• Still a good Asian franchise
• Slow and steady growth strategy
• Upgrade to BUY, FV of S$25.00

Deepening its intra-Asian roots

Continuing with its focus of tapping on rising intra-regional trades, UOB recently shared more details of this strategy at its Corporate Day; this by leveraging on the potential for further trade flows within the region including further cooperation within the ASEAN Economic Community (AEC).

UOB Malaysia – still a key market, but cost could move higher

Going forward, with the investment in infrastructure investments, management expects the cost-to-income ratio to move up from prevailing low rates of 34.1%-37.2% (FY09-13) in Malaysia, which is lower than at the group’s level (41.8% as of 2Q14). Corporate/Business banking will remain key; as there is still a sizeable pool of companies in Malaysia and the economy is still growing at a healthy rate. OCBC Treasury Market Research & Strategy is projecting GDP growth of 5.3% for 2014, up from 4.7% in 2013. For the Malaysian economy, we believe growth will be supported by exports recovery and a healthy and stable financial market.

Outbound trades from Malaysia have also been growing, and there has been a recent improvement in non-commodity exports. UOB Malaysia generated average ROE of 17.5% from 2001-2013, and is ranked 7th in terms of gross loans (>5% market share) in Malaysia. It posted net profit of RM1342m in FY13 and this accounted for 15% to UOB Group’s PBT in FY13 – the largest of its overseas operations. In terms of 5-yr CAGR, PBT stood at 18% and total assets was 20%. NPLs were manageable at 1.7% (gross). We also like its FDI Advisory framework, which has a long term effect of further entrenching its clients for more banking services and business flows.

Medium term re-rating likely; upgrade to BUY

Post its recent results, the stock fell from the recent high of S$24.24 to a recent low of S$22.53. We are seeing value emerge again in the stock, especially with the more optimistic outlook and the recent re-rating of banking stocks in the region. Based on comparables’ average Price/Book of 1.4x, we are raising our valuation from S$23.87 to S$25.00. Together with a 3% dividend yield and a potential total return of 12%, we are upgrading the stock to a BUY.

Source: OCBC Research - 10 Sep 2014