United Overseas Bank (UOB) is emerging as the preferred pick among Singapore’s big three banks, with DBS Group Research projecting a significant $2 billion share buyback announcement during UOB’s FY2024 results. This move, coupled with robust loan growth and resilient earnings, positions UOB as a standout in the sector.
Strong Capital Management Drives Confidence
DBS Group Research analyst Lim Rui Wen has reiterated a “buy” call on UOB with a target price of $37.90, citing its higher return on equity (ROE) trajectory and proactive capital management plans. Lim highlights UOB’s 6% forward dividend yield, backed by a strong provisions buffer of 99%, as key attractions for investors. The anticipated share buyback is expected to further bolster shareholder returns and provide upside support for its share price.
In contrast, DBS maintains a “hold” call on OCBC, with a target price of $16.10, citing uncertainties surrounding its capital management plans, particularly in light of its voluntary general offer for Great Eastern.
Earnings Visibility into FY2025
With interest rate cuts expected to slow in FY2025, Singapore banks are increasingly focusing on stabilizing net interest income (NII). DBS Research estimates that each 25-basis-point rate cut will reduce Singapore banks’ FY2025 earnings by 1%-2%, down from previous cycles where sensitivity to rate cuts was higher. For instance:
- UOB’s net interest margin (NIM) remained stable quarter-on-quarter in 3QFY2024.
- DBS’s NIM sensitivity per basis point has declined to $4 million, down from $18-$20 million in 2021.
Lim notes that these trends reflect improved loan book management, with banks extending loan durations to two to three years to maintain earnings stability through rate cycles.
Loan Growth Fuels Optimism
Rate cuts in FY2025 are expected to spur loan growth. As of September 2024:
- UOB’s loans grew 4.0% year-to-date—the highest among the big three banks.
- DBS and OCBC reported loan growth of 0.5% and 2.9% year-to-date, respectively.
Key drivers include increased regional lending activity, particularly in Malaysia and ASEAN, and the expansion of Singapore’s integrated resorts. Marina Bay Sands is reportedly seeking a $12 billion loan deal, underscoring the robust loan pipeline in sectors like data centers, semiconductors, and property.
DBS and UOB have provided guidance for mid-single-digit and high-single-digit loan growth in FY2025, respectively, with the sector forecasted to achieve overall growth of 6%-7%.
Asset Quality Remains Resilient
Asset quality across Singapore banks has remained stable, with credit costs expected to stay within management guidance. However, UOB faced challenges in 3QFY2024, including:
- Asset quality issues related to Citi Thailand integration.
- Collateral revaluations in Hong Kong commercial real estate, which contributed to 20% of specific allowances.
Despite these challenges, Lim expects credit costs for FY2025 to remain manageable, assuming a calibrated global economic landing.
Sector Outlook and UOB’s Edge
DBS analysts see UOB as well-positioned for sector re-rating, given its robust capital management and shareholder-friendly policies. While OCBC’s plans for Great Eastern create uncertainty, UOB’s consistent execution makes it the preferred choice.
UOB shares closed at $36.45, up 0.25%, as of 10 a.m. on December 2, while OCBC shares inched up 0.06% to $16.29.
Key Takeaways
- Buy UOB: Analysts forecast a $2 billion share buyback and a 6% dividend yield.
- Strong Loan Growth: UOB is leading the pack with 4.0% year-to-date growth, supported by a robust regional pipeline.
- Stabilized NII Sensitivity: Lower impact from rate cuts reflects disciplined loan book management.
Investors looking for growth and stability in Singapore’s banking sector should keep a close watch on UOB as it navigates FY2025 with strong fundamentals and shareholder-friendly initiatives.
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