Analysts at CGS-CIMB Research anticipate that United Overseas Bank’s (UOB) earnings for the 2QFY2023 ended June 30 will be “sequentially softer q-o-q”. This is as net interest margins (NIM) start slipping amid modest loan growth and elevated funding costs. However, in their view, strong liquidity will allay asset quality deterioration fears.
For this reason, Andrea Choong and Lim Siew Khee have reiterated their “add” call to United Overseas Bank (UOB), with an unchanged target price of $33.30.
Choong and Lim say that 1QFY2023 earnings were supported by a jump in wealth management income, new money inflows due to fallouts in the banking sector globally, and strong trading and investment income.
“These trends would likely taper off in 2QFY2023 as operating conditions stabilise, but still help offset the impending margin compression, in our view,” they say.
As such, they expect UOB to report a net profit of $1.4 billion in 2QFY2023, which represents an 8% decrease q-o-q, and 30% increase y-o-y. They also expect a milder NIM compression of -4 basis points (bps) q-o-q, where the figure was at - 8bps in the previous quarters, as funding cost pressures ease and new loans reprieve on higher interest rates.
The continued compression comes as customers renew their matured fixed deposit placements amid a low-growth environment, say the analysts.
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According to UOB, about 50% of these matured fixed deposits were rolled over into new fixed deposits (vs. about 60% - 70% in 1QFY2023), around 20% went into current account savings accounts, while about 20% was placed in wealth management products, particularly bond funds.
Going forward, the analysts expect funding cost pressures to ease as UOB has cut its fixed deposit rates from a peak of 4% in November 2022 to 2.9% at present. The bank has also ceased to offer longer-dated 12 and 15-month placements as it did in 4QFY2022, and now only offers fixed deposits with tenors of up to 10 months.
“UOB’s guidance is for margins to hold up at current levels (2.1% - 2.2%) in FY2023; this assumes no additional Fed rate hikes this year. Should the Federal Open Markets Committee (FOMC) meeting on July 27 result in a rate hike, we highlight the possibility of management raising its NIM guidance slightly,” say Choong and Lim.
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Meanwhile, loan growth will likely be more upbeat in 2QFY2023, as the analysts expect an increase of 1.2% q-o-q as compared to the previous quarters decline of 1.1%. This is backed by corporate loan drawdowns and trade loans as loan repayments ease.
“We think that wealth management fees and net new money inflows likely eased in 2QFY2023, given the absence of a banking sector confidence crisis in 1QFY2023.” they add.
As the market environment remains conducive, Choong and Lim think that trading and investment income may stay relatively strong as the bank utilises its chest of excess funds. They believe that credit costs will stay benign in this quarter, within management’s guidance of 20 to 25 bps for FY2023, while excess liquidity remains a deterrence against significant asset quality deterioration for now.
“That said, top-ups of management overlays are likely as UOB builds up a preemptive buffer. Our Gordon growth model-based target price is unchanged, as downside risks include asset quality deterioration,” the analysts add.
As at 11.39am, shares in UOB are trading 0.41 cents higher or 1.50% up at $27.720.
