Comprehensive Analysis of United Overseas Bank

Broker: Maybank Research Pte Ltd

Date: November 8, 2024

Overview

United Overseas Bank (UOB SP) has demonstrated a solid performance in 9M24, surpassing MIBG and Street expectations. This success can be attributed to the effective integration of the Citi acquisition and the bank’s strategic leveraging of its ASEAN footprint. Investments in technology and the persistence of higher interest rates are expected to drive EPS upgrades. UOB’s strong commitment to capital returns, supported by CET1 uplifts from the BASEL 4 transition, positions the bank as a compelling investment opportunity. We maintain a BUY rating with a revised target price of SGD38.75.

Key Financial Metrics

UOB’s 9M24 core earnings outperformed expectations due to impressive trading and customer flow-related activities. The bank’s trading doubled year-on-year (YoY), while customer flow-related trading saw a 36% YoY increase. Additionally, wealth management fees surged by 25% YoY, indicating a higher risk appetite among clients. The bank witnessed new inflows of SGD4 billion in 3Q AUM, although only 37% was deployed in investment products. Management expects ongoing digital platform investments to convert more deposits into investments over the next 12-14 months. Consequently, 2024-26E NoII forecasts have been raised by 6-17%.

Net Interest Income (NII) and Margin (NIM)

NII could benefit from a slower trajectory of rate cuts under a new Trump Administration. NIMs were flat QoQ, indicating effective hedging activities. Management anticipates stronger loan growth in 2025, driven by the digital economy, trade, and green lending. These factors could lead to upgrade risks in NII.

Integration Challenges

Despite some integration hiccups, particularly in Citi Thailand, where there were issues with porting portfolios, billing cycles, and regulatory changes, management claims that these issues are being resolved. Structural stress across the broader portfolio is absent. As a precaution, credit charge assumptions for 2024-25E have been raised by 13-15%.

Capital Management and Returns

UOB is guiding for a 13.5-14.0% medium-term CET1, with a current CET1 of 15.5% following the BASEL4 transition. This indicates around SGD3.8 billion of excess capital. Management is comfortable allocating SGD2.5 billion for share buy-backs (1% of RWA). A detailed plan on capital returns is expected with 4Q24 results. These initiatives are positive for shareholder value creation. Consequently, 2024-26E DPS assumptions have been raised by 16-17%, with share buybacks potentially raising EPS by 4% once completed at current prices.

Price Performance and Statistics

As of November 8, 2024, UOB’s share price stands at SGD35.69, with a 12-month price target of SGD38.75. The stock has seen an absolute return of 12% over the past month, 19% over the past three months, and 30% over the past twelve months. Relative to the index, the stock has outperformed by 9%, 6%, and 11%, respectively.

Financial Performance and Projections

UOB’s operating income is expected to grow from SGD13,932 million in FY23 to SGD16,547 million in FY26. Pre-provision profit is projected to increase from SGD8,155 million in FY23 to SGD9,094 million in FY26. Core net profit is anticipated to rise from SGD6,151 million in FY23 to SGD6,970 million in FY26. Core EPS is expected to grow from SGD3.7 in FY23 to SGD4.2 in FY26.

Value Proposition

UOB is the largest SME lender, with strong legacy relationships that result in higher lending yields than peers. The bank is conservative, focusing on traditional commercial banking and is headed by the founding family, who have historically avoided aggressive overseas or trading bets. UOB’s wide SE Asian regional footprint through fully-owned operations in Malaysia, Thailand, Indonesia, and Hong Kong provides diversified earnings growth. The well-integrated regional operations offer cross-border services to an increasingly regional client base.

Loan Mix by Geography

The loan mix by geography highlights UOB’s diversified operations across Singapore, Malaysia, Thailand, Indonesia, Greater China, and other regions. The bank’s strategic focus on ASEAN provides a robust growth outlook.

