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We Lower Our United Overseas Bank FVE to SGD 38 but See Benefits From Citi Deal as Future Catalyst

Here’s our take.

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Securities In This Article
United Overseas Bank Ltd
(U11)

We maintain our narrow moat rating for Singapore’s United Overseas Bank U11 and lower our fair value estimate to SGD 38 per share from SGD 40 upon a change of coverage analyst and following UOB’s fourth-quarter results. Our new estimate represents a fair price/book ratio of 1.57 times based on year-end 2022 book value and 24% upside from the current share price. Assuming a midcycle return on equity of 13%, this implies a fair price/earnings ratio of 12.1 times and a fair dividend yield of 4.1% assuming a 50% payout ratio.

The market reacted negatively to UOB’s fourth-quarter announcement, which we believe mainly reflects the fact that consensus expectations did not fully incorporate the SGD 70 million in Citi integration costs and SGD 167 million in stamp duty as UOB closed the Malaysian and Thai portions of the Citi deal in the fourth quarter, nor the SGD 300 million-SGD 400 million in additional Citi-related costs that UOB expects in 2023, including technology as it works on closing the remaining Indonesia and Vietnam portions of the acquisition. However, we think it’s likely that the market has also not fully appreciated the future positive earnings contribution from the Citi business, which includes a benefit to UOB’s blended net interest margin as the weighting of Singapore loans declines and higher-yielding loans in emerging markets grow. We forecast that UOB’s ROE will consistently exceed 13% from 2024 (earlier than UOB’s promise of 2026) and expect efficiency gains to gradually kick in as UOB leverages technology to trim unneeded expenses and fuel growth. ROE around 13% would be several percentage points lower than the ROE we forecast for UOB rival DBS over the next several years, but this is reflected in our fair price/book multiple, suggesting upside for UOB shares from the current level.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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