United Overseas Bank (UOB) U11 is managing headwinds and its Citi acquisition well, say RHB Bank Singapore analysts.
This comes as UOB’s share price is down 9% year-to-date, underperforming peers and the market barometer, they add. “At 0.9x FY2024 price-to-book (P/BV), concerns over reversal in net interest margin (NIM) trajectory and asset quality pressures are priced in, in our view. A pick-up in business activities in 2H2023, helped partly by China’s reopening and evidence of asset quality resilience should result in positive share price re-rating.”
That said, RHB analysts maintain “buy” on UOB in a May 31 note but with a lower target price of $32.30 from $34.90 previously. RHB’s target price includes a 4% ESG premium, based on their proprietary ESG methodology. “We make no changes to our earnings. That said, our target price is lowered as we raise equity risk premium due to heightened economic uncertainty.”
UOB sees two key headwinds, say the RHB analysts: revenue and asset quality. “The revenue headwinds from the reversal of the bank’s NIM trend, down 8 basis points (bps) q-o-q, and moderating loan growth, have surfaced in 1QFY2023 [ended March]. Still, management expects to sustain NIM at 1QFY2023’s level of 2.14% as cost of funds stabilises in 4QFY2023, while the 25 bps hike in the Federal Funds Rate (FFR) in May and a pick-up in loan growth in 2H2023 [owing to] China’s reopening should help.”
In 1QFY2023, UOB’s loans contracted 1.2% q-o-q as the rise in interest rates prompted some borrowers to pay down their mortgages.
The 500 bps upward spiral in US rates since end-2021 had pushed the three-month Singapore Interbank Offered Rate (3M SIBOR) up by 390 bps. This has led to asset quality concerns, namely exposure to the property sector, say the RHB analysts.
See also: UOB reports record core net profit of $1.58 bil, 74% higher y-o-y in 1QFY2023
UOB’s leaders believe commercial real estate (CRE) in developed markets is most vulnerable with the office segment being the main pain point, they add. “For UOB, CRE financing is 30% of total loans with exposure to developed markets at 7% and the office segment at 2%. So far, the bank is not seeing any stress and takes comfort in its CRE loan-to-value of 50% and overall non-performing assets coverage of 96%.”
Aside, UOB’s Citi acquisition is progressing well, say RHB’s analysts. “Having completed its acquisition of Citi’s consumer banking businesses in Malaysia and Thailand in November 2022, and Vietnam in March, management is focused on revenue retention this year.”
This is progressing well, they add, with Malaysia and Thailand recording 4% revenue growth compared to expectations of a 10% drop. “Management is also pleased that a high 90% of Citi staff have crossed over to UOB, a positive given their expertise in the credit card and unsecured lending businesses.”
See also: UOB deepens its regional roots: Interview with Wee Ee Cheong
The acquisition in Indonesia is slightly delayed with completion now expected by end-2023. With the two potential pitfalls of revenue and staff attrition “effectively managed”, UOB expects the Citi acquisition to enhance its net profit by $250 million to $300 million from 2024.
Last month, RHB kept UOB as its top pick among the three Singapore banks, following 1QFY2023 earnings that grew by 74% y-o-y to hit a record $1.51 billion.
As at 11.19am, shares in UOB are trading 24 cents lower, or 0.85% down, at $27.82.
