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UOB's current P/BV at 1x represents 'attractive entry point' into banking sector: CGS-CIMB

Felicia Tan
·2-min read

UOB will be reporting its results for the 1HFY2022 ended June before the market opens on July 29.

CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee are keeping their “add” call on United Overseas Bank (UOB) with an unchanged target price of $35.60.

Ahead of the bank’s results announcement, the analysts are expecting UOB to post a net profit of $1.07 billion in the 2QFY2022, up 6% y-o-y and 19% q-o-q.

UOB will be reporting its results for the 1HFY2022 ended June before the market opens on July 29.

“Loan growth will likely be slower (we expect 1.8% q-o-q in 2QFY2022) as corporate demand remains impacted by supply chain disruptions from the lockdown in China,” the analysts write in their July 14 report.

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Choong and Lim are also expecting the bank to post a stronger net interest margin (NIM) expansion of 9% q-o-q to 1.67% in the 2QFY2022.

They anticipate UOB’s NIM to expand further in the 3QFY2022 given the lagged pass-through of the 50 basis point (bps) and 75 basis point Fed rate hikes in May and June.

“We understand that [around] 5-80% of UOB’s loan portfolio is on floating-rate,” the analysts write. “UOB maintains its 20-25 bps credit cost guidance for FY2022 at this juncture; we expect a benign 23 bps in 2QFY2022 (1QFY2022: 19 bps).”

They add that the bank’s exposure to the mainland Chinese market stood at $13 billion in the 1QFY2022, which is around 4% of its group loans; UOB’s customers largely comprise network customers that expanded from Asean into China, they note.

At present, the macroeconomic headwinds of persistent inflation, the uncertainties arising from the Fed fund rate hikes, as well as recession risks remain the key influencers of depressed bank valuations.

As at Choong and Lim’s report on July 14, UOB was trading at $26.05, which represents an FY2022 P/BV of 1x. According to the analysts, this represents “an attractive entry point” into the banking sector as UOB’s NIM expansion materialises.

To the analysts, UOB’s NIM expansion and the gradual reopening of Hong Kong/China are bright spots for the sector.

On the other hand, materially higher credit costs given a recession is a key downside risk.

Shares in UOB closed 37 cents higher or 1.42% up at $26.41 on July 18.

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