SINGAPORE (Oct 25): DBS is upgrading UOB to “buy” with higher target price of $26.90 saying its time for the lender’s fortunes to turn.
Firstly, the property market -- seen to be a proxy for UOB’s share price movement -- is recovering.
Secondly, firmer NIM levels could be expected in 4Q17 as SIBOR/SOR finally edge up more visibly over the quarter.
Thirdly, while asset quality concerns may still linger, the quantum of new NPLs has eased. This should warrant a re-rating in FY18.
Our earnings remain marginally above consensus after our 2-4% FY18-19 earnings upgrade to factor in higher NIM and loan growth. We now have one of the few BUY ratings among consensus. Our TP is also at the higher end of consensus.
“We expect 3Q17 results to be stronger with a further improvement in NIM and more importantly, a pickup in loan growth due to the recovery of the property market,” says analyst Lim Sue Lin in a Tuesday report.
Corporate loan growth, particularly from property developers, is likely to drive loan growth for 3Q17. As there may be a few more blips on the asset quality side, albeit in a much smaller quantum vs a year ago, specific provisions may still stay relatively high. Cost-to-income ratio will likely ease as revenue growth picks up.
“Our revised TP of $26.90 is based on the Gordon Growth Model (11% ROE, 4% growth and 9.5% cost of equity), equivalent to 1.3x FY18 P/BV, almost at its 10-year average P/BV multiple,” says Lim.
Shares in UOB are up 22 cents or 0.91% at $24.47 or 11.5 times FY17 earnings.
