“UOB’s share price has previously re-rated on its active capital management. As the trade war progresses into 2025, we believe any further revision to absolute dividends per share will be placed on hold,” writes Lim in an April 8 note. “We believe valuations will reflect a slower growth and accelerating rate cut environment going forward.”
Lim highlights the rising risk of US Federal Reserve rate cuts. “While the Fed’s current guidance is at two cuts, we think this will increase as markets begin to adjust and price in more aggressive cuts with an escalating trade war.”
Almost 100 basis points (bps) in cuts are now priced in for 2025, as it is assumed that the Fed will prioritise growth over inflation concerns, she adds. “Every 25bps Fed cut is estimated to impact UOB’s FY2025 earnings by 2%. While banks have assumed two Fed cuts for the year, there is likely further downside to net interest income on the horizon.”
Lim is now assuming slower loan growth and wealth management activities at UOB.
See also: UOB Kay Hian downgrades DBS to ‘sell’, OCBC to ‘hold’ on expected trade slowdown
While the bank continued to maintain its high-single-digit loan growth guidance for 2018 due to lower trade loan exposure, Lim believes the broad exposure that UOB has to Asean economies — representing 87% of group profit before tax — means it will be impacted by an escalating and prolonged trade war.
“Wealth management income and card activities in Asean are likely to take a hit with weaker market activity and consumer sentiment. As such, we have revised downwards our loan growth assumption from 8% to 6.5% for FY2025,” writes Lim.
With OCBC already at “hold”, Lim thinks further capital management plans are likely on hold. “We trimmed our earnings marginally by 3% for FY2026, largely on changes to net interest income and net interest margin (NIM) assumptions, on top of slower growth in wealth management fees and loans. We believe a further advancement in capital plans is unlikely for now.”
See also: Sembcorp and other Asian energy plays are possible trade war 'shelters', says HSBC
Notably, Lim highlights that in 2018, OCBC turned to scrip dividends to shore up more capital in an uncertain economic environment. That said, OCBC’s group CEO has changed since; Helen Wong took over from Samuel Tsien in April 2021.
Lim thinks there may be downside risks from OCBC’s asset quality, though this should be cushioned by “high” non-performing loan coverage. “We remain watchful of asset quality risks in a slower global growth environment amidst concerns of accelerating Fed cuts, on top of the weak commercial real estate (CRE) sector. In 4QFY2024, one Hong Kong CRE account was downgraded, leading to an increase in specific allowance. A credit cycle could derate the sector.”
Lim sees “limited catalysts ahead” for OCBC’s share price. “Downside to OCBC’s share price will be supported by its strong NPL coverage ratio of 159%.”
On April 7, UOB Kay Hian downgraded DBS Group Holdings to “sell” and OCBC to “hold” on expected trade slowdown.
As at 9.36am, shares in UOB are trading 82 cents lower, or 2.47% down, at $32.41; while shares in OCBC are trading 50 cents lower, or 3.23% down, at $14.97.
