United Overseas Bank Earnings: We Lower Our Fair Value 5% but Remain Bullish on UOB’s ASEAN Growth

We maintain our narrow moat rating on Singapore’s United Overseas Bank U11, or UOB, and lower our fair value estimate 5% to SGD 36 from SGD 38 after its third-quarter results. Our new fair value is equivalent to 1.45 times book and implies a fair price/earnings ratio of 11.6 times assuming midcycle ROE of 12.5% and a fair dividend yield of 4.3% based on UOB’s payout ratio of 50%. With 32% upside to our reduced fair value, UOB is our top pick among Singaporean banks at current prices. We continue to expect the businesses UOB is acquiring from Citigroup in Malaysia, Thailand, Indonesia, and Vietnam to drive top-line and bottom-line growth for it once initial integration expenses have passed. Further, at a time when the property market in China is struggling and Hong Kong’s economy faces slow growth, UOB’s increased exposure to ASEAN may make it easier for UOB than for some peers to deliver medium-term growth, in our view.

That said, declines in office property prices in the U.S., as well as headwinds surrounding property in Hong Kong and Greater China, mean that the outlook for UOB’s credit costs is getting harsher. UOB guided for credit costs of between 25 and 30 basis points of loans next year. In line with UOB’s guidance, we now forecast 27 basis points in 2024 and 25 basis points in 2025, compared with our previous forecast of 22 basis points for both years. The negative effect this has on profit is mostly but not entirely offset by an increase in our forecast for fee growth next year, after UOB guided for double-digit fee growth versus our previous projection of 6.5%. We also continue to expect UOB to generate loan growth of 5% next year, faster than we expect for some other Asian banks. The acquired Citi businesses and related benefits such as increased credit card fees after UOB spent heavily to promote its own brand to former Citi customers should help drive growth in loans and fees even if wealth management fees fail to grow as had been hoped earlier this year.