The Singapore research team at RHB Group Research has kept “buy” on United Overseas Bank (UOB) with a target price of $33.50.
The target price is based on an intrinsic value of $31 based on a Gordon Growth Model (GGM)-derived price-to-book (P/BV) of 1.2 times, near +1 standard deviation from the historical mean.
In its report on Jan 7, RHB says it remains “upbeat” on the bank’s prospects in FY2022 despite likely softness in the near-term on the back of the Omicron variant.
In 2022, the team expects to see broad-based growth.
“Management expects loan demand to stay strong with the pick-up in cross-border activities. Loans are expected to expand by mid to high single digit with growth from regional operations expected to strengthen, while lending in Singapore would moderate slightly,” notes the team.
“Management guided for net interest margin (NIM) to be stable to slightly higher, as rate hikes will be in late 2022, while margins from regional states will be flattish on their slower economic recovery,” it adds.
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According to UOB’s management, a 100 basis point (bps) increase in interest rates over a 12-month period would enhance interest income by $500 million to $600 million (or a 12-16 basis point NIM expansion).
The outlook for UOB's fees -- namely wholesale banking and wealth management -- remains positive although growth would likely moderate from FY2021. Management also aims to maintain its cost income ratio (CIR), which was at 43.8% in the 9MFY2021 with higher staff costs and digital investments to be mitigated by revenue growth, continues the team.
In FY2022, UOB’s asset quality is expected to stabilise although its management sees its non-performing loan (NPL) edging up to 1.7% to 1.8% compared to the 1.5% in the 3QFY2021 as some NPLs materialise.
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That said, the team at RHB estimates that UOB’s FY2022 credit cost would likely be slightly lower at 23 basis points compared to the 25 basis points in FY2021 as general provisions (GPs) were set aside for these anticipated NPLs.
“Loans under relief assistance is a very manageable 4.5% of group loans while non-performing assets (NPA) coverage was a comfortable 106%. Out of prudence, management plans to raise GP to 82-83 bps vs 70 bps during pre-pandemic. This points to potential write-backs of $580 million vs current excess GP of over $1 billion,” says the team at RHB.
As at 12.56pm, shares in UOB are trading 3 cents higher or 0.1% up at $29.19, with an FY2021 P/B of 1.08 times and dividend yield of 4.3%.
