RHB Group Research’s Singapore research team has kept its “buy” call on United Overseas Bank (UOB) with a higher target price of $34.90 from $31.90 previously.
“We expect United Overseas Bank to deliver strong earnings growth of [around] 18% in FY2023 despite the expected softening in GDP growth,” the team writes in its Dec 16 report.
To them, UOB’s net interest margin (NIM) remains a bright spot with the three-month compounded Singapore Overnight Rate Average (SORA) crossing 3% for the first time on Dec 5. The rate looks set to trend higher, the team notes.
The one-month SORA rate stands at at higher 3.39% while the US Federal Funds Rate (FFR) was raised another 50 bps to 4.50% on Dec 14, it adds.
“Recall that management guided for NIM to stay above 2.0% in 4QFY2022 and rise another 5 bps – 10 bps should the FFR reach 4.0%. Along with the rise in lending rates, UOB, similar to its peers, has also raised deposit rates since August,” the team writes.
“The rise in cost of funds would be mitigated by the very decent spread the bank makes from placing excess funds in the government treasury bills (T-bills),” it continues.
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UOB’s asset quality should also hold up well. In a previous briefing, the bank’s management revealed that it expects the group’s asset quality to “remain resilient” as rate hikes within the region have been “orderly”. At the same time, businesses continued to have access to credit and employment markets stood healthy.
In the 3QFY2022, UOB’s non-performing loan (NPL) ratio fell to 1.5%, down by two percentage points q-o-q, as NPLs fell by 10% q-o-q on lower NPL formation and higher recoveries.
UOB’s loan loss coverage (LLC) or better known as non-performing assets (NPA) stood comfortable at 98%.
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“Management guides for credit cost of 25 bps in FY2023, versus guidance of 20 bps for FY2022 (9MFY2022: 18 bps) with the 5 bps coming from the consolidation of Citi’s consumer business in Malaysia and Thailand,” the team writes.
Furthermore, UOB’s acquisition of Citi’s consumer assets are progressing well. The bank completed the acquisition of Citi’s consumer assets in Malaysia and Thailand on Nov 1; it is working towards full system integration in 12-18 months.
To the team, consolidation of Citi’s portfolio, which has a larger portion of unsecured loans, is expected to lift UOB’s NIM by another 5 bps to 10 bps while adding 5 bps to credit cost.
“Management expects to incur 700 million ringgit ($214.8 million) – 800 million ringgit in a one-time cost that would keep FY2023 cost income ratio (CIR) at 44%,” the team writes.
“We gather that revenue numbers are tracking ahead of expectations, helped by the pick-up in economic and tourism activities in these two countries,” it adds.
In addition to the higher TP, the team has upped its net profit estimate for the FY2023 to FY2024 by 5% and 7% respectively as they increased their NIM assumptions by 7 bps to 10 bps for the two-year period.
“We now expect earnings to rise by a very healthy 18% in FY2023, before moderating to a 12% growth in FY2024,” they write. “Our TP rises to $34.90 (from $31.40) based on our updated Gordon growth model (GGM) assumptions. The TP incorporates a 4% ESG premium, based on our in-house methodology.”
Shares in UOB closed 15 cents lower or 0.49% down at $30.72 on Dec 16.
