• Stay BUY, with new SGD32.30 TP from SGD34.90, 15% upside and c.6% yield. United Overseas Bank’s share price is down 9% YTD, underperforming peers and the market barometer. At 0.9x FY24F P/BV, concerns over reversal in NIM trajectory and asset quality pressures are priced in, in our view. A pick up in business activities in 2H23, helped partly by China’s reopening, and evidence of asset quality resilience should result in positive share price re-rating.

• Headwinds manageable – revenue... UOB sees two key headwinds – revenue and asset quality. The revenue headwinds from the reversal of the bank’s NIM trend (-8bps QoQ) and moderating loan growth, have surfaced in 1Q23. Still, management expects to sustain NIM at 1Q23’s level of 2.14% as cost of funds stabilises in 4Q23, while the 25bps hike in the Federal Funds Rate (FFR) in May 2023 and a pick-up in loan growth in 2H23 (China’s reopening) should help. In 1Q23, UOB’s loans contracted 1.2% QoQ as the rise in interest rates prompted some borrowers to pay down their mortgages.

• … and asset quality. The 500bps upward spiral in US rates since end-2021 had pushed the 3-month Singapore Interbank Offered Rate (3M SIBOR) up by c.390bps. This has led to asset quality concerns, namely exposure to the property sector. Management believes commercial real estate (CRE) in developed markets, is most vulnerable with the office segment being the main pain point. For UOB, CRE financing is c.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 (LTV) of 50% and overall non-performing assets coverage of 96%.

• Citi acquisition progressing well. Having completed its acquisition of Citi’s consumer banking businesses in Malaysia and Thailand in Nov 2022, and Vietnam in Mar 2023, management is focused on revenue retention this year. This is progressing well 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. Acquisition in Indonesia is slightly delayed with completion now expected by end-2023. With the two potential pitfalls – revenue and staff attrition – effectively managed, UOB expects the Citi acquisition to enhance its net profit by SGD250-300m from 2024.

• TP lowered. We make no changes to our earnings. That said, our TP is lowered to SGD32.30 (from SGD34.90) as we raise equity risk premium due to heightened economic uncertainty. Our TP includes a 4% ESG premium, based on our in-house ESG methodology (Figure 1).

• ESG framework update. As there is now a greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% of the E pillar, followed by 25% each of the S and G pillars. Further details are in our 2 Mar 2023 thematic research note titled Envisioning a Better Future.

Source: RHB Research - 31 May 2023