United Overseas Bank - CGS-CIMB Research 2019-05-15: Technology Is A Friend, Not A Foe


United Overseas Bank - Technology Is A Friend, Not A Foe

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11) has built up its digital capabilities, incorporating analytics and machine learning into its systems. This is a necessary step given the likely disruption.
  • UOB targets to achieve 42% CTI ratio and at least 13% ROE by FY21 (FY18: 44% and 11.3%) by providing customised solutions to improve stickiness.
  • Maintain ADD with a GGM-based Target Price of S$29.58 (LTG: 2.5%, ROE: 11.5%). Valuations are attractive; UOB trades below its long-term mean of 1.3x P/BV.

Market volatility still a constant, but UOB is confident of riding it out

  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11)’s Corporate Day emphasised the bank’s ability to create long-term value through improvements in customer engagement (understanding and providing solutions to foster stickiness), and using data and technology as a means to automate processes (programmed customer reminders) and reduce costs.
  • In time, the bank believes that it may even be able to anticipate asset quality issues.
  • Although trade war noise is aplenty, the bank remains confident of riding out the macroeconomic volatilities. UOB’s strength lies in its ability to capture cross-border transactions via its regional network, and we believe that it is well placed to benefit from a shift in supply chains out of Greater China into surrounding ASEAN economies.

TMRW bank targets the emerging affluent – the HNWI of tomorrow

  • Keeping up with its regional peers in terms of digital offerings, UOB launched TMRW, its digital bank in Thailand in Feb 2019. Operated as a digital sibling to UOB’s brick-and-mortar branches, TMRW targets the emerging affluent, or young professionals and families, as its gateway to banking the high net worth individuals of tomorrow.
  • Investment costs for TMRW came up to S$100m. Although reaching a break-even point may still be a while to go, its traction in customer acquisition has been encouraging. To date, 50% of TMRW’s customers are new-to-bank.

Technology as an enabler; 42% CTI and at least 13% ROE by FY21

  • To be clear, UOB views technology as an enabler towards improving customer engagement, and not merely as a tool to automate processes. The bank targets to increase its c.44% revenue mix from operations outside Singapore to 50%. Higher regional transaction volumes should also allow for greater scale and efficiency in reducing costs. Management believes that it can achieve a 42% CTI ratio by FY21 (FY18: 44%).
  • UOB intends to maintain an omnichannel (both digital and physical presences) approach. The bank’s studies show that customers still prefer face-to-face interaction during the application stage of more complex products (eg. wealth products, mortgages). It is likely that most of the CTI reduction should come from increased customer stickiness, and not so much from shrinking its branch network.
  • Management expects ROE to inch up to at least 13% (FY18: 11.3%), although this in part depends on how quickly this initiative scales up regionally. We think that this could be a longer-term prospect given the subdued macroeconomic environment.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-15
SGX Stock Analyst Report ADD MAINTAIN ADD 29.580 SAME 29.580