• Following the Fed’s emergency rate cut of 50bps this week, our house expects a bias for further rate cuts if the viral outlook deteriorates.
• With the latest cut in rate expectations amidst a more prolonged than previously expected viral outbreak situation globally, we lower our estimates and fair value for the stock to SGD26.30, which implies ~1.2x price/book.
• Remains a preferred regional sector pick with diversified geographical exposure in growing ASEAN markets and supportive dividend yield ~5%.

Investment thesis

Established in 1935, UOB has grown over the decades organically and through strategic acquisitions to become one of three leading banks in Singapore today. Over the medium term, UOB targets to derive more revenues beyond Singapore and a cost-income ratio of ~43% (vs FY18’s ~44%). UOB aims to further build on its strategic positioning to capture growth in Southeast Asia region and enhance its banking franchise. Est. breakdown of its 2018 pretax income by region: Singapore 60%, Malaysia 12%, Greater China 9%, Thailand 6% & Indonesia 2%.

Investment summary

Emergency Fed cut of 50bps this week, house expects bias for further cuts if virus outlook worsens

Following the Fed’s recent emergency rate cut of 50bps from the previous range of 1.5%-1.75% to 1%- 1.25% range and messaging which suggested the inter-meeting cut is not ―50bps and done‖, our house now expects a bias for further rate cuts if the viral outlook deteriorates sharply in the weeks ahead, with possibility for the Fed to make one to two more 25bp cuts in its scheduled meetings in March and April 2020.

Lower estimates and fair value to SGD26.30 - With the lowered rate expectations amidst a more prolonged viral outbreak situation globally, we have reduced our estimates and fair value for UOB to SGD26.30, which implies ~1.2x price/book (at a discount to its past 10-year historical average valuation multiple of 1.33x). Compared to DBS, UOB is expected to be relatively less rate sensitive helped by its lower proportion of loans in USD rate related currencies (~64% of UOB’s total loans exposure, vs DBS’ ~80% of total loans).

Support from dividends expected – Capital position remains robust with CET1 ratio of 14.3% (+60bps qoq in 4Q), which is supportive of continued dividend payouts (2020E DPS is estimated at $1.20/share, which implies ~5% forward dividend yield).

Conservative outlook maintained: constructive on Southeast Asia franchise and more cautious stance on North Asia in 2020 – Slight uptick in credit costs is expected this year due to front loading of credit loss projections under FRS9 (vs stable credit costs in FY19 of 18bps), with margins to see further pressure although fee income (driven by wealth management) should remain supportive. To mitigate uncertainties, UOB had reduced its North Asia loan exposure in 2H19 to 15% of gross loans as of Dec-19, with the loans in Singapore and Southeast Asia accounted for 51% and 23% of gross loans respectively.

Potential catalysts

• Providing exposure to Southeast Asia’s growth and as the third largest weighted stock on the MSCI Singapore index, UOB also benefits from an improved risk taking environment and pick up in regional liquidity inflows. Capital and dividend policy.
• Better than expected wealth management growth and digital strategy execution. Faster than expected market share gains and margin gains

Investment risks

• Deceleration in loans and earnings growth, and margin pressure as interest rates decline or macro-environment in its key markets deteriorate more than expected.
• Worsening in asset quality trends and credit cost guidance, higher than expected costs pressures.
• Regulatory and/or merger & acquisition risks.

Source: OCBC Research - 5 Mar 2020