[SINGAPORE] UOB’s second-quarter earnings may have beaten expectations, but a lowered fee income guidance and a spike in non-performing assets (NPAs) have led to Citi Research and OCBC Group Research downgrading its shares.
The bank on Friday (Aug 7) reported a net profit of S$1.48 billion for Q2, beating estimates of S$1.45 billion. The bottom line was supported by strong wealth management income and a S$200 million gain from properties sold.
However, the lender lowered its fee income guidance to low single-digit growth from high single-digit growth, citing headwinds such as higher card-redemption expenses and lower revenue from investment banking deals.
This prompted Citi Research on Tuesday to downgrade UOB to “sell” from “neutral”, setting a target price of S$38. Analyst Tan Yong Hong noted that net interest margin (NIM) expectations need to be moderated as fixed-rate assets reprice lower.
UOB shares fell 0.6 per cent on Friday, after the results.
The downgrade also reflects expected earnings per share downgrades from reduced net interest income and non-interest income after the UOB Asset Management (UOBAM) sale, alongside lower non-wealth fees, he said.
This followed OCBC Group Research downgrading the stock to “hold” from “buy” on Friday, though it raised its fair-value estimate to S$42.35 from S$41. The research house noted that UOB’s share price is now trading close to its fair value.
While wealth management was a standout performer, with income up 16 per cent year on year in the first half and assets under management hitting a record S$204 billion, the lower fee income guidance weighed on the outlook.
RHB and Macquarie bullish
Conversely, RHB on Tuesday upgraded UOB to “buy” from “neutral” and lifted its target price to S$46.60 from S$41.30.
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RHB said that despite the lender’s unexciting set of numbers and the cut to fee growth guidance, the valuation gap between UOB and its peers is becoming too wide for investors to ignore.
The brokerage added that UOB is likely comfortable with its provision buffers, and said that it expects the cost-of-equity gap versus the bank’s peers to narrow.
Macquarie Equity Research on Friday echoed this bullish valuation sentiment, retaining its “outperform” rating and raising its 12-month target price by 3 per cent to S$46.57. Analyst Jayden Vantarakis highlighted that UOB remains the value play in the sector, trading at a 48 per cent price-to-book discount to its domestic peer average.
Asset quality was a recurring theme across all broker notes.
UOB saw new NPA formation spike to S$902 million in Q2, up from S$341 million in the first quarter. About two-thirds of this new formation stemmed from a single Greater China-Hong Kong commercial real estate account, though the bank had been monitoring the client closely.
While this led to a decline in some allowance coverage metrics, management has expressed that the current buffers are adequate and does not expect any further chunky NPA slippages.
UOB management maintained its full-year guidance for credit costs at 25 to 30 basis points and NIM at 1.75 to 1.8 per cent.
