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RHB downgrades UOB to ‘neutral’ on limited potential upside to share price

RHB's target price remains unchanged at $31.70.

The Singapore research team at RHB Bank Singapore has downgraded its call on United Overseas Bank (UOB) U11 to “neutral” as it sees limited potential upside to its share price.

As at RHB’s report on Sept 18, shares in the bank closed at $29.20 as at Sept 15. In comparison, the team’s unchanged target price of $31.70 offers an upside of 9%.

That said, the team remains positive on the bank’s earnings, seeing that it could report a sequentially stronger profit before tax (PBT) in the 3QFY2023 ending Sept 30. This is based on the assumption that broad trends in headline items materialise.

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During the 3QFY2023, the team is also expecting better net interest margin (NIM) performance on a q-o-q basis given June’s exit-NIM of 2.14% versus the 2.13% reported in the 2QFY2023. The rate hike in July will also lead to a higher q-o-q NIM, writes the team.

In addition, deposit competition has been stable so far as all three Singapore banks are “flushed with liquidity while loan growth has yet to pick up meaningfully”.

“These suggest the further repricing of deposits in 2HFY2023 could be muted,” says the team.

UOB’s stable asset quality should also be positive for its credit cost in the 3QFY2023. To recap, the bank’s credit cost of 30 basis points (bps) in the 2QFY2023 was impacted by lumpy specific allowances for a major Thai corporate account and some pre-emptive general allowances. The allowances for the Thai account is not expected to recur in the 3QFY2023.

To be sure, the bank’s management guided for credit cost to be on track to achieve 25 bps for FY2023, which suggests that its credit cost for the 2HFY2023 will be “significantly lower”.

“UOB remains watchful on the commercial real estate space and China-related exposures, but there have been no major adverse developments yet,” says RHB.

UOB’s trading & investment (T&I) income would also be the key swing factor with respect to how its 3QFY2023 earnings turn out as the team expects the bank’s fee income to stay muted during the three-month period.

“While we raise our FY2023 non-interest income by 10% to factor in the strong T&I income in 1HFY2023, this still assumes a more conservative average quarterly run rate of $350 million/quarter vs [an estimated] $500 million/quarter in 1HFY2023,” says RHB.

Lastly, the non-recurring operating expenses (opex) from the Citi deal should start to drop off from the 3QFY2023.

“Despite minor operational hiccups, which have since been resolved, the $1 billion revenue contribution from the deal remains on track, although we think this has been largely priced in. We await details of further synergies (e.g. wealth, deposits) that can be reaped from the Citi customer base,” says RHB.

According to the team, the bank “remains keen” to redeploy the liquidity that’s been built up so far although opportunities (i.e. trade and onshore loans) have largely been narrow.

“The mortgage pipeline looks stable and will continue to support retail loan book growth, supplemented by trade loans. All-in, the bank thinks the low- to mid-single digit loan growth guidance will still hold,” notes the team.

In all, the team has raised its net profit estimates for FY2023 by 2% on stronger non-interest income assumptions and partly offset by softer loan growth assumption of 3% from 5%.

Its patmi estimates for FY2024 and FY2025 remain unchanged.

The team’s target price includes a 4% environmental, social and governance (ESG) premium.

Shares in UOB closed 4 cents lower or 0.14% down at $28.51 on Sept 20.

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