SINGAPORE (May 23): Analysts believe United Overseas Bank (UOB) will leverage technology as well as efforts to spread its wings across the region in order to ride out current macroeconomic volatilities.

“[UOB’s] key differentiator remains in their Asean footprint across Malaysia, Indonesia, Myanmar, Vietnam, particularly being the only Singapore bank with a local Thailand presence,” says DBS Group Research analyst Lim Rui Wen in a flash note following UOB’s Corporate Day 2019 on May 15.

“We continue to see huge potential as UOB continues to engage and tap into a different pool of retail customers, while continuing to build the high-growth intra-regional flows across Asean-Greater China in its Group Wholesale banking business,” Lim adds.

DBS is keeping its “buy” recommendation on UOB with an unchanged target price of $29.20, implying an upside of 16%.

CGS-CIMB Research lead analyst Andrea Choong agrees that UOB is well placed to benefit from a shift in supply chains out of Greater China into the surrounding Asean economies.

“UOB’s strength lies in its ability to capture cross-border transactions via its regional network,” she says in a flash note on May 15. “Although trade war noise is aplenty, the bank remains confident of riding out the macroeconomic volatilities.”

One of the key weapons in UOB’s arsenal will be the use of digital offerings to reach out to a regional audience.

In February this year, the bank launched TMRW, its digital bank in Thailand.

“TMRW targets the emerging affluent, or young professionals and families, as its gateway to banking the high net worth individuals of tomorrow,” Choong says. “Investment costs for TMRW came up to $100 million. Although reaching a break-even point may still be a while to go, its traction in customer acquisition has been encouraging. To date, 50% of TMRW’s customers are new-to-bank.”

CGS-CIMB is keeping its “add” call on UOB with an unchanged target price of $29.58, implying an upside of 17.7%.

Beyond its initial launch in Thailand, DBS’s Lim believes TMRW adds testament to, and completes, UOB’s Asean strategy by reaching out to the region’s digital generation.

The analysts note that UOB has set out a cost-to-income ratio (CIR) target of approximately 42% by FY21, from close to 44% currently.

According to UOB’s management, ROE is likely to move past 13%, depending on the speed at which it can achieve scale across the region.

“Should its target cost-to-income ratio materialises by FY21F, we estimate that every 1% improvement in cost-to-income ratio could lead to a close to 2% positive impact to our FY21F’s forecasts, assuming all else constant,” says Lim.

“A continued improvement of ROE towards 13% (from 11.3% in FY18), will also be a key driver to rerating UOB’s share prices,” Lim adds.

As at 1pm, shares in UOB are trading 0.7% higher at $24.71.

According to CGS-CIMB valuations, this implies an estimated price-to-earnings (PE) ratio of 9.7 times and a dividend yield of 4.8% for FY19F.