CGSI downgrades UOB to ‘hold' following softer loans growth expectation; near-term outlook ‘uncertain'

Business Times

a day ago

[SINGAPORE] CGS International (CGSI) analysts Tay Wee Kuang and Lim Siew Khee on Friday (Aug 8) downgraded local bank UOB to a 'hold' call from a prior 'add' rating on the back of 'earnings uncertainty' in H2 FY2025, with a lowered target price of S$38.30 from S$38.60.
On Thursday, UOB had stated its net interest margin (NIM) expectations for FY2025 to come in at between 1.85 and 1.9 per cent, a decrease from its earlier forecast of around 2 per cent. Additionally, it expects loan growth to be in the low single digits, The Business Times reported previously.
This lower guidance comes on the back of restricted growth in Asean in light of recent US tariffs, noted UOB deputy chairman and chief executive officer Wee Ee Cheong at the bank's Q2 results briefing.
As such, Tay and Lim have lowered their FY2025 to FY2027 forward earnings per share by 2.5 to 5.8 per cent to account for lower loans growth, as well as lower NIMs to factor in the time lag for funding cost savings to pass through.
On fee income, UOB is also guiding for high single-digit growth compared to a double-digit growth rate, with management observing that customers are shifting to more conservative wealth solutions that are likely less profitable, said the analysts.
That said, the analysts expect UOB's NIM to rebound in the second half of this year.
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'This comes after the bank initiated two interest rate cuts on its flagship high-interest savings account, the UOB One Account, with effect from May 25 and Aug 25, respectively,' they explained.
The CGSI analysts also noted that continued investments in IT infrastructure suggest that UOB's cost-to-income ratio for FY2025 could trend higher than its previously guided at around 42 per cent.
Possible SP easing in H2: analysts
Additionally, UOB recorded S$279 million in total allowances for the second quarter, translating to total credit cost of 32 basis points (bps), with a majority of it entailing specific provisions (SP). Management has retained its FY2025 forward guidance of net credit costs at 25 to 30 bps, with an inclination to top up UOB's general provision buffer.
This suggests SP could ease in the second half of this year, with the potential writeback of a single US commercial real estate account that had seen bidders for its assets, write the analysts.
'Management also highlighted that its credit quality in Thailand has improved, having observed an uptick in business volumes across sectors apart from mortgage loans,' they also noted.
The analysts therefore keep their elevated credit cost expectations of 35 bps for FY2025 forward for this in mind, in view of excess buffers undertaken by management, before tapering down to 25 bps in FY2026 forward.