Analysts are overall positive on United Overseas Bank (UOB) after it posted a “decent” set of results for the 2QFY2023 ended June 30.
On July 27, the bank reported a net profit of $1.42 billion for the quarter and a net profit of $2.93 billion for the 1HFY2023.
CGS-CIMB remains upbeat with positive NIM outlook
CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee kept their “add” call with an unchanged target price of $33.30 with the bank’s swift integration of its Citi portfolio.
Furthermore, the bank has guided that the bulk of the related costs of $300 million to $400 million should roll off by the end of the FY2023, placing it on track towards a cost-to-income ratio (CIR) of 41% - 42% in FY2024, from 44% currently.
With the bank more positive on its net interest margin (NIM) outlook in the 2HFY2023 on the back of the US Fed Funds rate (FFR) hike on July 27, Choong and Lim have upped their earnings per share (EPS) estimates for the FY2023 – FY2025 by 0% - 2%. The higher EPS estimates come as the analysts raise their NIM estimate for the FY2023 by 2 basis points (bps) to 2.16% to incorporate the latest rate hike and higher credit costs in view of a potential weakening in borrower repayment capacities.
See also: UOB’s earnings growth enables higher dividends and general provisions, as it charts regional plans
“We raise FY2023 credit costs to 27 bps (from 25 bps previously) to factor in the elevated risk of borrower repayment disruptions. UOB remains watchful on the commercial real estate segment,” say Choong and Lim.
On the bank’s current account savings account (CASA), the rebound seen in the 2QFY2023 should further ease funding costs, thereby holding NIMs stable in the 2HFY2023 in the current levels at least.
The analysts have raised their dividend per share (DPS) estimate for the FY2023 – FY2024 to $1.85 from $1.65 - $1.75 previously in line with the bank’s 50% dividend payout ratio policy.
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“We think that its current 6% dividend yield is attractive, positioning UOB well as a yield play,” they write, adding that the rising NIM momentum is a re-rating catalyst for the bank. Persistent market volatility, hampering the return of risk-on sentiment, as well as operational delays in integrating the rest of its Citi franchise are downside risks.
CLSA keeps ‘buy’ as UOB’s results within expectations
CLSA analyst Neel Sinha has also kept his “buy” call and target price of $39.70 as UOB’s 2QFY2023 results stood above his expectations.
However, the bank’s credit costs at 30 bps were also higher than their 20 – 25 bps estimate as UOB provisioned for a specific customer in Thailand, which is electrical wire maker Stark Corporation.
“Macro risks include a meaningful macroeconomic shock, subdued domestic and regional loan growth, a disorderly rise in interest rates, lower interest rates, and competition. Micro risks include IT and staff investment costs, unexpected and meaningful non-performing loans (NPLs) in the bank's core markets (Singapore and Asean ex-Singapore, largest proportion of asset portfolio amongst the three Singapore banks) due to poor credit-risk management, and pursuit of growth to hold or gain market share despite a challenging liquidity environment/lack of good-quality loan demand,” he says.
“Upside potential comes from stronger trade and investment across Asean due to a deeper pivot to a regional trading bloc,” he adds.
UOB’s earnings a miss for Goldman due to higher credit costs
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Goldman Sachs analysts Melissa Kuang and Olivia Shi have kept their “buy” call on UOB and target price of $32.10 even though the bank’s 2QFY2023 missed their estimates on higher-than-expected credit costs at 44 bps versus its guidance of 20 – 25 bps.
“Overall, we see this as a decent set of results though credit cost came in higher than expected but we see it normalising next quarter. The flattish NIMs and the higher interim dividend should help support the stock price,” they write.
To them, key risks include a more aggressive strategy in deposit collection or changes in the bank’s management’s stance on liquidity build up. The latter could see NIMs falling faster than expected, say Kuang and Shi. Finally, an unexpected deterioration in asset quality from its Asean exposures; as well as slower-than-expected economic recovery which could result in slower credit growth, are also downside risks.
UOB’s retail business expected to get boost from Citi acquisition: OCBC
OCBC Investment Research (OIR) analyst Carmen Lee has kept her “buy” call on UOB with an unchanged fair value estimate of $32.50.
Like her peers at Goldman, Lee deemed UOB’s 2QFY2023 earnings as higher than expected with a stable NIM and NPLs. The bank’s asset quality was also still healthy.
