30.

“With its integration of newly-acquired Citi franchise in Malaysia, Indonesia, Thailand and Vietnam underway, we look forward to earnings synergies between the two franchises,” they write in their Feb 22 report.

UOB’s 4QFY2023 core net profit also stood in line with their expectations also its final dividend of 85 cents per share fell short.

On the back of the set of results, Choong and Lim, like their peers, note that there will be neutral momentum in its share price.

The implementation of Basel IV rules, which will take effect in July this year, will provide a transitional 150 bps uplift to UOB’s common equity tier 1 (CET-1) ratio putting it at 14.9% on a pro-forma basis.

“Given the transitional nature of the capital uplift and its base CET-1 of 13.4% (in 4QFY2023), UOB is inclined to keep its capital base for organic growth, and to maintain its current 50% dividend payout ratio, it said. According to management, it may revisit its utilisation of excess capital when its CET-1 reaches the 15% - 16% range,” say the CGS analysts.

“UOB remains optimistic of an improving economic growth outlook for Asean in FY2024 although we believe this may take time to materialise. As overall loan demand has stayed rather muted amid the elevated interest rate environment, UOB said it will remain selective, focusing on high-quality credits and lower-risk mortgages, and this could keep its asset yields compressed,” they add.

During the briefing for analysts, UOB revealed that its key priority will be to contain funding costs, given its stronger funding position in the 4QFY2023 with a liquidity coverage ratio of 157% and given its liquidity concerns earlier in the FY2023.

“It said amongst its levers to contain this would be via the strategic repricing of its fixed deposits (FDs) and using domestic funding in its regional markets where possible (versus using forex swaps which could result in lower NIMs). Tactically shifting customers from FDs (as they mature) into wealth management products will also aid in sustaining asset yields, it said,” say Choong and Lim.

“Nonetheless, management highlights that there will be cases where margins may be sacrificed for opportunistic loan growth – underlining rationale for its guidance for FY2024 total income (versus NIM). In all, UOB guides for 2% NIM in FY2024 (FY2023: 2.09%),” they add.

UOB also said that it expects its NIMs to dip slightly in the 1QFY2024 to 2QFY2024 given the deposit cost pressures. However, NIMs are expected to rise in the 3QFY2024 and 4QFY2024 the fall in funding costs outpace the decline of asset yields when the US Fed fund rate cuts set in.

“UOB’s asset quality has stayed resilient over FY2023, and it expects credit costs to trend at the lower end of 25 bps – 30 bps in FY2024. On investor concerns over its portfolio in mainland China ($12 billion loan exposure in 4QFY2023), UOB highlighted that domestic-based customers accounted for only $3 billion of these loans (with loan-to-value ratio of below 50% in 4QFY2023),” say the analysts at CGS.

For the FY2024 to FY2025, they have lowered their EPS estimates by 3% to 4% to factor in lower NIMs to account for the funding cost pressures.

PhillipCapital analyst Glenn Thum has maintained his “buy” call on UOB as its 4QFY2023 adjusted earnings of $1.5 billion came slightly above his estimates. This was attributed to higher fee income and other non-interest income, although offset by lower-than-expected NII and higher allowances.

UOB’s FY2023 adjusted patmi also stood slightly above Thum’s full-year forecast at 102%.

While Thum sees FY2024 to be “another year of growth” from stable NIMs, loan recovery and double-digit fee income, his target price is lowered to $34.90 from $35.90. His earnings for the FY2024 have also been lowered by 9%.

“Our NII is reduced as we assume softer NIMs and increased allowances, offset by higher fees and other non-interest income. We assume 1.41 times FY2024 P/BV and return on equity (ROE) estimate of 13.9% in our Gordon growth model (GGM) valuation,” he says.

Shares in UOB closed 24 cents higher or 0.86% up at $28.19 on March 1.