CFA Society Singapore
SINGAPORE (Apr 12): Overseas growth will help drive earnings and share price of United Overseas Bank (UOB), according to Maybank Kim Eng, which continues to rate the bank a “buy” with an unchanged target price of $29.71.
In a Thursday report, analyst Thilan Wickramasinghe believes that concerns of weak earnings growth in Singapore are to blame for UOB’s 6% YTD underperformance, as compared to DBS. But, Wickramasinghe says, “This is the wrong place to look.”
Increasingly, UOB’s growth is generated overseas – from SE Asia and Greater China – not Singapore.
“In 2019E, we estimate almost half of the group’s loan mix should be in higher growth overseas markets,” says Wickramasinghe.
And by 2020E, for the first time, UOB’s loan book is estimated to comprise more foreign loans than local, particularly from Southeast Asia and Greater China where growth and net interest margins (NIMs) are much higher than developed Singapore.
Meanwhile, non-performing loans (NPLs) in overseas operations have contracted, as a result of the group conservatively balancing its risk and growth. This reaffirms the bank’s historically prudent management style.
“Structurally, supplementing slower growth at home with stronger overseas hinterlands, will contribute to UOB’s ROEs expanding 22bps by 2021E,” says Wickramasinghe.
Separately, UOB’s NIMs have lagged DBS in the past 3-quarters.
According to the analyst, this will change in 1Q19, following upward mortgage rate resets since late-2018, as these drivers will provide the catalysts necessary for the gap to close vis-a-vis DBS.
As higher asset yields trickle through, the analyst expects to see an inflection point for NIMs in 1Q19. He also estimated overall 2019E NIM to increase by 5bps y-o-y.
From a share price performance perspective, UOB’s 50-dma is already very close to crossing its 200-dma. In the past 5-years, such crosses have resulted in absolute returns of 20-65%.
As at 3.00pm, shares in UOB are trading at $26.61 or 1.1 times FY19 book with a dividend yield of 4.7%.