• Maintain NEUTRAL and SGD32 TP, 4% upside. United Overseas Bank held its Corporate Day 2024 last week, with the key financial highlight being its 2026 medium-term ROE target of 14%. Compared to its core FY23 ROE of 14.2%, UOB essentially thinks this level can be sustained through the rate cut cycle. We keep our more conservative earnings forecasts, for now. In a rates downcycle, we think the focus should be on dividend yields and DPS growth – and UOB’s preference for capital retention means yields and DPS growth are relatively more muted.

• Sustaining ROE through a rates downcycle. Several broad key assumptions UOB has made in deriving the above 14% ROE target include: i) 4% revenue CAGR on the back of low single-digit NII growth (10 rate cuts expected all the way through end-2026) and mid-teens fee income growth. UOB intends to pivot away to trade and capital-light non-II growth from the traditional asset- based, capital-intensive balance sheet growth; ii) 3% opex CAGR from improved cost efficiency and productivity; iii) credit cost of 25-30bps (FY23: 25bps) – potentially lower should economies in its major markets continue to improve; and iv) 50% dividend payout ratio. UOB thinks this is an optimal mix as it believes its main markets continue to offer good growth opportunities and the capital retained should be able to support volume growth of 7-8%.

• Income growth – pivoting to an asset-light business model. UOB is positioning its wholesale banking business towards trade, cash and treasury to capitalise on the rise in connectivity flows (eg shift of value chain, China+1 strategy) and its digital banking platform for wholesale. Outcomes expected include a doubling of trade loans and ASEAN-4 (Indonesia, Malaysia, Thailand and Vietnam) wholesale banking loan mix rising to 20% by 2026 (2023: 14%). As for its enlarged retail franchise, its focus will predominantly be on fee income from wealth and cards with the aim of raising this to 50% in 2026 from 38% in 2023. Similarly, this rise is expected to be tilted towards ASEAN- 4, whose contribution is projected to rise to 40% from 33% in 2023.

• Improved cost efficiencies through cost optimisation and productivity. This includes optimising its channels (digital and physical infrastructure), offshoring some of its more labour-intensive operations out of Singapore and leveraging off technology to improve productivity. Its end-financial metric is to reduce CIR to 40% by 2026 (2023: 41.5% core CIR, ie ex-Citi integration costs).

• Execution is key; stick to our forecasts, for now. We maintain our more conservative forecasts for now, where we project 2023-2026 operating income and opex CAGR at 3% and 2%. A major variance in our projected growth vs UOB’s target is fees, where we project a CAGR of 7%. We pencilled in credit cost of 25-26bps and an annual dividend payout ratio of 50%. We set out the highlights from its other key business lines in the pages ahead.

Source: RHB Research - 22 Aug 2024