Analysts remain mixed on United Overseas Bank U11 ’s (UOB) prospects after the bank’s core net profit of $1.49 billion for the 2QFY2024 ended June 30stood within the consensus estimates.
The ‘add’ calls
CGS International analysts Andrea Choong and Lim Siew Khee have kept their “add” call with an unchanged target price of $36.50 as UOB’s 1HFY2024 net profit formed 49% of their full-year forecasts. The analysts are remaining positive on UOB as they see synergies from the bank’s Citi integration likely to set in.
“It was an overall steady set of earnings in 2QFY2024, in our view, where the softer q-o-q net profit was largely driven by a decline in non-customer-related treasury income. Key growth drivers were intact (net interest margin or NIM +3 basis points q-o-q, fee momentum strong),” they write in their Aug 1 report.
“At the current juncture, we think credit cost issues in Thailand are transitory, and its Thai asset quality is still resilient. We stay watchful on continued non-performing assets (NPA) formation,” they add in a separate report also dated Aug 1.
DBS Group Research analyst Lim Rui Wen has kept her “buy” call due to UOB’s “robust” q-o-q NIM improvement with q-o-q loan growth in the 2QFY2024.
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The bank’s asset quality also continues to be stable, although the analyst says she remains “watchful” of asset quality risks in the uncertain macroeconomic and high-interest rate environment, especially for commercial real estate (CRE) exposures.
“UOB’s average loan-to-value (LTV) for office CRE continues to be 50%, providing a buffer in the event underlying collateral valuations collapse,” Lim notes in her Aug 2 report.
In the 2QFY2024, UOB stated that about half of its specific allowances and some general allowances during the quarter are attributable to Thailand. This was due to Citi Thailand’s experiencing certain friction and service standard issues on operating day one and UOB had to divert its resources to stabilise its Citi portfolio. The disruptions affected collections and caused “slippages”, Lim writes.
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“Management believes that 70% - 80% is recoverable and technically there will be some reversals over the next two quarters,” she says.
“Harmonisation of the credit policy across Citi and UOB also increased allowances by $30 million, as UOB took a more conservative stance – this is a one-off increase. Industry regulations have also become more stringent, hence management expects the provision run-rate to be a few basis points higher than pre-Covid,” she adds.
Going forward, the bank’s active management of deposit costs can buffer its earnings, as evidenced in the 2QFY2024 when its NIM proved by 3 basis points after experiencing a 7-basis point q-o-q decline in the 4QFY2023.
“For instance, UOB has started to adjust its wholesale fixed deposit rates since December 2023 and also continues to lead the market in cutting retail fixed deposit rates since 2HFY202023. Management remains confident of holding NIMs at the current 2QFY2024 levels,” Lim writes.
Her unchanged target price of $34.50 represents 1.1 times UOB’s FY2025 estimates at the average of its 15-year historical forward P/BV multiple, which is “undemanding”.
“We believe the share price remains well supported by its strong provisions buffer of 98% and forward dividend yield of 5.6%, with potential upside for higher dividends,” she says.
PhillipCapital analyst Glenn Thum has downgraded UOB to “accumulate” from “buy” even though UOB’s 2QFY2024 adjusted earnings met his estimates. UOB’s 1HFY2024 adjusted patmi was 49% of Thum’s FY2024 forecast.
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The downgrade, says Thum, is to account for UOB’s recent share price performance. As at his report on Aug 5, UOB’s last-traded price was $31.83.
However, Thum has kept his FY2024 estimates unchanged. His share price also remains at $34.90.
The ‘hold’ calls
OCBC Investment Research (OIR), Maybank Securities and RHB Bank Singapore have kept their “hold” and “neutral” calls. Of the three, Maybank was the only one with a higher target price of $32.90 from $31.03 as UOB’s 1HFY2024 core earnings stood in line with analyst Thilan Wickramasinghe’s estimates.
“Wealth management activity is returning. This trend should continue. UOB has executed well in keeping funding costs in check, and this should be supportive of NIMs near term,” he writes in his Aug 1 report.
“Yet with Fed rates cuts expected, we think NIM risks are on the downside, while loan guidance remains conservative,” he adds.
Looking ahead, Wickramasinghe expects management to maintain its 50% dividend in the medium term, supported by its strong common equity tier 1 (CET-1) ratio of 13.4% and execution. The maintained dividend payout should also support yields of over 5.6% should interest rates fall, he notes.
After UOB’s 2QFY2024 results, the analyst has also raised his FY2024 to FY2025 earnings estimates by 1%.
According to OIR analyst Carmen Lee, the market’s uncertainty in the second half of this year, especially with the US presidential elections, could add to volatility.
“With multi-national companies diversifying their operations and risks, south-east Asia is seeing increased investments from semiconductor to data centres,” she writes in her Aug 1 report.
“UOB, with its Southeast Asia focus and diversified loans portfolio, is well-positioned to tap on opportunities within the region which will result in still healthy growth for its wealth-related earnings,” she adds.
Lee has kept her target price of $33.50.
The RHB team has also kept its target price of $32 with UOB’s 2QFY2024 results also in line with expectations.
“Looking ahead, the roll-off in Citi integration costs in 2HFY2024 is positive for earnings and, beyond that, efforts to build up the wholesale platform look to be bearing fruit. However, we think investors’ focus will be on dividend yields and dividend per share (DPS) growth in a rates downcycle – and UOB’s preference for capital retention means yields and DPS growth are more muted,” it writes.
The ‘sell’ call
Citi Research analyst Tan Yong Hong downgraded his call to “sell” as he cuts the bank’s earnings per share (EPS) estimates for the FY2024 to FY2026.
“Factoring 225 basis points cuts by mid-FY2025, we now expect NIM compression of 11 basis points in FY2025 and a further 8 basis points in FY2026. This is based on using NIM sensitivity of 2.3 basis points ($4 million) per basis point of policy rate cuts,” he writes in his Aug 5 report. Tan has also lowered his target price estimate to $27.50 from $30.50. The analyst has issued downgrades for the other two banks. Read more here.
Shares in UOB closed 40 cents higher or 1.35% up at $30.03 on Aug 15.
