UOB Earnings: Higher-for-Longer Interest Rates to Support NIM; Raising Valuation on Cost Efficiency

Narrow-moat United Overseas Bank reported a mild 2% year-on-year drop in first-quarter net profit, beating market consensus on higher noninterest income, but in line with our expectations. Net interest margin is stable quarter on quarter at 2.02%. Management expects to hold NIM above 2% for the rest of the year as interest rates are higher for longer, which should bring net interest income back to growth for the full year, compared with a 2% year-on-year drop in the first quarter. We edged up our 2024 NIM assumption to 2.02% from 2.00%, as we see less pressure on loan yield, and a higher mix of low-cost current and savings account deposits should support NIM in the second and third quarter, before the impact of US Federal Reserve rate cuts comes through in the second half of 2024. This lifts our 2024 net profit growth forecast to 4.7% from 3.0% previously. We also lowered our midcycle cost/income ratio assumption as the bank aims to bring it down to around 40% by 2026. As such, we raise our 2026 earnings forecast by 5% and lift our fair value estimate for UOB to SGD 38 per share from SGD 36.