Analysts remain positive on United Overseas Bank (UOB), as the bank’s net profit of $1.02 billion for the 4QFY2021 ended December came in slightly above consensus’ expectations of $998 million.
In an unrated report dated Feb 17, UOB Kay Hian analyst Jonathan Koh notes that the worst could be behind the bank amid a stabilising operating environment.
“Management sees improvement in consumer sentiment in Singapore. There are green shots of recovery and significant upside in the Asean region, although the pace of recovery may vary by country. There is sizeable flow of foreign direct investments (FDI) into Asean,” he writes.
UOB is also seen as a beneficiary to the interest rate hikes by the US Fed, in which management has already guided that every hike of 25 basis points will lead to a four- to five-basis point net interest margin (NIM) expansion for UOB.
This, says Koh, translates to an additional net interest income of $150 million to $200 million per year.
In his report, Koh also noted UOB’s loan growth of 10.5% y-o-y in the 4QFY2021, which were driven by large corporate and institutional clients. “By industry, transport & communications, building & construction and financial institutions & holding companies grew 16%, 16% and 30% y-o-y respectively.”
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“Singapore, Greater China and Others (mainly Australia, the UK and the US) grew 10%, 10% and 32% y-o-y respectively,” he adds.
In addition, UOB rolled out several sustainable financing solutions, says Koh. “Total sustainable financing reached $17 billion in 2021, surpassing its 2023 target of $15 billion,” he says. “Management has set a new sustainable financing target of $30 billion by 2025.”
Koh notes that non-interest income was seasonally softer. “Fees & commissions grew 12.8% y-o-y but remained flat q-o-q at $589 million in 4QFY2021,” he says. “Growth from credit cards (+2% q-o-q) and loans related (+4% q-o-q) fees were offset by a seasonal decline in wealth management (-8% q-o-q).
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“Assets under management (AUM) from high affluent customers grew 4% y-o-y and reached a new record of $139 billion, while total card billings in Singapore increased 17% in 2021,” Koh says. “Trading and investment income however dropped 31% q-o-q due to lower customer flows and seasonally weaker transaction volume.”
Meanwhile, non-performing loans (NPL) balance increased 6.4% q-o-q, according to Koh. “NPL formation was higher at $670 million due to several secured corporate accounts,” Koh explains. “A property company in Singapore accounted for one third, or about $220 million, of the increase in NPLs.”
NPL ratio deteriorated 0.1 percentage points q-o-q to 1.6%, where NPLs for buildings & construction and financial institutions and holding companies increased by $292 million and $196 million y-o-y respectively.
The research team at OCBC Investment Research (OIR) has also taken a favourable stance on UOB. In its Feb 16 report, the team has maintained its "buy" rating and increased its target price to $36.50. The higher target price implies 1.33 times price/book (close to +0.5 standard deviation to its 10Y historical average multiple of 1.24 times).
“We remain constructive on financials and in particular banks in view of the tailwinds expected from higher rates,” says the team.
“Loan deposit ratio was stable at 87%, where the common equity tier 1 (CET-1) ratio remained robust at 13.5% with leverage ratio of 7.2% more than double the regulatory requirement,” they add.
Moreover, the team is also confident in UOB maintaining its 50% dividend payout ratio. “A final dividend of 60 cents/share was announced, which brings the total 2021 dividend to $1.20/share, implying an approximate 49% dividend payout ratio, normalized from previous year’s 45% that was in line with regulators’ dividend cap,” notes the team.
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Looking ahead, apart from upside from NIM expansion, the gradual reopening of borders within Asean is also supportive of further recovery in regional business flows over the medium term, says the team.
“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,” they add.
DBS Group Research analysts Paul Yong and Rui Wen Lim have also kept their "buy" rating on UOB with an increased target price to $37 from $34.20.
“We believe there is further room for UOB’s share price to re-rate, as we continue to see strong business momentum and improved profitability in a rate hike environment,” say Yong and Lim in their Feb 17 report. “Our house view currently stands at five hikes in 2022 and two more in 2023, which will be positive for UOB’s NIM through FY2023 and beyond.”
In addition, the analysts have revised their estimates higher by 5-6%, factoring in higher NIM expectations and slightly higher non-interest income.
Some key risks that Yong and Lim see include a deteriorating asset quality. “Larger-than-expected NPLs as well as a worse-than-expected Covid-19 pandemic situation globally could unwind expectations of credit cost and NPL declines, thus posing risks to earnings,” say the analysts.
Maybank Securities analyst Thilan Wickramasinghe has kept "buy" on UOB with an increased target price to $36.69 from $31.15.
“The group’s gearing to Asean recovery (19% of loans, ex-Singapore), exposure to higher margin SMEs and an expanded retail franchise following the Citibank asset acquisition puts it in a strong position to benefit from rising rates and re-opening,” says Wickramasinghe.
“With return on equities (ROEs) set to expand (12% FY2023 vs. 9.8% FY2021), we expect the group to trade at higher multiples, while dividend payout risks are on the upside.”
Finally, PhillipCapital analyst Glenn Thum has kept his "accumulate" call on UOB with a higher target price of $35.70 from $31.30 previously.
"We assume 1.46 times FY2022 P/BV in our valuation, up from 1.26 times," he writes.
Thum has also raised his earnings estimates for FY2022 by 8% as he ups UOB's NII and fee income estimates for FY2022.
"Our ROE estimate is raised from 10.2% to 11.5%. There is upside to our estimates from $300 million writeback and higher NIMs. Every 25 basis point (bps) rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%," says Thum.
At 3.53pm, shares in UOB are trading at 33 cents higher or 1.01% up at $33.08.
