• Stay BUY, with new SGD31.70 TP from SGD32.30, 11% upside and c.5% yield. United Overseas Bank’s 2Q23 results were in line as operating income held up, dampened by higher credit cost. That said, management sees asset quality holding up as the Citi acquisition continues to buoy retail performance while core opex remains well managed. UOB is our preferred pick for Singapore banks given its focus on leveraging the ASEAN network. At 1x P/BV against 13% ROE, valuation remains compelling.

• 2Q23 results within expectations. 2Q23 net profit of SGD1.4bn (-6% QoQ; +28% YoY) brought 1H23 net profit to SGD2.9bn (+45% YoY) – 51% of our and consensus FY23F. Excluding a one-off opex of SGD159m for its acquisition of Citi’s retail assets, 1H23 core earnings stood at SGD3.1bn (+53% YoY). 1H23 core ROE was 13.7% (FY22: 11.9%) while CET-1 strengthened 30bps from end-2022 to 13.6%. UOB declared an interim DPS of 85 SG cents (1H22: 60 SG cents), translating to a payout ratio of 49%.

• Results highlights. QoQ, the drop in core net profit was due to higher credit cost of 30bps (1Q23: 25bps) – reflecting a combination of specific allowances (full provision for one corporate account in Thailand) and pre-emptive provisioning. Otherwise, NIM was broadly stable at 2.12% (-2bps QoQ); fee income fell 5% QoQ (softer loan/trade and wealth fees), offset by stronger trading and investment income; while core opex looks under control (flat QoQ with core CIR at 40.9%).

• Loan growth soft but targets unchanged. Loans remain muted (+1% QoQ/- 1% YoY) while YTD was flat. The sequential expansion in loan book was led by Greater China (+4% QoQ) whereas its Singapore book inched up 1% QoQ. The ASEAN-4 book, however, was down 1% QoQ mainly due to Malaysia (-3% QoQ). UOB prefers to stay disciplined as competition for quality loans remains keen and the economic outlook uncertain.

• Asset quality stable. NPL ratio was stable at 1.6% while non-performing assets coverage stood at 99%. Management does not see any systemic risk and expects the NPL ratio to stay stable at 1.6-1.7%. However, management acknowledged that current interest rate levels are elevated and could potentially stay high for longer. Hence, credit cost (beyond FY23) may be higher at 25-30bps vs <20bps just prior to COVID-19.

• Other highlights. NIM guidance was unchanged but with a possible upside bias given July’s hike in the Federal Funds Rate (FFR). However, fee income growth was toned down to high single digit from double digits given 1H trends. Finally, the Citi one-off costs should roll off next year, which would bring reported CIR to 41-42%. UOB targets to lower this further to 40% in 2026.

• Earnings and TP. We tweak down our FY23F-25F earnings by 2-4% mainly on higher credit cost assumptions (Figure 3). TP is revised down by 2% to SGD31.70. Key risks to our view are sharper-than-expected NIM compression and weaker-than-expected non-II.

Source: RHB Research - 28 Jul 2023