Broker’s Call: UOB Q3 2022 Results Driven by NIM Expansion, Maintain Add

November 7, 2022

UOB buy Southeast Asia

CGS-CIMB Analyst take

In Singapore, bank stocks are back in vogue with investors given the rising interest rate environment. Recently, all of Singapore’s three big banks reported their latest Q3 2022 earnings.

First to reveal its quarterly numbers was Southeast Asia-focused United Overseas Bank Ltd (SGX: U11), better known as UOB. That set the tone for the other two big Singapore banks.

UOB reported its earnings on Friday 28 October and they were impressive.

The research team at CGS-CIMB Securities maintains our “ADD” call on UOB buts cuts our target price slightly to S$34.80 (from S$35.60 previously).

So, with the constant negative stream of news coming from global stock markets right now, here are some encouraging highlights for investors from UOB’s solid quarter.

Optimistic tone, not expecting recession in ASEAN markets

UOB saw net profit of S$1.4 billion in Q3 2022, which was up 34% year-on-year and increased 26% quarter-on-quarter.

That was driven by multiple Federal Reserve (Fed) rate hikes that translated into higher net interest margins (NIMs), which were up 28 basis points (bps) on the quarter.

Strong trading and investment income from hedging activity – amid market volatility – also contributed to the profit growth.

These more than offset the continued weakness in wealth management fees and a slowdown in loan-related fees as credit growth cooled.

UOB said it remains selective in its credit exposure and we expect the bank to witness c.4.6% loan growth in FY 2023, which would be stable year-on-year.

NIMs may peak in H1 2023

There’s no change to the NIM sensitivity of Fed rates rising further although that comes with a caveat. The incremental impact of margins in future may not be as significant as the catch-up in funding costs.

Management is guiding for NIMs to peak in either Q1 or Q2 2023 and we believe this will mean that NIM expansion will likely moderate in the next few quarters.

UOB’s aggressive strategy to offer higher fixed deposit (FD) rates ahead of its peers has positioned it well going into the final quarter of the year.

That’s because this proactive approach has started to pay dividends – it’s been able to lock in relatively cheaper funding as Fed rates continue to go higher.

Despite a drop in its Current Account and Savings Account (CASA) ratio to around 50% (from a peak of 56% in Q4 2021), due to an influx in FD placements, the bank is still able to post a positive carry.

Asset quality remains in check

UOB reported that its asset quality is benign, especially with the writeback of a non-performing loan (NPL) that was related to a North Asian property developer during Q3 2022.

Management maintained its c.20bp credit cost guidance for FY2022 and c.20-25bp for FY2023, with it coming in slightly higher to account for Citigroup Inc’s (NYSE: C) unsecured portfolio coming on board.

That portfolio, of course, comes from UOB’s deal to acquire the American bank’s consumer assets in Southeast Asia.

For asset quality remain contained, further rate hikes will have to come in an orderly manner so that credit availability does not seize up.

Reiterate Add but with lower target price

We reiterate our add rating on UOB and raise our forecast FY 2022 earnings per share (EPS) by around 12% as we incorporate more significant flow-through of the Fed’s rate hikes into NIMs and higher investment income.

Using current interest rate assumptions, UOB management projects its Return on Equity (ROE) to reach nearly 13% in FY 2023 and rise towards 14% in FY 2024.

Our Gordon growth model-based (GGM-based) target price gets lowered, though, to S$34.80 as we roll over to FY 2023 and factor in a higher risk-free rate of c.2.5%.

One potential downside risk is if asset quality deterioration picks up as interest rates keep heading north.

Disclaimer: CGS-CIMB Securities Banks Analyst Andrea Choong doesn’t own shares of any companies mentioned.