UOB - CGS-CIMB Research 2022-09-30: Margin Upside From Rising Rates

UOB - Margin Upside From Rising Rates

  • The Fed has taken unprecedented action, raising interest rates by 75bp to 3.25% in Sep 22 in a bid to reel in persistent inflation.
  • In Singapore, investors have correspondingly been holding their breath on a recession in the US spilling over into Asian economies, which has somewhat resulted in an overhang on banks’ valuations. Although this translates into slower global economic growth amid higher unemployment, we think that SG banks will nonetheless remain beneficiaries from the pass-through of these higher rates into NIMs.
  • Market participants have correspondingly reacted to the Fed’s refreshed commitment towards staving off inflation, with the Fed fund futures now implying a ~4.3% rate by end-2022F before rising to ~4.6% by mid-2023F and easing to ~3.6% by end-2024F. We now factor in the higher Fed fund rates mentioned above.
  • We are cognisant that higher global interest rates may slow economic growth and have toned down our FY23-24F loan growth estimates for UOB (SGX:U11) as well, from ~6-7% to ~4-5%. Factoring in the stronger rate outlook, we project FY22F/23F/24F NIM of ~1.77%/2.03%/2.01%, and correspondingly raise EPS forecast for UOB by ~1%/2%/2%.
  • Reiterate ADD recommendation on UOB with unchanged GGM-based target price.
  • Risks to our thesis include a steeper-than-expected increase in funding costs as customers rotate CASA deposits into higher-yielding fixed deposits, although this is partly moderated by UOB’s higher 55% CASA holdings in 2Q22 compared to the average of ~44% over the last rate hike cycle in FY15-18.
  • At the same time, higher interest rates may pressure borrower repayment capacities. In particular, we think that the SME segment (~13% of UOB's gross loans in 2Q22) could be most vulnerable to cashflow disruptions if trade sentiment weakens. That said, at this stage, we think that our credit cost estimates of ~20- 23bp over FY22-24F (unchanged) caters to these risks. Further, UOB had ~S$1bn of management overlays in 2Q22, providing some buffer for downside earnings protection.
  • UOB announced that it received regulatory approval for its acquisition of Citi’s retail franchise in Malaysia. Smooth integration of Citi’s franchise (in Malaysia, Thailand, Indonesia, Vietnam) leading to >13% ROE by 2026 (from ~10% currently) is a key re-rating catalyst.

Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2022-09-30
SGX Stock Analyst Report ADD MAINTAIN ADD 35.600 SAME 35.600

Read also CGS-CIMB's most recent report:
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