Price Drivers

• Beginning of the Covid-19 pandemic
• Vaccine-led recovery optimism
• Growth concerns from higher interest rates
• Rising NIMs and flight to safety from North Asia growth concerns
• Expectations of higher-for-longer interest rates and rising NoII

Financial Metrics

NIMs are expected to decline in FY24E due to higher funding costs and lower asset yields, resulting in a -5bps YoY decrease following a +23bps YoY growth in FY23. NPLs are forecasted to remain benign with an improved growth outlook in ASEAN, reaching 1.6% by FY25E from 1.5% in FY24E. Credit charges are expected to come within guidance at 29bps in FY24E before declining to 26bps in 2025E. ROEs are expected to average 13.3% in 2024-26E compared to 10.6% in FY19-23.

Swing Factors

Upside

• Improved growth trajectory for China and ASEAN driving higher loans and fees
• Turnaround in wealth management and other fee income as market conditions improve
• Potentially higher dividends or special dividends following increased capital based on BASEL4

Downside

• Asset quality downside surprises, especially from China and North American commercial property
• Digital platform outages and cyber attacks
• FX translation downside surprises, especially from ASEAN currencies

3Q24 Results Summary

UOB’s 3Q24 results showcase a robust performance with total income growing 11% YoY and 10% QoQ. Net interest income increased by 1% YoY and 2% QoQ, while non-interest income surged by 34% YoY and 28% QoQ. The bank reported a record-high net fee income driven by wealth management fees, with trading and investment income also making significant contributions. Total expenses rose by 12% YoY and 210% QoQ, primarily due to increased core expenses related to investment in regional capabilities, excluding one-off Citigroup expenses. Profit before allowances grew by 10% YoY and 11% QoQ, while allowances for credit and other losses increased by 29% YoY and 31% QoQ due to frictional issues within Thailand’s retail portfolio, leading to higher NPL formation. Core net profit grew by 11% YoY and 10% QoQ, while reported net profit increased by 16% YoY and 13% QoQ.

Key Assumption Changes

Key assumptions for 2024-26E have been updated, reflecting a stable outlook for net interest income and a significant increase in non-interest income. Total income is projected to grow by 5% in 2024, 2% in 2025, and 3% in 2026. Operating expenses are expected to rise by 2% annually. Pre-provision profit is forecasted to grow by 8% in 2024, 2% in 2025, and 4% in 2026. Allowances for credit and other losses are projected to increase by 13% in 2024 and 15% in 2025, with no change in 2026. Core net profit is expected to grow by 8% in 2024, 1% in 2025, and 4% in 2026.

Detailed Assumptions

Loan growth is expected to average 5.7% annually between 2024 and 2026, with corporate loan growth outpacing consumer loans. Deposit growth is projected to be steady at 3.6% annually. The loan-to-deposit ratio is anticipated to improve from 83.0% in 2024 to 88.5% in 2026. Net interest margin is expected to decline slightly in 2024 before improving in 2025 and 2026. Gross NPLs are forecasted to remain stable at 1.5% in 2024 and 2026, with a slight increase to 1.6% in 2025. Credit charges are expected to decline from 0.29% in 2024 to 0.24% in 2026. CET1 ratio is projected to remain stable, averaging 13.4% over the forecast period.

Focus Charts

Net Interest Income

Net interest income has shown a steady upward trend, with significant growth expected in the coming years. The bank’s focus on loan growth and effective management of interest margins will be key drivers of this income stream.

Net Interest Margin

Net interest margin is expected to remain stable, with slight fluctuations due to changes in funding costs and asset yields. Effective hedging strategies and loan growth will support the bank’s profitability.

Gross NPLs and Provision Cover

Gross NPLs are expected to remain stable, with provision cover improving due to effective credit risk management. The bank’s focus on maintaining asset quality will be crucial in managing NPLs.

Core Earnings YoY

Core earnings have shown significant growth, driven by strong income streams and effective cost management. The bank’s focus on capital returns and strategic investments will support continued earnings growth.

Historical Recommendations and Target Price

UOB has consistently been rated as a BUY, with target prices reflecting the bank’s strong performance and growth potential. The current target price of SGD38.75 represents a 9% upside from the current share price of SGD35.69.

Conclusion

United Overseas Bank has demonstrated strong performance and growth potential, supported by effective integration of acquisitions, strategic investments, and a focus on capital returns. The bank’s commitment to maintaining asset quality and managing credit risk will be crucial in sustaining its growth trajectory. Investors are advised to consider UOB as a compelling investment opportunity, with significant upside potential.