Even after United Overseas Bank’s (UOB) share price gained over 10% in November, DBS Group Research analyst Lim Rui Wen believes there is further room for the counter to grow amid expectations of a gradual pick-up in the economy.
“[UOB’s] strong non-performing asset (NPA) coverage of 111% (2QFY2020: 96%) and ongoing provisioning (management guides for S$2-3bn through FY2020-2021F) will limit downside risks. Management has guided for better-than-expected asset quality outlook during 3QFY2020 results briefing,” she notes in a company update dated Nov 24.
Despite UOB’s dividend cut, Lim still views its yield of 4% “relatively attractive” with the bank’s management indicating its willingness to revert to its FY2019 dividend policy.
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“We believe the market has priced lower net interest income in FY2021F. As we expect some asset quality deterioration in 2HFY2020 and 1HFY2021, especially when the various moratoriums and reliefs expire, share price upside may be capped at around 1x price-to-book (P/BV),” she shares.
Lim has also identified lower-than-expected credit costs and recovery in return on equity (ROE) post-Covid-19 as potential catalysts that can drive UOB’s share price.
However, key risks in her view include a deteriorating asset quality
“A larger-than-expected NPL arising from generic sectors and/or commodity-related exposure, as well as a worse-than-expected COVID-19 pandemic situation globally, could unwind expectations of credit cost and NPL declines, thus posing risks to earnings. Further, unemployment arising from recession could pose risks to mortgages and unsecured consumer lending, among others,” she says.
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Lim has maintained her “buy” recommendation on UOB with a higher target price of $24.80 from $22.20 previously.
Shares in UOB closed 47 cents higher or 2% up at $23.60 on Nov 24.