Accelerating its ASEAN strategy
- Latest acquisition of Citi’s assets cements UOB’s ASEAN strategy
- Acquisition allows UOB to scale up and deepen regional franchise
- Execution remains key to longer-term synergies
- Maintain BUY, higher TP of S$34.20
Investment Thesis
A recovery play and Fed hike beneficiary. We believe there is further room for UOB’s share price to re-rate as we continue to expect economic recovery in a rate hike environment.. Management expects some net interest margin (NIM) improvement into FY22F as it gears up on regional loans, which typically have higher NIMs. Successive fed hikes will also be positive for UOB’s NIM through FY23F. Release of its management overlay buffers in general provisions may further provide ROE upside in FY22F.
Accelerating, deepening and scaling up the regional franchise. UOB’s acquisition of Citigroup’s Consumer Business in Indonesia, Malaysia, Thailand and Vietnam is positive to UOB’s overall strategy in our view, enabling UOB to accelerate, scale up and deepen the regional franchise. Execution remains key to longer-term synergies as management targets >13% ROE post-acquisition by FY26F.
Potential catalyst: Sustained positive deliveries. Lower–than-expected credit costs could drive UOB’s earnings while post-COVID recovery in ROE could boost its share price.
Valuation:
Maintain BUY, higher TP of S$34.20. Our TP of S$34.20 is based on the Gordon Growth Model (11% ROE (previous: 10%), 3% growth, 9% cost of equity) on the back of higher ROE assumptions. This is equivalent to a c.1.3x FY22F P/BV that is c.0.5 s.d. above its average 12-year forward P/BV multiple.
Where we differ:
We believe UOB’s strong non-performing asset (NPA) coverage of 106% and large management overlay of >S$1bn in general provisions will mitigate any potential unexpected specific provisions.
Key Risks to Our View:
Deteriorating asset quality. Larger-than-expected NPLs as well as a worse-than-expected COVID-19 pandemic situation globally could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.