Back in 2023, UOB completed the acquisition of various consumer businesses in key Asean markets from Citi, adding around 8 million customers to its fold.
According to Lim in her April 23 note, with UOB, betting on its own effective execution in integrating the operations and then accelerating growth, the bank can expect a higher structural return of equity of more than 13% by FY2026.
Lim lauds UOB's active management of deposit costs too, which, combined with later-than-expected rate cuts, would help buffer pressure on earnings.
For its 4QFY2023, UOB's NIM saw a sharper q-o-q contraction of 7 basis points on loan yields due to competition for high-quality credit.
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In response, UOB has started to adjust its wholesale fixed deposit rates since December 2023. The bank has also led the market in cutting retail fixed deposit rates since 2HFY2023.
UOB had previously assumed three rate cuts and guided for FY2024 NIMs to be at around 2%. "With the increasing possibility of there being no rate cuts during FY2024, we believe there is further upside to UOB’s FY2024 earnings," states Lim.
Meanwhile, the analyst will keep an eye on asset quality risks amid this uncertain macroeconomic and high-interest rate environment, especially for commercial real estate exposures.
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She notes that UOB’s average loan-to-value for office commercial real estate continues to be around 50%, which will be a buffer in the event underlying collateral valuations collapse.
Using a Gordon Growth Model, Lim's revised target price for UOB is $34.50, representing an "undemanding" 1.1x FY2025 price-to-book, which is the average of UOB’s 15-year historical forward multiple for this metric.
"We believe there is further earnings upside and the share price will be well supported by its strong provisions buffer of 101% and forward dividend yield of around 6%," says Lim, who has also raised her earnings estimate through FY2026 by 1 to 6%.
For Lim, key risks to her call would include higher-than-expected non-performing loans, high inflationary pressure, and recessionary risks that could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.
Another key risk would be if the US Fed, having flagged that rates are staying put longer than expected, ended up cutting earlier instead.
UOB shares as at 11.25 am changed hands at $31.01, up 1.84%.
