UOB upgraded to 'buy' as price rally continues

SINGAPORE (June 21): OCBC Investment Research is upgrading United Overseas Bank (UOB) to “buy” amid a share price rally that has seen shares in UOB surge by some 12% so far this month.

And the bank is poised to extend a price streak that is now heading into its 11th day.

UOB’s shares have rallied for 10 straight days, gaining over 9% from $23.96 on June 6 to close at $26.22 on June 20. As at 1pm on Friday, shares in UOB continues to ride on the momentum, trading 0.3% higher at $26.31.

But OCBC analyst Carmen Lee believes UOB is “still inexpensive” despite the recent rally.

The way Lee explains it, Singapore financial stocks suffered the brunt of a recent selldown in equities.

“Weakness in the banking sector was largely due to concern of trade war, weakening global and regional economic outlook and more importantly rising likelihood of further cuts in interest rates,” Lee says. “With the recent rally, [UOB] has re-gained some of the lost ground.”

According to Lee, UOB is currently trading at 1.19 times price-to-book – just slightly below its 10-year price-to-book average of 1.21 times – with a dividend yield forecast of 4.6% for FY19F.

“Valuations are not expensive,” Lee says.

The brokerage is keeping UOB’s fair value estimate unchanged at $28.90, implying an estimated total return of 15%.

Lee cautions that possible interest rate cuts by the US Federal Reserve, expected in the second half of this year, could have an impact on UOB’s margins. However, she believes the effect of this will only be seen in the later part of 2020.

“In the last 10 years, UOB’s net interest margin (NIM) ranged from a quarterly low of 1.65% in 2013 to as high as 2.27% in 2009. In 1Q19, NIM was 1.80%. We expect this level to hold for the rest of this year,” Lee says.

The analyst notes that net interest income as a percentage of total income was around 60-61% during periods of prolonged low rates in the last 10 years.

She expects net interest income as a percentage of total income to now be at “a reasonable level” of around 62-65%, compared to a recent high of 68% in 2018.

“In terms of profitability, and despite relatively flat rate for the large part of the past decade, the compounded annual growth rate (CAGR) for net profit was 7.7%. Dividend distribution also grew proportionally by about 7.2% for the same period,” says Lee.