Brokers' take: Analysts raise target price on UOB as net interest margin bottoms out

ANALYSTS have raised target prices on UOB as they believe the bank's net interest margin has bottomed out.

In a research note on Friday, DBS maintained its "buy" call and raised its target price on UOB to S$27.60, up from the previous target price of S$22.20.

Analyst Lim Rui Wen is optimistic of a better business environment for local banks on observations that net interest margins (NIMs) for all three local banks UOB, OCBC and DBS have bottomed out.

She noted that UOB's NIM had inclined four basis points (bps) quarter on quarter, a second consecutive quarter of improvement led by lower cost of funds. She believes that "the worst NIM declines are largely over" and forecast an NIM of about 1.57 per cent for UOB in FY2021.

Further, she opined that the banks are poised for return-on-equity recovery as "asset quality environment has stabilised from trough levels" and banks continue to make active provisions for non-performing assets and non-performing loans.

"We expect broad-based fee income growth across the banks on improved momentum of business activities as banks expect wealth management to continue to be a material growth contributor for fees," said Ms Lim.

Meanwhile, Maybank Kim Eng continued to declare a preference for OCBC over UOB, as it maintained a "hold" call on UOB.

The brokerage raised its target price on UOB to S$26.24 on expectations that the lender will benefit further from a pick-up in economic activity as well as the potential escalation of the North-South supply chain momentum.

Analyst Thilan Wickramasinghe estimated the bank's loans to expand 7 per cent year on year in FY2021 compared to 5 per cent in FY2020 as demand from clients in segments such as logistics, data centres, suburban real estate rises.

"Singapore's hub status and strengthening North-South supply chain relocations should also be a key driver for loans and fees to grow going forward," he said.

Even though the bank's asset quality showed signs of improvement, Mr Wickramasinghe thinks there are still risks, given that non-performing loans made up a "material portion of UOB's portfolio".

Shares of UOB closed at S$24.68 on Friday, up S$0.03 or 0.1 per cent.