Analysts are remaining mixed with unchanged “buy” and “hold” calls on United Overseas Bank U11 ’s (UOB) outlook after it released its results for the 3QFY2023 ended Sept 30 on Oct 26.
For the quarter, the bank reported a core net profit of $1.48 billion, 5% higher y-o-y, while 9MFY2023 core net profit stood at $4.56 billion, 33% higher y-o-y.
Including the one-off integration expenses, UOB’s net profit stood at $1.38 billion for the 3QFY2023 and at $4.31 billion for the 9MFY2023.
The ‘add’ and ‘buy’ calls
CGS-CIMB Research’s Andrea Choong and Lim Siew Khee have kept their “add” call after the bank’s results came in line with their estimates and 8% higher above the expectations of the Bloomberg consensus. The analysts have also kept their target price unchanged at $33.30.
In their report dated Oct 27, the analysts note that the bank is going defensive to protect its liquidity and credit quality going into the FY2024 amid the uncertain macroeconomic uncertainties.
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“As strengthening its balance sheet is its key priority, management addressed several deliberate steps it took in 3QFY2023. Among them, UOB sacrificed some margin (by deploying funds into lower yield but more liquid interbank holdings) to maintain a strong liquidity and funding profile (net stable funding ratio: 121%, liquidity coverage ratio: 153%),” write Choong and Lim.
In its briefing for the 3QFY2023, UOB’s management indicated that it hopes to keep its net interest margin (NIM) for the FY2024 steady at its current levels of 2.1%.
“It expects one more US Fed fund rate hike this year and for these rates to stay steady until a cut, if any, in 2HFY2024. UOB does not expect material movements in Singapore dollar (SGD) interest rates from the Fed rate hike as it believes the direct correlation between the two has eased,” note the analysts.
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“With its asset yields topping out, UOB said it will defend its NIMs by focusing on longer-term assets (e.g. extending mortgage duration) and managing funding costs (e.g. adjusting fixed deposit pricing). Nonetheless, margin sacrifice may still be likely in return for high-quality credits in this market, according to management,” they add. “UOB’s NIM as at end-3QFY2023 was [around] 2.08% (3QFY2023 average: 2.09%).”
In its results statement, UOB had also downgraded some of its collaterals, which resulted in top-ups of specific provisions to serve as a buffer against any weakening in its credit profile.
“In essence, it had effectively reallocated the burden of provisions to its business units (versus adding on management overlays, which would come from shareholders’ funds). UOB views a 25 basis point (bps) FY2024 credit cost as reasonable (at the lower end of its formal 25 bps – 30 bps guidance) given its current outlook on asset quality risks,” say the analysts.
“Management warned that there could be pockets of weakness in its loan portfolio, such as commercial real estate in developed markets, but these exposures are relatively small in quantum and are not indicative of systemic asset quality risks,” they add.
To this end, the analysts have tweaked their earnings per share (EPS) estimates for the FY2023 to FY2025 by 0.6% to 2.7% as they adjust their NIM estimates given the impact of higher interest rates on both asset yields and funding costs. The EPS changes were also to reflect the higher credit cost assumptions given UOB’s more conservative stance.
Further to their report, the analysts say that they are looking forward to the earnings synergies following the integration of Citi’s consumer banking businesses. The synergies could come from cross-selling opportunities between the two franchises, the analysts write.
OCBC Investment Research’s Carmen Lee has also kept her “buy” call on UOB with an unchanged target price of $32.50 after the bank’s 3QFY2023 earnings were in line with her expectations. The analyst is also expecting the bank to see a stable FY2024 based on management’s guidance.
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In her report dated Oct 26, Lee liked the bank’s balance sheet with stable asset quality, as well as the fact that large corporates accounted for 54% of its overall portfolio.
The analyst also noted that the bank’s current share price levels have “partly discounted” the soft market conditions.
“The uncertain global outlook and heightened geopolitical tensions have led to the lowering of global growth in 2023 and 2024. The region is likely to be more resilient due to rising inter-regional trades,” she writes.
“UOB’s share price has declined 9.7% year-to-date (ytd) – underperforming its Singapore peers and the FTSE ST All-Share Financials Index (-1.0% ytd). At current share price level of $27.72 [as at her report on Oct 26], the projected dividend yield is 6.1% based on our estimated dividend per share (DPS) of $1.70 for FY2023, and this should provide some support to its share price,” she adds.
Looking ahead, the analyst sees UOB’s retail business receiving a boost from its acquisition of Citigroup’s consumer businesses in Malaysia, Thailand, Indonesia and Vietnam.
“The acquisition was part of its strategic plan to grow its Asean franchise, and the group is starting to see the benefits coming from CitiGold customers and Citi’s credit cards, especially in terms of the stronger contribution from the credit card business,” says Lee. “UOB’s expanded operation will also benefit its wealth business and grow its customer base for more cross-selling opportunities. Management’s guidance is of a 50% dividend payout ratio.”
