United Overseas Bank (UOB) remains a work in progress, says Maybank analyst Thilan Wickramasinghe. As a bank with a wide ASEAN footprint, UOB has some catching up to do to protect against ESG (environmental, social and governance) risks, while maintaining its reputation within SME banking needs.
Wickramasinghe is maintaining his “hold” call on the bank, with an unchanged target price of $20.79.
“As a group with a large SME customer base, UOB is particularly exposed to social risks in terms of balancing shareholder returns and supporting small business owners in a backdrop of Covid-19. Its ESG financing portfolio and certain diversity metrics lag Singapore banking peers,” he says in a September 18 note.
That said, he believes such ESG risks are typical for a bank with a regional presence like UOB. Among Singapore banks, Wickramasinghe prefers DBS for its North Asia growth potential and client mix.
Within the field of SME banking, UOB has a recognised franchise that is core to its strategy, notes Wickramasinghe. The group also has been proactive in supporting this customer base by introducing early Covid-19 relief measures ahead of its peers in 1Q2020.
The group has launched a digital banking product in Thailand and Indonesia (with plans for wider regional reach) to increase financial inclusivity, particularly among younger demographics. It also has a track-record of investing in productivity tools and offering flexible working arrangements to key employee segments such as mothers, students and caregivers even before the pandemic, he says.
In addition, Wickramasinghe warns of governance and diversity risks for UOB. “The group has had several mis-selling incidents in the past two years, which raises Fair Dealing and Governance Risks. UOB may also be exposed to data security and cyber-attack risks given the sizable scale of its technology platforms.”
From a diversity aspect, women make up just 10% of Board membership (the lowest among its Singapore peers) and 35% of senior management at end-2019.
See: Banks’ earnings will erode as NIMs expected to fall near post-GFC low: DBS
With regards to earnings, 16% of UOB’s loans are under moratoriums, a bulk of which are set to expire between 3Q2020 and 4Q2020. This may increase near term NPL (non-performing loans) risks. Tighter net interest margins (NIMs) and softer loan growth may further erode earnings visibility, warns Wickramasinghe.
As at 2.30pm, shares in UOB are trading at 9 cents higher, or 0.47% up, at $19.30.