“UOB’s retail business is expected to get a boost from last year’s acquisition of Citigroup’s consumer businesses in Malaysia, Thailand, Indonesia and Vietnam. It has completed the integration of Malaysia and is targeting to complete Indonesia by the end of 2023. Thailand and Vietnam are slated for completion in 2024,” Lee notes.
“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. This will also benefit its wealth business and grow its customer base for more cross-selling opportunities,” she adds.
Another plus about UOB is its good dividend yield, which Lee calls a “sweetener” for the stock. For the 1HFY2023, UOB raised its dividend per share to 85 cents from 60 cents.
“With the uncertain global outlook and slower-than-expected growth in China, [UOB’s] 2HFY2023 growth expectation is likely to be modest. While the region is likely to be resilient, loans growth is tepid. With the US Federal Reserve (Fed) hiking rates by 25 bps in July, and indicating that it is open for another, this should provide support for NIM to hold at current levels,” she says.
“Singapore banks have underperformed against global peers, and based on the MSCI Singapore Financials Index, it is down 0.7% for the year. UOB is down 7.5% from this year’s high in Feb 2023 and at current share price level, the dividend yield is almost 6%,” she adds.
UOB’s results carries ‘positive read-across’ for DBS and OCBC, says UBS
UBS analysts Aakash Rawat and Benjamin Tan say that UOB’s 2QFY2023 results carries a “positive read-across” for DBS Group Holdings and Oversea-Chinese Banking Corporation’s (OCBC) results.
The team is overall positive on the bank’s results with upside to its NIM guidance, lack of signs of systemic asset quality stress and an unchanged dividend payout. While the team notes the lower revision of the bank’s fee growth, it adds that the bank’s credit costs may normalise in the 2HFY2023.
RHB keeps buy with lower TP; UOB remains preferred pick
The team at RHB Bank Singapore has kept its “buy” call but with a lower target price of $31.70 from $32.30 previously as UOB’s results were dampened by higher credit costs even though its results were within the team’s estimates.
The team has also lowered its earnings estimates by 2% to 4% for the FY2023 to FY2025 mainly on higher credit cost assumptions.
That said, management sees asset quality holding up as the Citi acquisition continues to buoy retail performance while core operating expenses (opex) remains well managed.
“UOB is our preferred pick for Singapore banks given its focus on leveraging the Asean network. At 1x P/BV against 13% return on equity (ROE), valuation remains compelling,” it writes.
DBS keeps ‘hold’ due to limited catalysts
DBS Group Research analysts Lim Rui Wen and Tabitha Foo have kept their “hold” call on UOB with an unchanged target price of $30.30 as they see limited catalysts for the time being.
“Management believes that NIMs have largely stabilised, with 2QFY2023 NIM at 2.12% (2 bps decline q-o-q) and June exit NIM at 2.14%. Management remains hopeful that there could be further upward bias should benchmark rates go higher on future Fed hikes,” they write.
“As the Fed rate comes close to the peak in this cycle, we believe bulk of the banks’ share price re-rating is over,” they add.
In addition, the analysts see further downside risks with the bank’s lowered FY2023 loan growth guidance as loans continue to contract. The bank has revised its guidance to low-to-mid single digit loan growth from mid-single digit previously.
Lim and Foo also see that asset quality risks could emerge with higher credit costs of 30 bps in the 2QFY2023 largely due to a major Thailand corporate account and pre-emptive general allowance set aside.
“Consequently, credit cost guidance was raised to 25 bps for 2HFY2023, suggesting 26 bps credit costs for FY2023 (previously 20 - 25bps). We remain watchful for asset quality risks in the more uncertain macroeconomic environment,” they say.
That said, they believe that the downside to UOB’s share price will be supported by its strong provisions buffer of 99%.
Thai exposure fully provided for: UOB Kay Hian
In a non-rated report, UOB Kay Hian analyst Jonathan Koh noted a few pluses including UOB’s results, which stood in line with expectations and the bank’s swift integration of its Citi consumer business.
On the hit from the major Thai corporate account, Koh says that the exposure is “fully provided for” adding that “it is uncertain whether the company will be allowed to resume operations”.
Shares in UOB closed at $30.16 on Aug 1.
