United Overseas Bank Earnings: We Lower Our Fair Value 5% but Remain Bullish on UOB’s ASEAN Growth

We maintain our narrow moat rating on Singapore’s United Overseas Bank, or UOB, and lower our fair value estimate 5% to SGD 36 from SGD 38 after its third-quarter results. Our new fair value is equivalent to 1.45 times book and implies a fair price/earnings ratio of 11.6 times assuming midcycle ROE of 12.5% and a fair dividend yield of 4.3% based on UOB’s payout ratio of 50%. With 32% upside to our reduced fair value, UOB is our top pick among Singaporean banks at current prices. We continue to expect the businesses UOB is acquiring from Citigroup in Malaysia, Thailand, Indonesia, and Vietnam to drive top-line and bottom-line growth for it once initial integration expenses have passed. Further, at a time when the property market in China is struggling and Hong Kong’s economy faces slow growth, UOB’s increased exposure to ASEAN may make it easier for UOB than for some peers to deliver medium-term growth, in our view.