The Singapore research team at RHB Bank Singapore is remaining “neutral” on United Overseas Bank (UOB) as it awaits the bank’s results for the 4QFY2023 and FY2023 ended Dec 31, 2023. UOB will release its results for the final quarter and full year on Feb 22.
In their report dated Jan 22, the team thinks UOB could report a “flattish bottomline q-o-q” for the 4QFY2023, bringing the bank’s FY2023 earnings to broadly meeting RHB’s estimates as well as that of the consensus. “This takes into account potentially softer non-interest income q-o-q from treasury & investment (T&I) income, offset by credit cost staying benign,” says the team.
While fees were a “bright spark” in 3QFY2023, the team notes that T&I income may continue to moderate.
“The average quarterly run-rate in 9MFY2023 of $454 million was trending ahead of the guided $300 million - $400 million run-rate due to elevated levels in 1HFY2023. This moderation would dampen some of the strength in fees,” it writes.
In UOB’s 4QFY2023 results, the RHB team also expects to see the bank’s defensive strategy from the previous quarter to remain a drag.
In the 3QFY2023, UOB fortified its balance sheet by protecting asset quality and liquidity, although this came at a cost with a compression in its net interest margin (NIM) as well as higher specific provisions (SP), notes the RHB team.
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“We understand that stance had not shifted materially during the quarter, and there would be some continued drag on margin (September 2023 exit NIM was 2.08% versus 9MFY2023: 2.12%),” says the team. “Meanwhile, loans growth was still soft but should meet the low- to mid-single digit guidance for FY2023 (9MFY2023: flat y-o-y).”
“Overall, we are not expecting too much excitement on the net interest income (NII) front,” it adds.
That said, UOB’s asset quality has held up, which should be positive for its credit cost in the 4QFY2023.
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“[UOB’s] 3QFY2023 credit cost was 19 basis points or bps (-11 bps q-o-q/+2 bps y-o-y) with higher SP (+13% q-o-q) following a portfolio review that led to the downgrade of certain loan accounts and marking down of some collateral valuations, cushioned by the release of general provisions (GP),” the team notes.
“We learnt that there were no major adverse developments during the quarter. Management remains comfortable with the outcome of the earlier said portfolio review. As such, we think 4QFY2023 credit cost could stay muted and full-year credit cost should be in line with the 20 bps - 25 bps guidance,” it adds.
The non-recurring operating expenses (opex) from the acquisition of the four Citi businesses should tail off with some residuals expected in FY2024.
“This mainly relates to the Citi Thailand business, where completion of operating day one (OD1) is on track for 1H2024. OD1 for Vietnam is still slated in 2H2024. However, given the size of Citi Thailand, the bulk of the nonrecurring cost this year ($150 million - $200 million) is expected to be incurred in 1H2024,” says RHB.
Ahead of UOB’s results, the team has kept its earnings forecast with an unchanged final dividend estimate of 86 cents. The estimate would bring UOB’s full-year dividend to $1.72, translating to a yield of 6%.
Meanwhile, it has lowered its target price to $29.10 from $29.70 to reflect a lower environmental, social and governance (ESG) premium.
In the near-term, the team believes that a peaking rates cycle will lead to income pressures and may dampen the share price performance of the Singapore banks in RHB’s coverage. That said, a decent dividend yield should provide downside support.
As at 11.57am, shares in UOB are trading 12 cents higher or 0.43% up at $27.97.
