In line with the global sell off, UOB has seen its share price plunge 12.7% in the month of August. Recently, the bank organised a Greater China Corporate Day on 31 Aug and Macquarie Equities Research (MER) released a research report on 2 Sept reiterating its ‘Outperform’ rating and a 12-month price target of $24. Read more for excerpts from the research report…..
 
 
UOB's Greater China strategy is very much focused on expansion in MER’s view. Strategically UOB is probably doing the right thing to not miss out on the Greater China opportunity mid-term. The risks for UOB are less on asset quality but in the near term more on costs MER believes.
 
Impact
Among the three Singapore Banks, UOB has the smallest business in Greater China. Loans in Greater China account for 12% of total Group loans whereof Mainland China accounts for 4% of total loans. The exposure is mainly to large corporates and therefore of low risk in MER’s view.
 
UOB's Greater China expansion strategy is mainly built around connecting China with ASEAN. The strategy of UOB is not different to peers. HSBC and StanChart had the same approach for years, but failed to deliver on ROE.
 
That said, the Greater China strategy of UOB still makes some sense to MER – at least on a mid-term view. UOB is on the right track to avoid the worst missteps of the global universal banks. UOB (i) will not push its luck in poorly profitable sub-scale retail banking and will not roll-out a large branch network in China, (ii) will stay clear of high risk on-balance sheet lending (for example to domestic SMEs), (iii) will not expand into new client segments or markets via M&A in MER’s view.
 
UOB sees its main competitive advantage for Greater China cross-border\ businesses as (i) a strong credit rating (ii) leading ASEAN franchise and expertise in ASEAN (iii) competitive product solutions vs domestically focused banks, and (iv) being a Singapore bank and taking advantage of Singapore as a regional platform.
 
If UOB executes on its strategy, and stays clear of risky domestic lending, their Greater China business should not generate material asset quality issues in MER’s view. MER thinks the main risks relate to strong cost growth while revenue growth may fall short of expectations.
 
Price catalyst
12-month price target: S$24.00 based on a Price to Book methodology.
 
Catalyst: Higher dividend payments, asset quality, operating expense trends
 
MER’s action and recommendation
MER has an Outperform rating on UOB – target price S$24.00.
 
While UOB's Greater China strategy makes sense on a mid-term view, MER finds it difficult to get excited about it. It looks virtually certain that strong cost growth will continue while the revenue outlook looks less certain. On the positive side, MER does not think that UOB has any asset quality issues in Greater China (based on the assumption that there is no hard landing) and it will likely avoid the major expansion missteps of the global universal banks. 
 

Source: Macquarie Research - 8 Sep 2015