Rising interest rates to dampen UOB’s share price surge

Its stocks are inexpensive but unattractive.

UOB’s stock has been outperforming its peers of late. The company has been reaping the benefits of its competitors’ exposure to Greater China, but analysts warn that the good times may soon be at an end.

According to a report by Maybank Kim Eng, UOB’s outperformance could reverse when there are clearer signs that short-term interest rates are on the rise, because UOB has the weakest deposit franchise among Singapore’s three biggest banks.

“While interest rates are only expected to rise starting from mid-2015, the expectations of this happening will set in earlier, triggering the reversal of its share-price outperformance perhaps sometime in early 2015. Relative valuation to its local peers has widened significantly, reducing the risk-reward attractiveness of the stock,” noted the report.

Here’s more from Maybank Kim Eng:

Benefitting from its perceived safe haven status. YTD, UOB’s share price has risen by 13.1% well ahead of that for DBS (+0.4%) and OCBC (-7.8%) and the benchmark Straits Times Index (+4.0%). In our view, UOB’s share-price outperformance is due to: Worries over DBS’s significant exposure to Greater China and

In the case of OCBC, investors are concerned about the potential pitfalls from the acquisition of Wing Hang Bank.

Outperformance unlikely to unwind but well played out. While UOB’s share-price outperformance is likely to sustain, we believe it is well played out. Our view is premised on widening valuation gap relative to its sector
peers.

On its own, valuation is inexpensive but unattractive. From a historical standpoint, UOB is priced at forward P/E and P/BV mean since 2005. While the stock is inexpensive on a standalone basis, it trades head and shoulders above its sector peers despite its weaker EPS CAGR of 11.3% over FY14E-FY16E and less inspiring ROE profile