• Keep BUY with a higher SGD34.90 TP from SGD31.40 and c.5% yield. We expect United Overseas Bank to deliver strong earnings growth of c.18% in FY23 despite the expected softening in GDP growth. Tailwinds from further NIM expansion, coupled with contributions from Citi’s consumer assets in Malaysia and Thailand would drive ROE improvements over the next two years. Our intrinsic value of SGD33.57 is based on a GGM-derived 1.26x FY23F P/BV.

• NIM remains the bright spot. The 3-month compounded Singapore Overnight Rate Average (SORA) rate crossed 3% for the first time on 5 Dec and looks set to trend higher. The 1-month SORA rate is at a higher 3.39% while the US federal funds rate (FFR) was raised another 50bps to 4.50% on 14 Dec. Recall that management guided for NIM to stay above 2.0% in 4Q22 and rise another 5-10bps 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 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).

• Asset quality to hold up well. Management expects the group’s asset quality to remain resilient as rate hikes within the region have been orderly while businesses continue to have access to credit and employment markets are healthy. UOB’s NPL ratio eased to 1.5% in 3Q22, from 1.7% in 2Q22, as NPLs fell 10% QoQ on lower NPL formation and higher recoveries. LLC was comfortable at 98%. Management guides for credit cost of 25bps in FY23, vs guidance of 20bps for FY22F (9M22: 18bps) with the 5bps coming from the consolidation of Citi’s consumer business in Malaysia and Thailand.

• Acquisition of Citi’s consumer assets progressing well. On 1 Nov 2022, UOB completed the acquisition of Citi’s consumer assets in Malaysia and Thailand. The bank is working towards full system integration in 12-18 months. Consolidation of Citi’s portfolio, which has a larger portion of unsecured loans, is expected to lift UOB’s NIM by another 5-10bps while adding 5bps to credit cost. Management expects to incur MYR700-800m in a one-time cost that would keep FY23 CIR at c.44%. We gather that revenue numbers are tracking ahead of expectations, helped by the pick-up in economic and tourism activities in these two countries.

• Earnings revisions and TP. We nudged up our FY23F-24F net profit by 5% and 7% respectively, as we adjusted NIM assumptions up by 7-10bps for the two years. We now expect earnings to rise by a very healthy 18% in FY23F (FY22F: +16%), before moderating to a 12% growth in FY24F. Our TP rises to SGD34.90 (from SGD31.40) based on our updated GGM assumptions (Figure 2). The TP incorporates a 4% ESG premium, based on our in-house methodology.

Source: RHB Research - 16 Dec 2022