The lender will enjoy benefits as its multi-year investments in platforms and its Citi acquisition are gaining traction and bearing fruit, say analysts

 

RHB has upgraded its call for UOB : U11 -0.55% to &ldquo buy&rdquo from &ldquo neutral&rdquo , while raising its price target for the lender to S$40.20 from S$35.60 previously.

 

The new price target is 10.3 per cent above UOB&rsquo s latest closing price of S$36.43 and 12.9 per cent above its previous target price on Nov 11.

 

On Wednesday (Nov 20), the research house said its new call and price target comes amid a positive 2025 outlook. The lender largely lagged peers in the past 23 months, but RHB thinks this trend will reverse and that UOB will outperform the sector.

 

Analysts from RHB&rsquo s Singapore Research pointed out that UOB&rsquo s Asean-centric portfolio may provide investors a &ldquo hideout&rdquo from the market volatility likely to follow from 2024&rsquo s US presidential election outcome.

 

&ldquo UOB may offer investors a defensive shelter to ride through the volatility ahead,&rdquo they said.

 

As Asean economies have &ldquo relatively low&rdquo trade exposure to the US, RHB Global Economics and Market Strategy expects they will post &ldquo stable-to-stronger&rdquo economic growth for 2025 on sustained strength in trade and manufacturing, as well as tourism.

 

However, it warned that these economies might be indirectly affected by market volatility through exposure to China.

 

RHB&rsquo s Singapore Research analysts also believe that UOB will enjoy benefits as its multi-year investments in platforms and its Citi acquisition &ldquo are gaining traction and bearing fruit&rdquo .

 

&ldquo We believe some of these benefits were evident in the recent Q3 2024 results &ndash its loan and current and savings account growth of 5 per cent year on year, and 17 per cent year on year outpaced that of peers,&rdquo said the analysts.

 

This leads to a positive outlook for 2025, as the analysts forecast that the bank&rsquo s earnings growth will outperform that of the &ldquo flat earnings&rdquo of its peers in the sector.

 

&ldquo We expect its reported profit after tax and minority interests (Patmi) for FY2025 to grow by 6 per cent year on year, superior to the flat earnings for the sector. On a core basis, we still forecast FY2025 Patmi to rise by 3 per cent,&rdquo they said.

 

&ldquo The rise in Patmi and higher dividend payouts assumed supports our 9 per cent dividends per share growth for FY2025F,&rdquo they added.

 

With UOB&rsquo s improved capital position, shareholders can potentially expect &ldquo more aggressive&rdquo capital returns in the form of higher dividends or share buybacks.

The bank is open to investing it in growth, or returning it to shareholders through share buybacks or more dividends, he says

 

UOB is actively looking to manage its capital, and hopes it can find ways to take &ldquo full advantage&rdquo of the excess by the end of this year, its chief executive Wee Ee Cheong said on Friday (Nov 8).

 

With around S$2 billion to S$2.5 billion in excess capital from Basel IV reforms, the bank is open to investing it in growth, or returning it to shareholders, whether through share buybacks or more dividends, he said at a briefing for UOB&rsquo s third-quarter 2023 results.

 

Chief financial officer Lee Wai Fai said: &ldquo We&rsquo re looking at all options, because if we can&rsquo t utilise the capital for growth, we have to find some way to return it to shareholders.&rdquo

 

UOB&rsquo s Common Equity Tier-1 (CET-1) ratio stood at 15.5 per cent as at end-September 2024, up from 13.4 per cent as at end-June, as a result of changes to international standards for bank capital requirements under Basel IV. Fully loaded, the CET-1 ratio would be 15.2 per cent.

 

Lee noted that the lender has &ldquo always been comfortable&rdquo about the ratio being in the 13.5 to 14 per cent range. To use the excess, it has to consider the different views of its wide range of shareholders.

 

&ldquo This is something that is still premature to discuss&hellip But we are in a good position to talk,&rdquo Wee said.

 

Beating forecast

On Friday, UOB reported a 16 per cent rise in Q3 net profit to S$1.61 billion, from S$1.38 billion a year earlier.

 

The record quarterly net profit beat the S$1.51 billion consensus forecast among four analysts polled by Bloomberg.

 

The results were driven by record highs in net fee income and trading and investment income.

