Why the sudden change in target share price?
In our model, we had penciled in 32bps credit costs as guided by management. We had extended the 32bps into FY18 and that caused provision expense to be higher. However, owing to improving economy and signs bottoming out in the oil and gas sector, we believe that credit costs in FY18 will improve. Therefore, we estimate credit costs in FY18 will be c.28bps, ahead of management’s current guidance of 32bps, which leads to better ROE and a higher target price.
UOB’s ROE could remain a laggard compared to peers
Our FY18e ROE at 9.8% is lower than our estimates for DBS (ROE: 11.6%) and UOB (ROE: 10.9%). The main reason for the higher ROEs for DBS and OCBC are the larger exposure of both banks to the less capital intensive wealth management business, in particular after DBS’ acquisition for ANZ’s wealth management business and OCBC’s acquisition of NAB and Barclay’s wealth management business. As positive market sentiments are expected to be strong in 2018, DBS and OCBC will benefit from a robust pick-up in wealth management products and solutions from that enlarged base of clients. DBS’ and OCBC’s wealth management share of total income have been rising in the past quarters to hit c.17% and c.33% respectively. UOB does not separately disclose their wealth management income in full detail therefore we are unable to compute the percentage contribution. As of 2Q17, UOB’s wealth management AUM is S$99bn, lower than DBS’ S$175bn. OCBC’s private banking arm – Bank of Singapore’s AUM alone is cS$90bn not to mention the AUM from other wealth segments. Other reason for our preference for DBS and OCBC is the better performance out of Hong Kong where we expect NIMs to improve as the 1-month HIBOR has started to move higher in the 2H17.
Valuation: Gordon Growth Model
3-Year Historical Price-to-Book
Upgrade “NEUTRAL” with a higher target price of S$23.46 (previously S$21.61). Our target price is based on Gordon Growth Model.