The vaccine rollout and return to form for dividends will contribute to UOB’s recovery over the course of the year, says OCBC Investment Research. 

OCBC Investment Research is maintaining buy on UOB with a raised fair value of $26.30, implying 1.2x price to book ratio.

“Valuations remain reasonable with the share price trading close to book value and offering an attractive risk reward proposition for patient investors,” says OCBC analysts in a Jan 11 note. 

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Over the medium term, UOB targets to derive more revenues beyond Singapore and a cost-to-income ratio of approximately 43%. OCBC notes in a breakdown of UOB’s 2019 pre-tax income by region: Singapore, 61%; Malaysia, 11%; Greater China, 10%; Thailand, 5%; and Indonesia, 2%.

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In addition, analysts see scope for UOB’s share price to catch up this year, with potential catalysts from improving clarity on asset quality trends in its ASEAN loan book and eventual normalisation of sector dividends. 

“Overall, we maintain our constructive medium-term view on the financial sector and expect continued recovery in its earnings outlook over the course of the year, driven by better fee income growth and stabilising net interest margins, and asset quality remaining under control,” say OCBC analysts. 

On credit risks, analysts note that the outlook is looking better than previously anticipated, with UOB management guiding for total credit costs to be better than its prior credit costs estimation of 120 to 130bps over two years (2020E and 2021E), with credit costs of approximately 60bps and 30-40bps expected for 2020 and 2021 respectively.

“Overall, the bank is comfortable it has sufficiently provisioned to cover potential loans deterioration when the loans moratorium schemes expire next year,” they note. 

On net interest margins (NIM), pressure is stabilising with “flattish” trend expected ahead, write OCBC analysts. “Costs should remain controlled, with the exception of strategic investments on technology to lay the foundation for the next phase of growth.” 

OCBC analysts hold a mixed outlook for fee income, with modest credit card fees and projections of single digit growth. That said, analysts believe wealth management should remain strong. 

The potential easing of dividend restrictions introduced by the Monetary Authority of Singapore last year will be a positive catalyst for the sector, with encouraging trends of late from global central banks, say OCBC analysts.

See: UOB reports 40% lower 3Q net earnings of $668 mil, shores up $339 mil of credit allowance for the quarter

UOB pays dividends on a half-yearly basis, and the next payout will still be subject to the regulatory dividend cap when it reports full year FY2020 results. The bank has indicated it would like to resume its past 50% payout subject to a CET1 ratio of more than 13% and regulators’ guidance at a later stage.

UOB’s FY2020 results will be released in February.

As at 11.47am, shares in UOB are trading 20 cents higher, or 0.85% up, at $23.78.