 

Wee noted strong momentum across Asean &ndash healthy demand across sectors and geographies boosted UOB&rsquo s loan books, driven by Asean&rsquo s role as a trade hub and related trade financing opportunities from the digital economy.

 

Following US rate cuts in September, there were positive consumer sentiments in the lender&rsquo s Asean markets, he added.

 

Net fee income for the quarter rose 7 per cent on year to a record S$630 million, driven by growth in wealth management fees. The group observed healthy trade and wealth demand, on top of a pick-up in card fees.

 

The lender&rsquo s Q3 assets under management rose 9 per cent on the year to S$185 billion, and added around S$4 billion in net new money inflows in the quarter, Lee said.

 

He noted that a bulk of the growth is in the consumer space, and not private banking. Flows were also more focused in Asean than North Asia.

 

&ldquo The consumer space of our Asean franchise is very strong, and this also gives testimony to the cross-sell that we are trying to do in the region,&rdquo he said.

 

&ldquo So we are quite hopeful of the momentum that&rsquo s coming out of the Asean region,&rdquo he added.

 

Trading and investment income rose 82 per cent to S$709 million, bringing other non-interest income up 70 per cent to S$744 million.

 

This came as customer flow treasury income reached an all-time high in addition to &ldquo exceptional&rdquo performance from trading and liquidity management activities, said the group.

 

Meanwhile, net interest income for the quarter grew 1 per cent to S$2.46 billion from S$2.43 billion in the year before.

 

Net interest margin (NIM) was down four basis points on year, but stable on quarter at 2.05 per cent, as loan margin widened on proactive deposit cost management.

 

Speaking about the impact of the US elections and movement of the US 10-year Treasury yields, Lee said the bank has to keep watch as it is &ldquo still early days in the US&rdquo .

 

The lender has reduced its sensitivity to rate movements in anticipation of rate cuts, although it will still benefit if cuts were not as deep.

 

&ldquo The market has always moved ahead of the economy, and for all you know, it will come back next month. So we can&rsquo t use the market, but we are watching that,&rdquo he said.

 

Nevertheless, given that the yields are attractive, the lender has started to extend some of its books, especially in the liquid-asset portfolio, to capture opportunities.

 

Wee noted that stability is a key area for UOB, and that it would still benefit when interest rates are down, as loan growth will pick up thereafter.

 

Gross customer loans grew 5 per cent on year to S$334 billion in Q3, amid broad-based wholesale growth and mortgages.

 

As for asset quality, Wee said the lender remains resilient, with the non-performing loan ratio unchanged at 1.5 per cent.

 

While there was new individual non-performing asset formation in the quarter, largely due to UOB&rsquo s retail operations in Thailand, recoveries and write-offs more than offset that.

 

Wee noted that the delinquencies in its Thailand unsecured book have peaked and are normalising, with the business intact and revenues picking up.

 

Outlook

Wee is forecasting higher total income for 2025.

 

This includes loan growth in the high single digits, and double-digit fee growth led by cards, wealth, trade and loan-related fees.

 

He also expects the cost-to-income ratio to be between 41 and 42 per cent, and total credit cost at 25 to 30 basis points.

 

&ldquo Globally, there are renewed uncertainties, and we are watching developments closely. As an Asean focus player, we see the region being resilient,&rdquo Wee said.

 

UOB&rsquo s net profit for the third quarter ended September 2024 rose 16 per cent year on year to S$1.61 billion, from S$1.38 billion the year before.

 

Its results released Friday (Nov 8) beat the S$1.51 billion consensus forecast among four analysts polled by Bloomberg.

 

UOB deputy chairman and chief executive Wee Ee Cheong attributed this quarter&rsquo s improved performance to new record highs in net fee income as well as trading and investment income.

 

Earnings per share (EPS) stood at S$3.79 versus S$3.23 in the year before.

 

Total income for the quarter grew 11 per cent to S$3.83 billion.

 

Core return on equity, which excluded one-off expenses related to the acquisition of Citi&rsquo s consumer banking business, was up by 0.4 percentage point year on year to 14.3 per cent.

 

Net interest income for the quarter grew 1 per cent to S$2.46 billion versus S$2.4 billion in Q3 FY2023.

 

Net interest margin (NIM) was down 4 basis points at 2.05 per cent.