RHB Bank Singapore has upgraded United Overseas Bank U11 (UOB) to “buy” as it believes that it’s time for the bank “to shine”.
The Singapore research team has also increased its target price to $40.20 from $35.60 previously. The new target price represents an upside of 10% from UOB’s share price of $36.40 as at its report dated Nov 20. The new target price also represents an FY2025 yield of 5%.
“UOB has lagged peers for a large part of the past 23 months, but we think this trend is set to reverse,” says the team, citing four factors. These are: the bank’s defensive, Asean-centric portfolio; multi-year investments in platforms as well as synergies from UOB’s Citi acquisition; better FY2025 earnings growth prospects compared to the sector average; as well as more aggressive capital returns, thanks to an improved capital position.
UOB’s Asean-centric portfolio will provide investors with a defensive shelter to ride through the market volatility that is likely to happen following the outcome of the US Presidential election this year.
“RHB Global Economics and Market Strategy (RHB GEMS) generally expects Asean economies under coverage to post stable-to-stronger economic growth in 2025 – on sustained strength in trade and manufacturing, tourism activities and policies to support consumption, among others,” says the team. “Trade exposure to the US is relatively low but RHB GEMS does have a caveat that the indirect impact via China could be substantial.”
UOB’s investments into its regional platforms as well as its acquisition of Citi’s consumer banking businesses in four Asean markets – Malaysia, Thailand, Indonesia and Vietnam – seem to be bearing fruit already.
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The benefits from the bank’s investments include positioning its wholesale banking business to better capture connectivity and foreign domestic investment (FDI) flows into the region and capturing the rise in retail wealth in the Asean region.
“We believe some of these benefits were evident in the recent 3QFY2024 ended Sept 30 results – its loan and current account savings account (casa) growth of +5% y-o-y and +17% y-o-y outpaced that of [its] peers,” says RHB.
All of these factors are leading to a positive outlook in FY2025 with UOB guiding to see higher total income from high single-digit loan growth and double-digit fee growth. The bank has also guided for its cost-to-income ratio (CIR) to be at 41% to 42% next year with a stable credit cost of 25 basis points to 30 basis points.
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Coupled with costs of the integration with Citi to taper off, the RHB team expects UOB’s reported earnings for FY2025 to grow by 6% y-o-y, which is better than the flat earnings projected for the sector.
On a core basis, RHB still forecasts UOB’s FY2025 patmi to increase by 3% y-o-y due to prospects from its non-interest income segment.
“The rise in patmi and higher dividend payouts assumed supports our +9% distribution per share (DPS) growth for FY2025,” the team writes.
The team also sees further upside potential for shareholder returns, with UOB indicating that it may embark on capital management initiatives next year.
“While we assume that its dividend payout ratio will rise to 52.5% in FY2025 from 51% in FY2024, there could be further upside to capital returns in the form of higher dividends and, or share buybacks, now that UOB has a better line of sight on excess capital, with Basel III reforms having gone live,” says RHB. “Also, its 14% mid-term return on equity (ROE) target excludes capital management activities.”
Even though the team kept its earnings forecasts unchanged, its higher target price stems from a lower cost of equity (COE) assumption of 100 basis points.
“We think [the higher target price] is deserved as confidence around UOB’s 14% ROE target rises,” says the team.
The new target price implies a P/BV of 1.31 times from 1.16 times previously, which is at the higher end of post-global financial crisis (GFC) levels.
As at 12.56pm, shares in UOB are trading 10 cents lower or 0.27% down at $36.33.
