Brokers' take: RHB downgrades UOB to 'neutral', expects headwinds to moderate FY2022 growth
Vivienne Tay
RHB on Wednesday (May 4) downgraded UOB to “neutral” from “buy” and lowered its target price to S$32.70 from S$38.10 as it expects headwinds to moderate growth for the bank’s FY2022.
The research team has also reduced its target price for DBS to S$38.10 from S$42.70, and S$13.90 from S$14.40 for OCBC , according to separate reports released on the same day.
RHB cut its target prices for all 3 Singapore banks to account for higher risk premiums and lower ESG (environmental, social and corporate governance) scores, as it recalibrates its assessment of risks and regulatory requirements associated with data and cybersecurity.
On Friday, DBS, UOB and OCBC each reported a 10 per cent fall in net profit for the quarter. Wealth and other non-interest income were the biggest drags, amid market volatility amid geopolitical tensions.
The downgrade on UOB comes as the lender’s Q1 results miss expectations on lower non-interest income. Other non-interest income had tumbled 70 per cent from an impact on hedges, resulting in lower non-customer-related trading and investment income.
RHB noted that the share price should consolidate in the near term, given UOB’s year-to-date outperformance and more subdued FY2022 earnings growth.
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Its lowered UOB target price of S$32.70 implies a potential upside of 7.6 per cent from the bank's last trading price of S$30.39 as at 11.17 am on Wednesday. The counter was trading 1.3 per cent or S$0.40 higher at the time.
RHB has trimmed its earnings forecasts by 5-6 per cent for FY2022-24 to account for the Q1 2022 mark-to-market trading loss as well as more conservative assumptions on non-interest income given the more challenging environment for wealth management and trading and investment income.
Meanwhile, DBS and OCBC’s results were within RHB’s expectations. Both banks also reported bigger improvements in net interest margins.
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RHB did not make any changes to its earnings forecasts for DBS but lowered its target price after raising the equity risk premium given geopolitical tensions, inflation fears and China’s pandemic lockdown.
The research team’s new S$38.10 target price for DBS implies a potential upside of 11.7 per cent from the counter’s Wednesday trading price of S$34.11 as at 11.17 am. The counter was trading 0.6 per cent or S$0.19 higher at the time.
Meanwhile, RHB’s latest S$13.90 target price for OCBC implies a potential upside of 12.5 per cent from the counter’s 11.17 am trading price of S$12.36. OCBC shares were trading 0.2 per cent or S$0.03 lower at the time.
Meanwhile, CGS-CIMB has raised its target prices on DBS to S$40.20 (from S$39.90) and UOB to S$35.60 (from S$35.40) as it incorporates Fed hikes but tones down treasury/wealth income. This implies a potential upside of 17.9 per cent and 17.1 per cent respectively.
Its top pick is OCBC, which has an unchanged target price of S$14.20, which implies a potential 14.9 per cent upside. The research team added that the earnings rise from stronger net interest margins and treasury income was offset by softer wealth.
Both CGS-CIMB and RHB noted that OCBC’s risk-reward ratio remains compelling and more attractive compared to the other 2 banks with its current price-to-book value (P/BV) of 1.1 times. OCBC is also trading at a 17 per cent discount to its peak valuation of 1.5 times P/BV during the previous rate hike cycle, CGS-CIMB said.
It noted that all 3 banks are well-positioned to sustain their dividend policies in FY2022 as management overlay buffers stayed intact and CET1 ratios held steady at about 13.1-15.2 per cent in Q1 2022. It maintains “overweight” on the sector.
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