• NEUTRAL, new SGD32 TP from SGD30.10, 2% downside with c.6% FY25F yield. Post meeting with United Overseas Bank’s management, we think 2Q24 PATMI could ease QoQ if trading & investment (T&I) income normalises from 1Q24’s high level. The roll-off in Citi integration costs in 2H24 is positive for earnings, and efforts to build up the wholesale platform look to be bearing fruit. However, investors’ focus will be on dividend yields and DPS growth in an interest rate downcycle, and UOB’s preference to retain capital for growth means yields and DPS growth may lag peers.

• 2Q key trends likely mixed. We gathered that loan growth momentum was surprisingly resilient in 2Q, thanks to broad-based growth. Coupled with NIM support from efforts to lower deposit cost (impact mainly felt in 2Q), 2Q NII should be decent QoQ while, YoY, NII could still be slightly lower on lower NIM. We understand that the reduction in deposit rates have not had a major impact on UOB’s deposit market share so far and, for now, no decision has been made on whether to undertake another round of rate cuts. As for non- II, we expect fee income to remain healthy but believe the normalisation of T&I income will dampen overall operating income. 1Q24 T&I income was SGD522m and, based on the guided run rate of SGD350-400m/quarter, non- II and operating income growth may soften ahead. Lastly, asset quality continues to hold up and UOB has not noted any adverse developments.

• Integration of Citi Thailand had seen some teething issues, but management believes the issue can be resolved fairly quickly. Expect the Citi integration costs (c. SGD100m per quarter) that UOB has been incurring to largely run its course in 2Q, and drop off significantly in 2H24 now that Operating Day 1 for the major markets in Malaysia, Thailand and Indonesia is past. Management made no change to the core CIR guidance of 41-42%.

• Wholesale platform starting to bear fruits. UOB rolled out its digital platform for the wholesale business for the rest of the region two years ago, and this should have a positive impact on wholesale CASA momentum. Despite the elevated rates environment, its CASA deposits at end-1Q24 was up 12% (CASA ratio: 50.6%) vs 4Q22 (CASA ratio: 47.5%). The focus ahead is on revenue generation, eg growing trade loans, which should also bring in ancillary revenue streams such as FX and cash management.

• Capital management unlikely at this juncture as UOB prefers to continue building up its CET-1 ratio (1Q: 13.9%) to narrow the gap with peers (CET-1 ratios of 14.7-16.2%) and to retain capital for growth opportunities. It cited a CET-1 comfort level of 13.5-14%, which it thinks is sufficient to support risk- weighted assets growth of 7-8% and a 50% dividend payout ratio. If growth is weaker than expected, it will reconsider its capital management theme.

• Forecasts unchanged but TP rises. We raise our TP to SGD32 from SGD30.10 after rolling forward our valuation base year to FY25F. Our TP includes an unchanged 2% ESG premium.

Source: RHB Research - 23 Jul 2024