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Leveraged to increasing wealth, trade and economic growth in South East Asia, I was bullish on United Overseas Bank (OTCPK:UOVEY)(OTCPK:UOVEF) (" UOB" ) when I covered it at the tail-end of last year. These shares also had some near-term drivers, too, namely decent leverage to higher interest rates and a fairly modest valuation in the 1.3x tangible book value region. With the bank' s return on tangible equity heading into the mid-teens area, paying that kind of price appeared a reasonable entry point for the long-term investor.
There has been a fair bit to pack in during that four months or so, including FY2022 full-year results and increasing fears surrounding loan growth, funding and credit costs. UOB will release its Q1 FY2023 results later this week, but right now the near-term outlook is probably skewing a bit more to downside vis-a-vis initial FY2023 management guidance.
Irrespective, this is a name I would be adding on any weakness, and with UOB' s dividend yielding over 4.5% on a ~1.2x book value multiple the current valuation remains attractive for long-term investors. I believe the stock is a buy.

Shares Subdued After FY2022 Disappoints Market

UOB shares initially sold-off a good 4-5% on the day after releasing 2022 results back in February, and at S$29.70 in Singapore trading at time of writing they remain down over 3% on their immediate pre-results level.
FY 2022 reported net profit landed at around S$4.5B, 12% higher year-on-year and good for a circa 11% return on equity (" ROE" ). That was mainly due to the anticipated surge in net interest income (70% of the bank' s total revenue), which was up over 30% year-on-year to S$8.3B on the back of significant net interest margin (" NIM" ) expansion from higher interest rates. NIM was 1.86% for the year, up from 1.56% in 2021. Credit quality holding up strongly also helped, with credit costs unchanged year-on-year at 20 basis points.



Source: UOB FY 2022 Results Presentation
UOB did close out the year on some soft notes, and alongside one-off costs from the Citi (C) deal those may explain the poor share price performance post-results. On the latter, in Q4 UOB closed on the Thai and Malaysian portion of its deal to acquire Citi' s consumer businesses in four ASEAN countries. S$246m in one-off integration charges and stamp duty lowered reported profit, albeit reported H2 net income of S$2.56B was still up 24% year-on-year. Excluding these costs, full-year net income was S$4.8B, with H2 net income of $S2.8B good for an underlying ROE of around 14%.
On the former, sequential loan growth was flat in Q4, while customer deposits were down 1.6% sequentially. The group' s CASA ratio (i.e. the proportion of total deposits from current and savings accounts) fell 2.4 percentage points to 47.5%, leading to elevated concerns that funding costs may depress near-term margins.



Source: UOB FY 2022 Results Presentation  

Short-Term Outlook Skewing More To The Downside

Looking ahead, I do think the near-term is now skewing more to the downside on loan growth, funding costs and credit quality. Management expects FY2023 loan growth in the mid-single-digit area, margin in the 2.2% area and credit costs in the 20-25 basis points range. Loan growth ended the year a bit sluggish and I see that continuing into FY 2023, while I' m also expecting higher funding costs to weigh a little on margins. Even so, soft comps early in the year will still result in significantly higher net interest income year-on-year. NIM should also get a boost from the integration of the Citi ASEAN assets, with the Indonesian and Vietnam businesses expected to close this year too.
On credit quality, my main worry is that this may also land near (or slightly beyond) the higher-end of management guidance as the macroeconomic outlook worsens, although I' m not expecting anything too drastic on that front. NPL formation was still flat in Q4.



Source: UOB FY 2022 Results Presentation
H2 2022 underlying ROE was just shy of 14% &ndash and that is my ballpark figure for underlying FY2023 profitability too. Note that the bank is guiding for S$300-400m in integration expenses this year from the Citi deal and that will weigh on its reported profit numbers. In the long-run, though, I expect these to be a boon for UOB as it skews the business more to emerging ASEAN markets. Those come with higher organic growth prospects, including significant fee income potential from cards and rising regional wealth.

Valuation Remains Undemanding

UOB stock still trades on an undemanding valuation, with the current S$29.70 share price equal to just 1.23x 2022 net asset value per share. The dividend yield is 4.5%.
Management' s 2026 target is for a ROE greater than 13%, though I do think there is a strong element of " under promise, over deliver" in that, and on a ROE-linked multiple of NAV I think these shares are cheap below 1.5x. That implies around 25% upside to fair value on that metric.
A simple dividend discount model also suggests the current valuation remains quite modest. UOB aims to maintain a simple 50% payout ratio, with that resulting in 12.5% growth in the per-share payout last year. Mid-single-digit per annum long-term growth would be enough to drive a fair value in the mid-S$30s per share region. That is in-line with post-financial crisis levels of growth (circa 6% CAGR between 2008-2022).
UOB Annual Dividend Per Share (2008-2022)



Data Source: Various UOB Annual Results
Given my FY 2023 EPS estimate (~$3.20 per share), this implies another year of double-digit dividend growth this year, I think that average growth in-line with past levels is more than achievable over the next decade or two. Buy.
Editor' s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
https://seekingalpha.com/article/4596100-united-overseas-bank-undervalued-despite-near-term-risks


 

 

Ho believes that this " unwarranted" gap, despite " superior ROE and dividend yield as well as similar growth, will likely narrow."