Broker: Maybank Research Pte Ltd
Date of Report: August 7, 2025

United Overseas Bank (UOB): Navigating Headwinds and Seeking Value Amid Limited Near-Term Catalysts

Overview: Cautious Optimism as UOB Faces Growth Challenges

United Overseas Bank (UOB) delivered 1H25 core earnings that fell short of both Maybank IBG and consensus Street expectations. The banking giant is currently navigating a challenging macro environment marked by rapidly falling policy rates, sluggish regional loan growth, and an under-invested wealth platform. Despite these hurdles, UOB’s robust asset quality and disciplined risk management remain key strengths. With core return on equity (ROE) expansion likely to lag, and capital returns momentum set to decelerate in FY26E, UOB is focusing on share buybacks to provide downside support for its share price. The target price (TP) is raised to SGD38.36, but the HOLD rating is maintained.

Performance Review: Broad-Based Pressure Across Segments

The second quarter of 2025 saw sequential weakness across all segments:

• Net Interest Income (NII): Fell 3% quarter-on-quarter (QoQ), reflecting the impact of narrowing net interest margins (NIMs).
• Fees: Declined 8% QoQ, with wealth management fees significantly lagging peers.
• Other Non-Interest Income (NoII): Dropped 11% QoQ, indicating broad-based pressure.

NIMs contracted by 9 basis points (bps) QoQ due to sharp declines in Singapore Overnight Rate Average (SORA) and HIBOR. Management now guides for NIMs of 1.85%–1.95% for 2025E, suggesting further downside risk. MIBG forecasts an additional 43bps fall in SORA from current levels, which could further pressure NIMs.

Segment Highlights and Strategy

• Wealth Management: Fees are underperforming versus peers, though credit card fees grew 4% year-on-year (YoY). Integration of the Citibank acquisition is complete, but anticipated synergies, especially in wealth and card fees, have yet to fully materialize.
• Asset Quality: Remains resilient with Non-Performing Loans (NPLs) stable at 1.6%. However, NPLs in the Rest of the World (RoW) segment increased 21% QoQ, primarily due to one US commercial real estate (CRE) customer, which has been fully provisioned.
• Credit Charges: Expected to remain elevated in the face of macro uncertainty.
• Return on Equity (ROE): Medium-term ROE guidance was revised down to 12-13% from the previous 14%, reflecting operational and macroeconomic uncertainties. FY25-27E earnings estimates have been reduced by 3-4% to reflect slower growth.

Capital Returns and Shareholder Value

• Special Dividends: SGD0.8bn of the SGD3bn capital return program will be distributed as special dividends by August, with no further commitment for FY26E. Consequently, dividend per share (DPS) is expected to fall 23% YoY.
• Share Buybacks: 13% of the buyback mandate is complete, running until FY27E, providing downside price support.
• Valuation: The multi-stage dividend discount model (DDM) is rolled forward to FY26E, with a 50bps cut in cost of equity (COE) to 8.6% and a 3% terminal growth rate. TP is raised to SGD38.36 from SGD35.21.

Market Performance Snapshot

• Current Share Price: SGD35.81
• 12-Month Price Target: SGD38.36 (+7%)
• 52-Week High/Low: SGD38.67/29.29
• Market Capitalisation: SGD60.2B (USD46.8B)
• Issued Shares: 1,681 million
• Free Float: 76.7%
• Major Shareholders:
  • Wee Family (10.2%)
  • Lien Family (5.1%)
  • Tai Tak Estates Sdn. Bhd. (4.1%)

2Q25 Results: Key Takeaways

UOB’s second quarter 2025 results underscore ongoing operational challenges:

• Net Interest Income: SGD2,336m, down 3% YoY and 3% QoQ due to lower yields on interest-bearing assets, with NIMs narrowing by 9bps.
• Non-Interest Income: SGD1,129m, up 5% YoY but down 10% QoQ, driven mainly by SGD3bn net new money inflows in wealth management and increased customer-related treasury income.
• Total Expenses: Slight YoY increase, mainly from higher IT spending, but staff costs fell 1.8% YoY.
• Profit Before Tax: SGD1,638m, down 10% YoY and 10% QoQ.
• Core Net Profit: SGD1,338m, falling 10% YoY and 10% QoQ.
• NIM (Reported): 1.91%, down from 2.05% in 2Q24 and 2.00% in 1Q25, reflecting lower benchmark rates and a shift to high-quality, low-yield assets.
• Cost/Income Ratio: 44.3%, up from 41.8% YoY and 42.6% QoQ, due to lower operating income.
• Gross Loans: SGD342.9bn, up 5% YoY and 1% QoQ, with growth led by Singapore (+7.5% YoY) and ASEAN (+7% YoY), particularly in housing and trade loans.
• Deposits: SGD405.1bn, up 4% YoY and 1% QoQ, with CASA mix improving to 56.5% from 51.5% a year ago.
• Gross NPL: 1.6%, stable QoQ, despite new formation from a US CRE account, comprising 0.8% of total loans.

