Analysts have either upgraded their calls or target prices on United Overseas Bank U11 (UOB) after the bank said that it is considering capital management plans with its excess capital of $2.5 billion.
CGS International has kept its “add” call with a higher target price of $39.50 from $34.50. DBS kept its “buy” call with a higher target price of $37.90 from $34.50 previously while OCBC Investment Research (OIR) also kept its “buy” call with a target price of $37.50, up from $33.50 before. PhillipCapital kept its “accumulate” call with a target price of $37 up from $34.90 previously while Morningstar kept its “four star” rating with a higher target price of $39 from $38 previously. Goldman Sachs has upgraded UOB to "buy" from "neutral" previously with a new target price of $41, 17% higher from before.
Despite UOB’s better-than-expected 3QFY2024 ended Sept 30 performance, the bank’s capital management plans were a “key focus” at its 3QFY2024 earnings briefing especially on the back of new disclosures on fully-phased in common equity tier 1 (CET-1) ratios for Basel III reforms, note CGS International analysts Andrea Choong and Lim Siew Khee in their Nov 8 report. “UOB’s proactiveness on capital management is welcome,” they add.
As at Sept 30, UOB’s CET-1 ratio rose by 2.5 percentage points y-o-y and 2.1 percentage points q-o-q to 15.5%. UOB’s group chief financial officer (CFO) Lee Wai Fai explained, at the bank’s results briefing, that the Basel reforms were to ensure a set of standardised risk treatments by all institutions. As UOB runs more standardised models outside of Singapore and with the bank being “a little bit more conservative” in its existing models, its transitional CET-1 ratio is tracking close to a fully-loaded CET-1 ratio unlike its peers.
“We also have been positioning the models for this new regulation. It's not new, [it’s been] something that is anticipated,” said Lee.
After reiterating its optimal CET-1 target of 13.5% to 14%, UOB stated that it had $2.5 billion in excess capital, or some 1% in risk-weighted assets (RWA), that is available for shareholder returns.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
Morningstar analyst Michael Makdad notes that UOB’s CET-1 ratio rose to 15.6% on a transitional basis. While not quite as high as the 17.2% reported by the bank’s peers, DBS Group Holdings and Oversea-Chinese Banking Corporation (OCBC), UOB said its ratio would still be at 15.2% with final Basel III rules fully phased in, on par with DBS’s 15.2% and close to OCBC’s 15.6%.
“We think the market has perceived UOB as having less excess capital than DBS and OCBC, so the disclosure of a fully phased-in ratio that's not much different from peers' suggests UOB may have more room for expanded future shareholder distributions than the market has been assuming,” he writes in his Nov 8 report.
“The Singaporean banks have traditionally favoured dividends over large repurchases to return capital to shareholders,” he adds.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
At UOB’s results briefing, CFO Lee and the bank’s deputy chairman and CEO, Wee Ee Cheong, said that they were assessing various options for returns. This includes a share buyback programme or special dividends. Based on Choong and Lim’s calculations, should all $2.5 billion be used for special dividends, this implies a dividend per share (DPS) of $1.50.
Morningstar’s Makdad has factored in a tentative assumption of a $1 billion buyback in 2025.
DBS Group Research analyst Lim Rui Wen is also looking forward to UOB’s capital management plans. In her Nov 8 report, Lee says UOB’s higher return on equity (ROE) trajectory as well as its plans to return capital to shareholders are “positives for the stock”.
The bank will be announcing its capital management plans at its 4QFY2024 results, which should take place around January or February 2025.
ROE optimism and Asean play
Beyond its capital return plans, the analysts continue to like UOB’s prospects as the bank remains optimistic of sustaining its ROE of 14% over the medium term.
They also like the bank’s expanded Asean franchise after its acquisition of Citi’s consumer businesses in Indonesia, Malaysia, Thailand, and Vietnam.
For more stories about where money flows, click here for Capital Section
The acquisition of Citi’s consumer businesses in these four countries allows the bank to “accelerate, scale up, and deepen its Asean franchise, the effective execution of which remains key to long-term synergies, with management expressing confidence in higher structural return on equity (ROE) of [over] 13% by FY2026,” says DBS’s Lim.
