SINGAPORE (Oct 25): Phillip Capital is upgrading UOB to ‘neutral’ and revising its target price upwards to $23.46 from $21.61 after reducing the lender’s FY18 credit cost estimate to 28bps from 32bps.

In its model, Phillip had penciled in 32bps credit costs as guided by management. It had also extended the 32bps into FY18 and that caused provision expense to be higher.

“However, owing to improving economy and signs bottoming out in the oil and gas sector, we believe that credit costs in FY18 will improve,” says analyst Jeremy Teong in a Wednesday update and preview on the stock.

“Therefore, we estimate credit costs in FY18 will be c.28bps, ahead of management’s current guidance of 32bps, which leads to better ROE and a higher target price,” says Teong.

In addition, the analyst says UOB’s ROE could remain a laggard compared to peers.

UOB’s FY18 ROE at 9.8% is lower than its estimates for DBS at 11.6% and UOB at 10.9%.

This is due to larger exposure of DBS and OCBC to the less capital intensive wealth management business, in particular after DBS’ acquisition for ANZ’s wealth management business and OCBC’s acquisition of NAB and Barclay’s wealth management business.

And as positive market sentiments are expected to be strong in 2018, DBS and OCBC will benefit from a robust pick-up in wealth management products and solutions from that enlarged base of clients.

As it is, DBS’ and OCBC’s wealth management share of total income have been rising in the past quarters to hit 17% and 33% respectively.

UOB does not separately disclose their wealth management income in full detail so Teong says he is unable to compute the percentage contribution.

But as of 2Q17, UOB’s wealth management AUM is $99 billion, lower than DBS’ $175 billion. AUM for OCBC’s private banking arm – Bank of Singapore — alone is already $90 billion not to mention the AUM from other wealth segments.

Another reason for Phillip’s preference for DBS and OCBC is the better performance out of Hong Kong where it expects NIMs to improve as the 1-month HIBOR has started to move higher in the 2H17.

As at 10.53am, shares in UOB are up 17 cents to $24.42 or 12.5 times FY17 earnings.