2023-07-21 11:02:52 ET
Summary
- The first quarter of 2023 delivered strong results.
- UOB's focus on Southeast Asia, or ASEAN, is promising.
- But the near-term growth prospects are under strain.
In almost nine decades of operation, United Overseas Bank ((UOB)) (UOVEF) (UOVEY) became a name to conjure with. One of the "Big Three" in Singapore (behind DBS and OCBC), it has built a sizable fortune for its founding family, particularly the clan leader Wee Cho Yaw who led the bank till 2013. It was Wee's clever strategizing - by way of diversification, international expansion and acquisitions - that brought UOB from humble beginnings to the top echelons of finance not only in rich Singapore but also the emerging economies in wider Southeast Asia .
True to its logo of a five-bar gate that symbolizes security in the traditional Chinese system of counting, UOB's key selling proposition has been stability. It is, to some extent, the benefit of being part of one of the safest financial systems in Asia, and maybe the world. This means that Singaporean banks like UOB are generally more resilient than their peers elsewhere. They also have been the prime beneficiaries of the growing regional economy.
1Q'FY23
Local banks have been reporting record earnings on the back of interest rate increases, but growth may be peaking.
Revenue growth (3-Yr CAGR) | Net income growth (3-Yr CAGR) | Dividend growth (3-Yr CAGR) | |
UOB ((UOVEY)) | 8.9% | 7.7% | 9.2% |
DBS ( DBSDY ) | 9.4% | 14.9% | 1.7% |
OCBC (SGX:O39) | 4.8% | 17.0% | 28.8% |
Source: Seeking Alpha, OCBC Annual Report, FY2022
In the latest financial year 2022, UOB increased its net profit by 18%, thanks to a 31% rise in net interest income which offset a 9% drop in net fee income (which, in turn, was due to some weakness in wealth and fund management businesses). Leading bank DBS experienced a similar decline but of 12%.
The first quarter of 2023 was equally strong, if not stronger. On a year-over-year basis, net profit expanded by 74%, net interest income by 43% and non-interest income by 66%, the latter due to better trading and investment performance.
These results exclude one-off expenses stemming from the acquisition of Citigroup's (C) consumer banking business. Of the four markets, Thailand, Malaysia and Vietnam have already been taken over. The last, Indonesia, will be added by the end of this year, by which time revenue is expected to be lifted by about $1bn.
For all that, interest earnings appear to have already hit their highest and have started to decline in the latest quarter. And not just at UOB. Its net interest margin was down by 8 bps; OCBC's by 1 bps.
Most analysts concur. 2Q results that will be released on July 27 are forecast to come in lower quarter-on-quarter, although UOB guides net interest margin to remain unchanged at 2.2%. It has begun to reprice deposits in an effort to squelch funding pressures.
With peaking margins across the industry and slowing uptake of credit, some see UOB's low exposure to China (which has been struggling with a difficult economic recovery) as a boon. North Asia, dominated by Greater China, contributes 17% of operating profit and makes up 16% of customer loans. Right now, the bank is more paying more attention to Southeast Asia.
It almost goes without saying that, regardless of the near-term earnings prospects, UOB and peers will continue to be well-capitalized and highly liquid, with little risk of asset quality issues.
Economy
Singapore's GDP in the first quarter inched by just 0.4% compared to 2.1% in the last quarter. Manufacturing, one of the twin engines of growth along with the financial services sector, contracted for the second consecutive period. For the full year, GDP growth is forecast to decelerate to 1.8%, from 3.6% in 2022 and 8.9% in 2021.
This confirms that the demand for bank credit, especially the corporate kind, will stay flat. Fee income too may not improve given the flagging investor and consumer sentiment. After a steady FY2023, a more pronounced normalization in performance is expected in FY2024.
Valuation
UOB's principal listing ( SGX:U11 ) had a decent showing over the past three years, returning 59% in total. Year-to-date, however, Singaporean banks are down about 7%. In contrast, the Straits Times Index ((STI)) of the top 30 companies is up slightly, 1%.
This includes dividends: at a payout rate of 49%, UOB yields 4.85% - nearly as much as the industry on average, 4.9%. In three years, the yield is forecast to reach 6.3%, under the assumption that dividends would grow roughly at the same pace as earnings per share.
At 1.1x PB, UOB is on par with OCBC and cheaper than DBS at 1.5x. At this level, it is also trading around its own and close to the industry's historical average. The consensus price target for the next 12 months is S$32, 12% above the current S$28.
Conclusion
Of the three banks, UOB's regional focus on Southeast Asia - or the ASEAN (the Association of Southeast Asian Nations) - looks the most promising. Especially given the deal with Citigroup, which will be doubling the bank's retail customer base. " One Bank for ASEAN " is its latest tagline.
However, over the medium term, in the next three years, the return on equity is expected to move up only slightly, from 10.5% at present to 12.8%. Such modest growth does not fully justify the current price level. Investors may want to wait for a better opportunity to buy.
For further details see:
UOB: From Singapore For ASEAN