The Singapore research team at RHB Bank Singapore is remaining “neutral” on United Overseas Bank U11 (UOB) with an increased target price of $32 from $30.10 previously, following a meeting with UOB’s management. The higher target price comes after the team has rolled its valuation forward to FY2025.
In its July 23 note, the team think UOB’s 2QFY2024 patmi could ease q-o-q provided trading and investment (T&I) income normalises from the high levels seen in 1QFY2024.
“The roll-off in Citi integration costs in 2HFY2024 is positive for earnings, and efforts to build up the wholesale platform look to be bearing fruit,” says the team.
That said, the team notes that investors’ focus will be on dividend yields following the ongoing interest downcycle for the bank’s dividend per share (DPS) growth.
Furthermore, UOB’s preference to retain capital for growth could cause yields and DPS growth lag peers.
In 2QFY2024, the RHB team sees “mixed” trends.
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“We gathered that loan growth momentum was surprisingly resilient in 2Q, thanks to broad-based growth,” the team writes.
Furthermore, it sees that the bank’s net interest income (NII) should be “decent” on a q-o-q basis for the 2QFY2024 due to support from its net interest margin (NIM) from efforts to lower deposit costs. On a y-o-y basis though, NII is expected to come in “slightly lower” on lower NIM.
They add: “We understand that the reduction in deposit rates have not had a major impact on UOB’s deposit market share so far and, for now, no decision has been made on whether to undertake another round of rate cuts.”
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As for non-interest income, the team expects a healthy fee income while overall operating income is set to dampen resulting from the normalisation of T&I income.
With UOB’s 1QFY2024 T&I income standing at $522 million and, based on the guided run rate of $350 million - $400 million per quarter, non-interest income and operating income growth may soften ahead.
Despite this, UOB’s asset quality continues to hold up and the bank has yet to note any adverse developments.
While UOB’s integration of Citi Thailand has seen some teething issues, management believes the issue can be resolved fairly quickly.
Additionally, the team notes that management expects Citi integration costs, at $100 million per quarter, that UOB has been incurring to largely run its course in 2QFY2024. Subsequently, this is expected to drop off significantly in 2HFY2024 following the passing of Operating Day 1 for the major markets in Malaysia, Thailand and Indonesia.
Management has also made no change to its core cost income guidance of 41% - 42%.
The team also adds that UOB’s digital platform for wholesale business is “starting to bear fruits”.
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Launched for the rest of the region two years ago, the digital platform should have a positive impact on UOB’s current account savings account (CASA) momentum.
Amid an elevated rates environment, UOB’s CASA deposits was up 12% as at end 1QFY2024, with a CASA ratio of 50.6%, in comparison to 4QFY2022 CASA ratio of 47.5%.
“The focus ahead is on revenue generation, e.g. growing trade loans, which should also bring in ancillary revenue streams such as foreign exchange and cash management,” adds the RHB team.
They also note that capital management for UOB seems unlikely at this juncture due to the bank’s preference to continue building up its common equity tier-1 (CET-1) ratio, which sat at 13.9% in 1QFY2024.
This could narrow the gap with peers, with CET-1 ratios of 14.7% - 16.2%, and retain the bank’s capital for future growth opportunities.
UOB has since cited a CET-1 comfort level of 13.5% - 14%, which it sees as sufficient to support risk-weighted assets growth of 7% - 8% and a 50% dividend payout ratio.
However, it adds that it will reconsider its capital management theme, in the face of weaker-than-expected growth.
UOB’s environmental, social and governance (ESG) sits at 3.2 (out of four). As per RHB’s in-house proprietary ESG methodology, the team’s target price includes a 2% discount to UOB’s intrinsic value.
As at 2.05pm, shares in UOB are trading 19 cents higher or up 0.58% at $32.76.
