In-Depth Analysis of Singaporean Banks: United Overseas Bank
Broker: CGS International Securities
Date: February 19, 2025
United Overseas Bank (UOB)
Capital Return Commitment Amidst Economic Uncertainties
United Overseas Bank (UOB) has introduced a robust capital return package totaling approximately S\$3 billion. This initiative is strategically underpinned by the bank’s targets, including a sustainable Return on Equity (ROE) of around 14%, a dividend payout ratio of 50%, a growth rate of 8% in Risk-Weighted Assets (RWA), and an optimal Common Equity Tier 1 (CET1) ratio of 14%. While there is potential for some Non-Performing Loans (NPL) accretion, UOB anticipates that its asset quality will remain generally stable. The guidance for credit costs remains unchanged, projected at around 25-30 basis points, with a management overlay buffer of approximately S\$1 billion to mitigate risks.
Stronger Earnings Outlook and Attractive Dividend Yield
UOB’s stated commitment to returning excess capital over three years reflects its proactive stance in managing shareholder expectations in light of prevailing macroeconomic uncertainties. The bank has set out a target of approximately S\$0.63 per share in potential capital return, which could enhance shareholder value significantly.
Despite a rise in specific provisions to about 52 basis points in 4Q24—largely due to exposure in two commercial real estate sectors in the U.S.—UOB has managed to stabilize costs of credit from its Citi portfolio in Thailand, which have eased to just above 3%. The proactive management of these exposures is evident as UOB has adjusted its Expected Credit Loss (ECL) parameters for its retail model, leading to increased provisions for its performing portfolio.
Interest Margin and Operating Efficiency
UOB’s exit Net Interest Margin (NIM) stood at approximately 2% at the end of 4Q24. The bank expects a single cut in the U.S. Federal Funds Rate in the second half of 2024, which could provide a favorable environment for NIMs to remain stable. The bank also anticipates a year-on-year increase in total income, projecting a Cost-to-Income (CTI) ratio of around 42% due to rising compliance costs.
Target Price Revision and Consensus Ratings
In light of these developments, CGS International has revised its target price for UOB to S\$43, reflecting a slight increase in its EPS forecasts for FY25-26 by about 1-4%. This adjustment accounts for the anticipated stronger NIMs, although it is somewhat offset by higher credit costs. The addition of synergies from the Citi integration is expected to bolster earnings further.
UOB remains a strong contender in the banking sector, with a consensus rating of ‘Add,’ supported by 16 buy ratings, 3 holds, and no sells. The current trading price is approximately S\$38.58, indicating an upside potential of about 11.5% to the target price.
Financial Summary and Key Metrics
The financial performance of UOB showcases a steady trajectory, with net interest income projected to grow from S\$9,674 million in FY24 to S\$10,775 million by FY27. Non-interest income is also expected to rise, contributing to a total operating revenue that will reach S\$17,133 million by FY27. Despite projected provision charges, net profit is forecasted to increase consistently, demonstrating resilience in its operational efficiency.
Conclusion
United Overseas Bank is positioned to weather economic fluctuations with its capital return strategy, stable asset quality, and improved operational metrics. The bank’s focus on shareholder returns, coupled with its integration efforts from Citi, ensures that it remains an attractive option for investors seeking stability and growth in the financial sector.
