SINGAPORE (Jan 26): OCBC expects the three local banks to continue posting good gains this year despite their share prices appreciating between 30%-43%. So far this year, the average gain is about 8%.
Hence, the bank's research house has upgraded UOB to "upgrade" with a fair value of $30.10.
UOB is expected to experience broad-based growth in both the net interest income and non-interest income for 2018. Fee income should also enjoy a boost from better wealth management earnings and credit card operations.
"We are projecting earnings growth of 10.8% in FY18 and 14.7% for FY19. With the recent re-rating, we have also raised our valuation peg to 1.3x FY18 book. This increases our fair value estimate from $25.36 to $30.10," says analyst Carmen Lee.
According to Lee, the recent re-rating of the banking sector has seen Asian banks enjoying higher valuations from the recent trough in 2016.
This was especially so for Singapore banks which saw the main drag from the oil and gas sector in 2016.
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At that low, most Singapore banks were trading below historical 1 times book, but bank stocks have since rebounded to about 1.4-1.5 times currently.
Regional banks are currently trading at about 1.6 times book. This trend was clearly seen for all three local banks, which are all trading at new historical highs in Jan 2018.
Lee says banks are in a strong position to enjoy this trend when the market is generally benign, inflation is under control, Asia Pacific's economic growth is at 4.7% in 2018 and 4.5% for 2019, interest rates are rising gradually and companies are enjoying good earnings growth.
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The current valuations too are likely to hold, barring no deterioration in economic outlook or operating conditions.
As at 3.02pm, shares in UOB are trading at $27.95 or 12.2 times FY18 earnings.