PhillipCapital’s Glenn Thum has kept his “buy” call with an unchanged target price of $35.90 for UOB after the bank’s 3QFY2023 stood above his expectations. Thum’s target price is the highest among all the brokerages featured here.
Positives included the continued y-o-y growth of UOB’s net interest income (NII) and NIM, the recovery of its fee income as well as the dip in new non-performing assets (NPAs), while negatives included the flat y-o-y growth and q-o-q decline in other non-interest income. The higher credit costs due to higher specific provisions, as well as higher expenses were also a concern to Thum.
In FY2023, the analyst expects UOB’s profit to grow on the back of stabilising margins, stronger fees and lower provisions.
The analyst expects its NII for the FY2023 to expand by 21% y-o-y. “We expect credit costs to come in around the guidance of 25bps. The company is not intending to write-back provisions. UOB has guided for loans growth of low to mid-single digit and NIM to stay around its current levels for FY2023.”
The ‘hold’ and ‘neutral’ calls
DBS Group Research, Maybank Securities and RHB Bank Singapore were not as upbeat as their peers.
Though UOB’s 3QFY2023 results met DBS analyst Lim Rui Wen’s expectations, the analyst sees limited catalysts for the bank for the time being as the Fed rate cycle nears its peak.
“Management believes that NIMs have largely stabilised, with 3QFY2023 NIM at 2.09% (3 bps decline q-o-q), having declined since peaking in 4QFY2022,” says Lim, who kept her “hold” call and target price at $30.30.
“As the Fed rate comes close to the peak in this cycle, we believe the bulk of the bank’s share price re-rating is over,” she adds. “Management expects FY2024 loan growth to recover to mid-single-digit levels, as Asean growth remains intact.”
Lim also has her eye on the bank’s asset quality risks amid the uncertain macroeconomic and high-interest rate environment. This is as the bank’s management guides for higher credit costs of 25 bps to 30 bps going into the FY2024, compared to its 2HFY2023 guidance of 25 bps.
However, Lim still sees bright spots, noting that the downside to UOB’s share price will be supported by its strong provisions buffer of 102%.
Maybank’s Thilan Wickramasinghe has kept his “hold” call and target price of $30.86 as he sees UOB’s earnings momentum falling despite its results being ahead of the consensus’ expectations.
“UOB’s 9MFY2023 core earnings were marginally ahead of Maybank’s/street’s expectations on supportive NII anchored by higher margins. Fee income support came from credit card while wealth and trading income saw slowing momentum,” he writes.
The bank’s asset quality also remains “benign” for now with general allowance write-backs offsetting higher specific provisions, the analyst notes, though adding that its non-interest income remains challenged.
That said, the bank’s latest results were “a good set of numbers” all things considered, in line with his thesis of “high earnings base, falling growth and resilient dividends”.
The Singapore research team at RHB Bank Singapore have also remained “neutral” on UOB. That said, they have lowered their target price to $29.70 from $31.70, making RHB’s target price the lowest among the brokerages here.
“While valuation appears decent, we note that [UOB] lags peers on asset quality metrics, leading to higher earnings risks if economic conditions pan out worse than expected,” writes the RHB team.
UOB’s 3QFY2023 results were in line with their expectations with fees bring a bright spot.
The team’s lowered target price is due to the higher equity risk premium for its weaker asset quality metric compared to its peers.
One more Fed rate hike won’t help, says Citi
In an unrated report dated Oct 26, Citi Research’s Tan Yong Hong got the sense of an “overall downbeat tone” from UOB’s management.
“[UOB’s] Common Equity Tier 1 (CET-1( ratio at just 13.0% may not bring comfort to investors on dividends especially if earnings turn,” Tan writes in an unrated report.
“Key discussions focused on NIM outlook (3QFY2023 exit NIM lower than quarterly NIM), asset quality (given higher provisions and downgraded collateral values) and capital adequacy (higher risk-weighted assets (RWA) and CET-1 ratio of 13.0%),” he adds.
On the bank’s NIM contractions in the 3QFY2023, Tan sees that one more rate hike from the Fed won’t add upside to SGD rates and asset yields.
“Funding cost management should dictate NIM trajectory especially if market competition for fixed deposits come back. Further competition and crowding into higher quality corporate may further compress asset yields. Managing/deploying excess liquidity an ongoing challenge,” he says.
In his report, the analyst cautions expectations for higher fees for peer Oversea-Chinese Banking Corporation (OCBC) as wealth drives a larger proportion, but DBS could benefit from their better cards franchise.
DBS’s NIM expansion could also be tempered, which was guided by the bank’s management during the 2QFY2023. OCBC could, however, benefit from the pricing down of its earlier aggressive fixed deposit (FD) campaigns in January 2023.
To this end, Tan says investors should look out for whether DBS and OCBC would downgrade their collateral values while noting that they have stronger capital positions to do so.
DBS will be reporting its results on Nov 6 while OCBC’s results will be released on Nov 10.
Shares in UOB closed 6 cents lower or 0.22% down at $27.02 on Oct 31.a
