RHB Research on Monday (Oct 31) upgraded its call on UOB : U11 +2.59%to &ldquo buy&rdquo from &ldquo neutral&rdquo following the bank&rsquo s release of record Q3 results last Friday.

 

The research house raised its earnings estimates for FY2022 by 10 per cent, and a further 3 to 4 per cent for FY2023. 

 

This comes as RHB analysts revise their net interest margin (NIM) revisions upwards, with lower expected provisions for FY2022 after the bank&rsquo s earnings for the first nine months of the year exceeded RHB and consensus expectations. 

 

This has resulted in a higher target price of S$31.40 as compared with S$29.30 previously, as the new target incorporates refreshed generalised gain margin (GGM) assumptions with a 4 per cent ESG (environmental, social and corporate governance) premium.  

 

Looking ahead, RHB&rsquo s research team said it is optimistic that UOB will be able to &ldquo ride through the current challenges&rdquo in light of its satisfactory 9M FY2022 earnings and strong NIM expansion. 

 

It is projecting the bank&rsquo s NIM to expand even further to remain above 2 per cent in Q4 FY2022, in tandem with the rise in the federal funds rate (FFR), or the interest that banks charge each other.

 

Similarly, Maybank Securities foresees UOB&rsquo s NIM to continue expanding and on Monday raised its target price to S$33.77.

 

The brokerage firm maintained its &ldquo buy&rdquo call on UOB, citing confidence in the bank&rsquo s capacity to &ldquo offer certainty amidst uncertain macro conditions&rdquo .

 

While RHB&rsquo s research team said it expects UOB&rsquo s planned acquisition of Citi&rsquo s retail portfolio to lift its NIM, it predicts NIM expansion to moderate in the quarters ahead even as the FFR continues to rise in 2023. 

 

UOB&rsquo s loan growth is also expected to moderate, in light of a challenging global economic outlook and slow growth in key markets. 

 

&ldquo Still, a tactical move to accumulate fixed deposits earlier in the rate upcycle would help sustain NIM,&rdquo it added. 

 

Considering that the bank&rsquo s non-performing loans (NPLs) fell 10 per cent quarter on quarter, the research team views NPL coverage as &ldquo comfortable&rdquo at 98 per cent. 

 

It views the stock&rsquo s current valuation at 1.03 times price-to-book value as compelling against the bank&rsquo s projected FY2023 return on equity projection of above 11 per cent.

The results were driven by strong net interest income, higher customer-related treasury income and lower charges. 

SINGAPORE &ndash UOB turned in a record set of results for the third quarter as it joined other banks like Standard Chartered Bank and HSBC in reporting a surge in lending income from higher interest rates. 

 

The bank&rsquo s net profit for the three months to September jumped 34 per cent year on year, and 26 per cent quarter on quarter, to $1.4 billion. The number easily topped estimates of $1.19 billion by analysts polled by Bloomberg.

 

The results were driven by strong net interest income, higher customer-related treasury income and lower charges, the bank said on Friday.

 

UOB shares and those of its peers DBS Bank and OCBC Bank rallied on Friday on UOB&rsquo s solid results. UOB jumped $1.04 or 4 per cent to close at $27.06. DBS gained 97 cents or 3 per cent to $33.78, while OCBC added 21 cents or 1.8 per cent to $11.99.

 

DBS will report its third-quarter results on Nov 3, with OCBC joining in a day later.

 

UOB deputy chairman and chief executive Wee Ee Cheong said that while uncertainties continue to cloud the global economy, the bank expects Asean economies to show resilience and avoid a recession.

 

&ldquo We are seizing the opportunities. If you look at the whole Asean generally, they are fairly strong. I think it could potentially be just a slowdown,&rdquo said Mr Wee at the bank&rsquo s results briefing.

 

UOB&rsquo s net interest margin (NIM) expanded by 40 basis points to 1.95 per cent, driving net interest income up by 39 per cent year on year to a new high of $2.23 billion. Loans grew 6 per cent to $323 billion.

 

Mr Lee Wai Fai, the bank&rsquo s chief financial officer, sees NIM rising to above 2 per cent before it peaks in the first half of 2023 as interest rate increases in the United States channel down to the global financial system.

 

But as interest rates rise further and as the global economy runs the risk of falling into a recession, there are growing concerns that non-performing loans (NPLs) will pick up.

 

UOB said its NPL ratio for the third quarter was down 0.2 percentage point quarter on quarter to 1.5 per cent, while the loan-to-deposit ratio was healthy at 85.2 per cent.

 

Ms Yustina Quek, credit research analyst at CreditSights, a financial research firm that is part of Fitch, said delinquency rates may rise modestly later down the road because there is always a lagged effect for higher rates to feed through.

 

But, Ms Quek said the impact of higher rates will be broadly manageable domestically as the labour market remains resilient. She does not expect UOB will have to increase its provisions meaningfully as it has set aside robust buffers for loan losses during the pandemic period.

 

UOB&rsquo s non-interest income, which includes wealth and fund management fees, remained soft as investors stayed cautious amid market volatility.

 

Other non-interest income rose, surging 58 per cent year on year to $431 million. This was due to record-high customer-related treasury income as demand for hedging activities rose.

 

UOB said its group&rsquo s balance sheet stayed robust as liquidity positions strengthened, with the all-currency liquidity coverage ratio improving to 142 per cent.

 

The common equity tier 1 ratio eased to 12.8 per cent largely due to interim dividends for 2022, but remained well above the minimum regulatory requirement of 6.5 per cent.

 

On its overseas markets, Mr Wee said UOB is making &ldquo meaningful progress&rdquo in growing its franchise across Asean.

 

Its digital platform, UOB TMRW, reached a significant milestone in August, achieving one million digitally acquired customers, he added.

 

&ldquo This platform will also be key in serving our incoming Citibank customers across the region,&rdquo Mr Wee said.

 

UOB announced in January that it will acquire Citigroup&rsquo s consumer banking franchise in Indonesia, Malaysia, Thailand and Vietnam for about $4.9 billion.

 

Mr Wee said UOB will complete its acquisition in Malaysia and Thailand on Nov 1, and Vietnam and Indonesia will follow by end-2023.

 

Around 90 per cent of Citi&rsquo s staff have agreed to join UOB, he added.