Key Assumption Changes for FY25E–FY27E

• Net Interest Income: Lowered by 2–5% across FY25E–FY27E.
• Non-Interest Income: Adjusted down by up to 5% for FY25E and FY26E; slight increase in FY27E.
• Total Expenses: Marginally increased by 1% in FY25E and FY26E.
• Pre-Provision Profit: Lowered by 4–10% across forecast years.
• Allowance for Credit Losses: Reduced by 23–36% for FY25E and FY26E, unchanged for FY27E.
• Core Net Profit: Essentially flat for FY25E, down 4% for FY26E, and down 3% for FY27E.
• NIM: Lowered by 3–9bps across forecast years.

Detailed Financial and Operational Metrics

• Loan Growth (YoY): 3.5% in FY25E, 4.6% in FY26E, 4.4% in FY27E.
• Deposit Growth (YoY): 4.1% in FY25E, 3.5% in FY26E, 3.6% in FY27E.
• Loan-to-Deposit Ratio: Ranges from 83.2% to 84.6% over FY25E–FY27E.
• Net Interest Margin (Adjusted): 1.82% in FY25E, 1.71% in FY26E, 1.77% in FY27E.
• Non-Interest Income/Total Income: Rises from 33.4% in FY25E to 35.6% in FY27E.
• Cost-to-Income Ratio: Peaks at 47.1% in FY26E before easing to 45.0% in FY27E.
• Gross NPL Ratio: Expected to rise to 1.7% in FY25E and 1.9% in FY26E, then decline to 1.6% in FY27E.
• Provision Coverage: Drops from 91% in FY24A to a low of 66% in FY26E, rebounding to 72% in FY27E.
• CET1 Ratio: Remains strong, projected at 15.2%–15.5% from FY25E to FY27E.

Strategic Positioning and Value Proposition

• Largest SME Lender: UOB’s strong legacy relationships yield higher lending margins than peers.
• Conservative Banking Approach: Led by the founding family, UOB has avoided aggressive overseas or trading activities, focusing instead on traditional commercial banking.
• Regional Footprint: Fully-owned operations in Malaysia, Thailand, Indonesia, and Hong Kong offer diversified growth and cross-border service capabilities.
• Integrated Operations: Well-positioned to serve an increasingly regional client base with cross-border banking needs.

Financial Metrics and Future Outlook

• NIM Outlook: Anticipated downside in FY25E and further pressure in FY26E due to higher funding costs and lower asset yields.
• NPL Trend: Projected to rise to 1.7% in FY25E on heightened global market uncertainty and US trade war risks.
• Credit Charges: Expected to remain within guidance at 30bps in FY25E, easing to 26bps in FY27E.
• ROE: Forecast to average 11.2% over FY25E–FY27E, above the 10.6% achieved in FY20–24.

Key Risks and Swing Factors

• Upside Triggers:
  • Improved growth in China, boosting North Asian demand and reducing NPL risk.
  • Accelerated ASEAN growth from supply chain shifts.
  • Higher momentum in wealth management via new private banking platform.
• Downside Risks:
  • Escalation of US trade war and tariffs.
  • Unexpected asset quality deterioration, especially from China and North American CRE exposures.
  • FX translation risks, notably from ASEAN currencies.

Conclusion: HOLD Rating Maintained Amid Limited Near-Term Catalysts

UOB remains fundamentally solid, with resilient asset quality, strong capital ratios, and prudent management. However, near-term growth is challenged by macro headwinds, sluggish loan growth, and underwhelming wealth management performance. With limited immediate upside catalysts, a HOLD rating is maintained and the TP is raised to SGD38.36. Investors are advised to monitor progress on the wealth platform, capital return strategies, and regional growth drivers moving forward.