“This is despite the continued drops in benchmark rates year to date, which UOB thinks can be cushioned by better loan volume, wealth management activities, deposit repricing and strong current accounts and savings accounts (Casa) traction,” say RHB’s analysts.
Further out, RHB believes UOB is “well-poised” to capture trade and investment flows arising from the shift in supply chains.
Hence, in an April 2 note, the RHB analysts maintain their “buy” call on UOB with an unchanged $41.60 target price, which represents a 10% upside. RHB’s target price includes a 2% ESG premium, based on its proprietary methodology.
Sora down, but UOB upbeat
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While the three-month compounded Singapore Overnight Rate Average (Sora) is down some 51 basis points (bps) year to date and puts pressure on net interest margin (NIM), UOB appears “optimistic” that stronger volume growth should help protect net interest income (NII), says RHB.
Management had guided for “high FY2025 single-digit loan growth” on mortgages for retail and trade for non-retail, notes RHB. “So far, the Sora fall has spurred mortgage demand and refinancing activities. Also, despite rising uncertainties from US trade policies, UOB thinks the China-Southeast Asia trade corridor should stay relatively resilient, given China’s importance as [a] trade partner. It is poised to capitalise on this given the bank’s strong regional footprint.”
Shift to wealth products
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Apart from mortgage volume, the Sora drop has also led to a switch from fixed deposits (FD) into wealth products, notes RHB.
“We gathered that North Asia-related wealth products demand has been doing well, which would be positive for fee income. UOB’s assets under management (AUM) was $190 billion, and management expects its private bank and affluent segments to deliver AUM growth,” they add.
UOB rolled out its wealth product via its digital platform in Thailand, which has been “well-received”, says RHB, and similar Malaysia and Indonesia offerings are on the cards.
Repricing deposits should help
Apart from the above revenue drivers, UOB thinks lower deposit cost will also be helpful, says RHB. “The lagged impact from the repricing of lower 4QFY2024 benchmark rates on deposits will be felt this year and, with system liquidity still ample, there is no urgency to bid-up deposit rates.”
Instead, RHB analysts say UOB has trimmed its FD rate by 35 bps this year and, more recently, trimmed interest rates on its flagship One Account savings account by up to 70 bps.
For context, UOB reported the strongest Casa growth among peers in 2024 at 17% y-o-y, thanks to retail, such as cross-selling to the former Citibank customer base; and wholesale, which includes investments in UOB’s trade and cash management platform.
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“The momentum appears intact, and should be positive in aiding lower deposit costs,” says RHB.
So far so good
UOB appears comfortable with asset quality, reports RHB. “For the corporate segment, it thinks the additional provisions made last year remain sufficient. For retail, it is starting to see some improvement in Thailand delinquency rates and non-performing loans (NPLs).”
Assuming asset quality still holds up, there may be some potential provisions reversal for the Thai consumer book ahead, says RHB.
As at 9.48am, shares in UOB are trading 54 cents lower, or 1.44% down, at $37.03.
