• Upgrade to BUY, new TP of SGD40.20 from SGD35.60, 10% upside with c.5% FY25F yield. United Overseas Bank has lagged peers for a large part of the past 23 months, but we think this trend is set to reverse. We see four factors underpinning its outperformance and further valuation rerating ahead: i) A defensive, ASEAN-centric portfolio; ii) multi-year investments in platforms and synergies from the Citi acquisition are gaining traction and bearing fruit; iii) superior FY25 earnings growth prospects vs the sector; and iv) more aggressive capital returns, thanks to an improved capital position.

• UOB offers investors a hideout from market volatility… We think market volatility is likely to persist following the 2024 US presidential election outcome. With a largely ASEAN-centric portfolio (loan book: 49%/22% is domestic/ASEAN-4), UOB may offer investors a defensive shelter to ride through the volatility ahead. RHB Global Economics and Market Strategy (RHB GEMS) generally expects ASEAN economies under coverage to post stable-to-stronger economic growth in 2025 – on sustained strength in trade and manufacturing, tourism activities and policies to support consumption, among others. Trade exposure to the US is relatively low but RHB GEMS does have a caveat that the indirect impact via China could be substantial.

• …while regional platforms and Citi acquisition bear fruit... These benefits include positioning the wholesale banking business to better capture connectivity and FDI flows into the region, capturing the rise in retail wealth and further solidifying the group’s funding franchise. We believe some of these benefits were evident in the recent 3Q24 results – its loan and CASA growth of +5% YoY and +17% YoY outpaced that of peers.

• … leading to a positive 2025 outlook. UOB had guided for higher total income on the back of high single-digit loan growth and double-digit fee growth, CIR at 41-42%, and stable credit cost of 25-30bps. On the back of this, coupled with a further step-down in the cost of the Citi integration, we expect its reported PATMIfor FY25 to grow by 6% YoY, ie superior to the flat earnings for the sector. On a core basis, we still forecast FY25 PATMI to rise by 3%, thanks to non-II prospects. The rise in PATMI and higher dividend payouts assumed supports our +9% DPS growth for FY25F.

• Further upside potential for shareholder returns from capital management. While we assume that its dividend payout ratio will rise to 52.5% in 2025 from 51% in 2024F, there could be further upside to capital returns in the form of higher dividends and/or share buybacks, now that UOB has a better line of sight on excess capital, with Basel III reforms having gone live. Also, its 14% mid-term ROE target excludes capital management activities.

• Earnings forecasts unchanged but TP upped as we cut our COE assumption by 100bps. This results in a revised GGM-derived P/BV of 1.31x (from 1.16x) – at the higher end of post-global financial crisis (GFC) levels but we think it is deserved, as confidence around UOB’s 14% ROE target rises. Our TP includes a 2% ESG premium.

Source: RHB Securities Research - 20 Nov 2024