United Overseas Bank (UOB) is cautious but confident following its 2QFY2022 results ended June, as expanded margins and the recovery in trading and investment income boosted the bank to post $1.11 billion in net profit, 11% higher y-o-y.
In a July 29 note, CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee are maintaining “add” on UOB with a target price of $35.60.
“Net interest margin (NIM) expansion remains UOB’s key earnings lever, offsetting the softer non-interest income and opex. On this end, we have factored in the Fed funds rate increasing to some 3.5% by end-FY2022, a slight cut to 3.25% by end-FY2023, and 3% by end-FT2024,” writes Choong and Lim.
Correspondingly, CGS-CIMB projects UOB’s q-o-q NIM expansion to peak in 4QFY2022 at some 1.9%, leading to full-year NIM of 1.73% in FY2022 (up 17 basis points or bps y-o-y) as its book reprices, and higher towards 2% in FY2023.
Meanwhile, PhillipCapital Research analyst Glenn Thum maintains “buy” on UOB with an unchanged target price of $35.70, the highest target among analysts mentioned here.
Thum writes: “Management is guiding single-digit loan growth with higher NIMs, stable cost-to-income ratio and slightly higher provisions. There is upside to our estimates from further general provisions (GP) write-backs and higher NIMs. Every 25 bps rise in interest rates can raise NIM by 0.04% and Patmi by 4.3%.”
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Asset quality
Maybank Research’s Thilan Wickramasinghe, meanwhile, holds a “buy” call on UOB with a lower target price of $32.28.
In a July 29 note, Wickramasinghe points to asset quality, highlighting UOB’s exposure to China. “Non-performing loans (NPLs) jumped to 1.7%, compared to some 1.5% in 2QFY2021, largely from a classification of a Chinese property credit.”
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He adds: “UOB’s non-bank exposure to the Mainland is 4% of loans — largely from network customers, such as Singapore corporates with China exposure. Its direct exposure to Chinese developers is 1%, where management claims half are to state-owned enterprises and, barring this single credit, the rest are performing. Nevertheless, the flip-side of rising interest rates and slowing growth could be asset quality deterioration.”
Wickramasinghe raised his FY2022-FY2024 NPL assumptions by 9%-20%, while allowances for credit losses were raised to 27%-34%.
Analysts from DBS Group Research are maintaining “buy” on UOB with a lower target price of $34.20, owing to higher cost of equity.
DBS analysts Lim Rui Wen and Tabitha Foo point to UOB’s pullback on guidance. “Management reiterates that the new guidances are a reflection of the overall market slowing and sentiment turning cautious. They include lower loan growth at mid-single digit down from mid-to-high), while year-to-date loan growth stands at 3.5%; lower fee growth at low-single digit (from high-single digit); and higher credit costs of 25 bps from 20-25 bps.”
RHB Group Research analysts sang a different tune with its Aug 1 note, maintaining “neutral” on UOB with the lowest target price among the analysts mentioned here, at $29.30, down from $32.70 previously.
“1HFY2022 results were within expectations, supported by a recovery in the domestic economy and regional trade flows, as well as higher interest rates. While key markets are not expected to fall into recession, slower growth ahead led to a downward revision in guidance. Exposure to China’s property market turmoil is limited. Given continued uncertainty, stock price would likely be range bound in the near term, even as valuation is now more reasonable,” writes RHB.
Finally, Citi Research analyst Tian Yafei highlights fee income in an unrated July 29 note.
“1HFY2022 fee income was down 8% y-o-y. The low-single digit fee income guidance implies material pick-up in growth in 2HFY2022. Management expressed that momentum for corporate fee income was strong while retail was slower. Looking ahead, management expects credit card fee growth can continue, helped by reopening. There was [a] lift in wealth-related fee income in May and June that could carry through in 2HFY2022, as investors diversified into bonds, structured notes and deposits. Bancassurance saw 20% y-o-y uplift, which management expects can continue,” writes Tian
As at 12.33pm, shares in UOB are trading 40 cents higher, or 1.45% up, at $27.95.
