- Raise EPS by 6-9% for better non-interest income.
- Housing slippage and less-favourable funding profile well-cited. Upgrade to BUY from HOLD with new SGD26.70 TP from SGD25.30, still on 12x FY15E EPS. Catalysts from stronger SGD deposit growth and improving housing NPLs.
- For sector exposure, prefer DBS. Best-positioned to benefit from rising rates.
We raise UOB from HOLD to BUY as we believe investors have more than priced in its housing-loan slippage and less-favourable funding profile. UOB’s PER and P/BV valuation premiums over peers have largely fallen well below their means since Jan 2005.
We cut FY14E-16E NIMs to capture stiffer competition. However, we raise EPS by 6-9% for better non-interest income. Accordingly, we lift TP to SGD26.70 from SGD25.30, still at 12x FY15E EPS. This is 0.5SD below its mean since Jan 2005 and implies 1.5x FY15E P/BV, slightly above its 10-year mean.
Tighter liquidity will not break the bank
We understand its housing defaults are isolated to loans originated in 2011 for some individuals for one high-end property development in Sentosa. If the sector’s housing-NPL ratio reverts to its peak after the AFC, the risk for UOB’s EPS is estimated at 17%, not much worse than for its peers.
Also, while SGD liquidity is tightening, Standard Chartered, with a 10% SGD deposit market share, may turn less aggressive as its global ambitions hit a stumbling block.
In the sector, we still prefer DBS, as it should be best-positioned for higher rates.
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