Analysts are mixed on UOB’s prospects after the bank released its results for the 1QFY2022 ended March.
On April 29, the bank reported softer 1QFY2022 earnings of $906 million amid market volatilities. The figure also stood below the expectations of analysts.
Nevertheless, analysts from DBS Group Research have kept their “buy” rating with an unchanged target price of $37.
According to DBS’s Paul Yong, Lim Rui Wen and Tabitha Foo, their recommendation comes as the bank’s guidance for the FY2022 remains “intact” from the last quarter.
To them, UOB remains a recovery play and a beneficiary of the US Fed rate hikes.
In addition, there is further room for a re-rating of UOB’s share price, as the analysts continue to see “a strong recovery of the business momentum amidst economies reopening”.
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“But we also remain watchful of inflationary pressures,” they write in their May 4 report.
“Our house view currently stands at 225 basis points (bps) in 2022 and 100bps in 2023, which will be positive for UOB’s net interest margin (NIM) through FY2023 and beyond,” they add.
In addition, UOB’s strong non-performing asset (NPA) coverage of 94% is likely to limit downside risks and provide share price support.
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“As of 1QFY2022, the large management overlay of over $1 billion in general provisions will mitigate any potentially unexpected, specific provisions. The release of some of this buffer on the back of a positive market outlook may provide a return on equity (ROE) upside in FY2022,” note the analysts.
In addition to their positive outlook, the analysts see UOB’s lower-than-expected credit costs as a driver for the bank’s earnings, while its post-Covid-19 recovery in ROE could boost its share price.
The research team at OCBC Investment Research has also kept their “buy” recommendation with a fair value of $36.50.
To the OCBC team, the bank is “expected to see an improved outlook this year in tandem with the brighter regional economic outlook as vaccinations progress, with guidance for a high single digit loan growth target (driven by its wealth management franchise, improving Asean/Greater China connectivity flows, digital strategy expansion across Asean), and double digit growth in non-interest income.”
“Efforts ahead will focus on integrating its acquisition of Citi’s consumer business in Malaysia, Indonesia, Thailand and Vietnam, which the bank estimates could double its retail customer base from 2.9 million pre-acquisition to 5.3 million post transaction. UOB is rated for its ESG, pegging the bank above the median global industry rating,” adds the team.
While the team is positive on the Singapore banking sector on the whole due to the tailwinds expected from the higher rates, it remains “watchful” for implications on higher macro risks.
“In terms of rate sensitivity, UOB had previously shared that its NIMs could gain 4 bps for every 25 bps Fed rate increase. The bank’s 2022 guidance reflected improved confidence on the recovery path which include: mid- to high single digit loan growth, double digit non-interest income growth, stable cost/income ratio and normalized credit costs (20-25bps of loans),” says the team.
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“Looking ahead, apart from upside from NIM expansion, the accelerating reopening of borders within ASEAN is also supportive of further recovery in regional business flows over the medium term,” it adds. “The focus for the coming months and quarters will be on ensuring a smooth integration of the Citi acquisition, which should eventually deepen its Asean franchise and is expected to complete between mid-2022 to 1QFY2024, depending on the pace of individual country’s regulatory clearance.”
PhillipCapital analyst Glenn Thum has kept “accumulate” on UOB with an unchanged target price of $35.70.
The analyst is also keeping his estimates for the FY2022 unchanged in his May 5 report.
To him, UOB’s profit should continue to grow during the year on the back of stabilising margins, stronger fees and lower provisions.
In addition, Thum expects UOB’s net interest income (NII) to expand 14% y-o-y. Credit costs are also expected to come in below guidance at 20 to 25 bps, he adds.
Thum notes: “There is earnings upside from writebacks of the $1 billion in management overlay of general provisions. Management has said that as it is being conservative, the intention is only to write-back some but not all of the GPs during the second half of 2022”.
The Singapore research team at RHB Group Research is the most negative out of all the houses, as it downgrades its call on UOB to “neutral”.
“Although trading and investment (T&I) income is expected to rebound in 2QFY2022, we trimmed non-interest income due to the more challenging outlook,” writes the team in its May 4 report.
The team has also lowered its target price to $32.70 from $38.10, on account of higher risk premium. The team has also factored in a lower ESG score of 3.2 from 3.3 as they “recalibrate assessment of risks and regulatory requirements associated with data and cybersecurity”.
That said, the team sees UOB’s share price consolidating in the near term given its performance year-to-date and more subdued FY2022 earnings growth.
On the back of the ongoing macro headwinds, however, the team has trimmed its earnings forecasts by 5% to 6% for the FY2022 to FY2024 to take into account the mark-to-market (MTM) trading loss in the 1QFY2022, as well as the more conservative assumptions on non-II.
