UOB - DBS Research 2019-05-16: Corporate Day 2019 Takeaways – Drive Towards Further Regionalization, ROE Improvement.

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - Corporate Day 2019 Takeaways – Drive Towards Further Regionalization, ROE Improvement.

Continued focus to tap intra-regional flows to grow ex-Singapore revenues to ~50%.
Sets out cost-to-income ratio target of ~42% by 2021; ROE is likely to hit 13%.
Ecosystem partnerships and omni-channel approach remains key.
Plans to launch Digital Bank in a second country, after TMRW’s initial launch in Thailand.

With its existing strong regional franchise within ASEAN and Greater China, and continued focus to tap intra-regional flows, UNITED OVERSEAS BANK LTD (UOB, SGX:U11) has a target to grow ex-Singapore revenues to ~50% (current: ~40%) by 2021. Currently, close to 80% of UOB’s operating profit is derived outside of Singapore, primarily ASEAN and Greater China.
UOB’s cross-border income has grown by 15% y-o-y in 2018, contributing 25% of Group Wholesale Banking (GWB) income, outpacing the overall growth of GWB income of c.11% y-o-y. UOB continues to see opportunities in ASEAN on the back of a continued shift of investments and supply chain to Southeast Asia amid rising labour cost in China and regional geopolitical tensions as it sharpens its sectoral focus.
As UOB seeks to acquire customers across various supply chains by providing sector-specific and client insights across its networks, this also helps UOB understand its customers’ credit risks across supply chains.

As UOB continues to drive efficiency and productivity while leveraging on its standardised systems to scale up, it targets to achieve CIR of ~42% by 2021 on the back of flat margins assumption. According to UOB’s management, ROE is likely to move past 13%, depending on the speed at which it can achieve scale across the region.
Ongoing initiatives include simplifying and automating processes, encouraging the migration of retail customers to online channels, optimising its existing branch network, harnessing analytics and machine learning to provide appropriate products and solutions, among others. UOB has started reshaping its branch network, and has reduced the number of branches by c.8.4% in the last 5 years, as it continues to encourage digital transactions.

UOB has adopted an omni-channel approach for its customers, i.e. choosing to serve them both offline and/or online. Various ecosystem partnerships have also been formed as UOB seeks to expand its offerings and grow its client base, including the regional bancassurance arrangement with Prudential, strategic alliance with Grab, as well as various partnerships in property and car ecosystems.
Within client ecosystems, UOB continues to reach out to the ASEAN countries in building its regional business as ecosystem players share the growth benefits together.

Having designed and launched TMRW within 14 months in Mar 2019 with a targeted and varied approach using localised context, UOB continues to work on generating awareness and interest among the young and savvy crowd through launch events and various online marketing channels and has achieved considerable success.
TMRW focuses on creating unique emotional connections among its targeted segment. TMRW has since rolled out 500 kiosks in Bangkok for authentication purposes, with half of authentication transactions now performed outside branches. Thus far, UOB has spent c. S$100m for its Digital Bank initiatives across two markets as it continues to scale up efficiently by offering incentives to drive transactions and engagement, such as small payouts e.g. THB150- 200 for 4 transactions or a set of transactions in an offer which bundles several transactions among others.
UOB’s end goal in its Digital Bank agenda would be to target five markets and 3- 5m customers with a steady-state CIR of ~35% as it seeks to serve the mobile-first and mobile-only generation.

Our key thoughts post the attendance of UOB’s Corporate Day 2019 (on 15 May) is that, its key differentiator remains in their ASEAN footprint across Malaysia, Indonesia, Myanmar, Vietnam, particularly being the only Singapore bank with a local Thailand presence. UOB embarked on a varied approach, compared to its peers, to launch a separate brand TMRW as its Digital Bank, specifically targeted at young, digitally-savvy customers with the ambition to reach out to ASEAN’s digital generation. This is beyond that of its initial launch in Thailand, which adds testament to and completes its ASEAN strategy, in our view.
We continue to see huge potential as UOB continues to engage and tap into a different pool of retail customers, while continuing to build the high-growth intra-regional flows across ASEAN-Greater China in its Group Wholesale banking business.
Should its target cost-to-income ratio materialises by FY2021F, we estimate that every 1% improvement in cost-to-income ratio (CIR) could lead to c.2% positive impact to our FY2021F’s forecasts, assuming all else constant. A continued improvement of ROE towards 13% (FY2018: 11.3%), will also be a key driver to rerating UOB’s share prices, in our view.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-05-16

SGX Stock Analyst Report BUY MAINTAIN BUY 29.200 SAME 29.200