“Integration continues to be on track, as UOB continues to leverage on an enlarged base of [around] 8.5 million customers,” she adds.
OIR analyst Carmen Lee notes UOB’s “strong share price boost” after the US presidential election results and “strong” 3QFY2024 results from all three banks.
“At the time of writing, UOB shares are trading at an all-time high of $33.82 (intra-day high on Nov 8) post the announcement of its results and management’s intention to explore capital management initiatives,” she says in her Nov 8 report. Shares in UOB opened at $34.22 on Nov 8, 2.76% higher from its previous close of $33.30.
Lee also highlighted UOB’s “good improvements” in its wealth management and credit card businesses, adding that any downsides will see share price support from the bank’s dividend yield of 5.3%. “[The yield] is better than the Singapore six-month Treasury bill (T-bill) cut-off yield of 3.04% (based on the Nov 7 auction) and ahead of most Singapore blue chips average dividend yield of 4.8%,” Lee writes.
PhillipCapital analyst Paul Chew likes UOB’s trading income surge, continued recovery in wealth management fees and higher net interest income (NII) from loans, although he also notes negatives such as the higher allowances from Thailand operational merger issues. That said, UOB’s management says it expects this to normalise in the following two quarters.
On the back of this, Chew has increased his FY2024 earnings estimates by 4% from higher fee and trading income estimates, as well as lower operating expenses (opex) estimates.
“We expect 4QFY2024 earnings to grow [by around] 15% y-o-y from more substantial fee, trading income, and loan growth recovery while NII and net interest margin (NIM) remain stable,” he writes in his Nov 11 report.
“We expect credit costs to come in around the guidance of 25 basis points (bps) - 30bps,” he adds. “UOB has maintained their FY2024 guidance for low-single-digit loan growth, NIM to hold above 2%, and cost-to-income ratio (CIR) stable at around 41% - 42% while providing FY2025 guidance for ‘higher total income’ from high single-digit loan growth and double-digit fee growth.”
Chew also expects UOB to post double-digit trading income growth in 4QFY2024 from higher volatility surrounding the US elections.
On the impairments from Thailand, CGSI’s Choong and Lim believe that the reversal of management overlays may not be on the cards just yet, as the bank awaits more clarity on the macro environment.
“Funding cost management is bearing fruit, with NIM and NII holding steady, though we await more ramp up on wealth management fees,” they write.
On wealth, Morningstar’s Makdad notes that UOB has not been able to benefit from the large growth in Singapore’s wealth management business compared to DBS and OCBC due to a “gap” in its private-banking capabilities. However, the analyst expects UOB to work on closing the gap even though it doesn’t expect the bank to catch up with DBS on that front.
“Meanwhile, we can expect profit additions from the retail banking businesses UOB bought from Citibank in Malaysia, Thailand, Vietnam, and Indonesia,” he says.
CGSI’s Choong and Lim notes that UOB booked $4 billion in net new money in 3QFY2024 alone.
“Investments as a proportion of assets under management (AUM) came up to 37% in 3QFY2024; UOB aims to raise this to 40% in the near term by building up its digital platform,” they write.
DBS’s Lim says she remains “watchful” of any asset quality risks in the uncertain macroeconomic and high-interest rate environment, especially with regard to 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. During 3QFY2024, 20% of specific allowances taken relate to collateral revaluations,” she notes.
Goldman Sachs says it expects to see better operating income growth at UOB, at a compound annual growth rate (CAGR) of 3% over FY2023 - FY2026. This is double its previous forecast, given the reduced US Federal Reserve cuts, more robust loan growth momentum and continued strong non-interest income growth.
"Furthermore, UOB now looks better positioned for capital returns after implementation of Basel IV, with commitment to return excess capital of $3 billion (based on [UOB's] current fully loaded CET-1 numbers) to shareholders via dividends and share buybacks," says the brokerage, adding that it sees 15% upside to its new target price and 21% total return with 5.7% FY2026 dividend yield.
As at 1.28pm, shares in UOB are trading 96 cents lower or 2.62% down at $35.69.
