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Broker's take: Phillip Capital upgrades UOB to 'neutral'

HOMEGROWN fund management company Phillip Capital has revised its target price for United Overseas Bank (UOB) to S$23.46, up from S$21.61 previously.

Citing an improving economy and signs of bottoming out in the oil and gas sector, the broker believes that UOB's credit costs in fiscal 2018 will improve from 32 basis points to about 28 basis points. Accordingly, UOB should have a higher return on equity (ROE) and thus a higher target price.

Nonetheless, the broker noted that UOB's estimated ROE of 9.8 per cent could remain a laggard as compared to its peers. Phillip Capital estimates an ROE of 11.6 per cent for DBS, and 10.9 per cent for OCBC.

"The main reason for the higher ROEs for DBS and OCBC is the larger exposure of both banks to the less capital intensive wealth management business, in particular after DBS's acquisition for ANZ's wealth management business, and OCBC's acquisition of National Australia Bank (NAB) and Barclay's wealth management business," the broker said.

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As market sentiment is expected to be strong in 2018, DBS and OCBC will benefit from a pick-up in wealth management products from an wider pool of clients, it added.

While UOB does not separately disclose their wealth management income in detail, DBS's and OCBC's wealth management share of total income has been rising in the past quarters to reach about 17 per cent and 33 per cent respectively, the broker said.

As at the second quarter this year, the assets under management of UOB's wealth management arm stands at S$99 billion, which is much lower than DBS's S$175 billion.

Another reason for the broker's preference for DBS and OCBC is their better performance from Hong Kong, where it expects net interest margins to improve as the one-month Hibor edges higher in the second half of 2017.

As at 9.29am, UOB was trading 12 Singapore cents higher at S$24.37 apiece.

DBS was trading at S$21.97, and OCBC at S$11.47 per share.

UOB will announce its third-quarter results on Nov 3.

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