UOB - OCBC Investment 2020-11-12: Improving Outlook

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - Improving Outlook

Quick +9% UOB Share Price gains since we reiterated our Buy call on 4th November.
Post 3Q results, UOB's management provided more constructive guidance on NIM and credit costs outlook into 2021E, although dividend clarity depends on future updates from regulators.
With encouraging vaccine developments globally and management’s latest guidance supporting a more constructive outlook in 2021E, we lift our UOB's fair value to S$24.30, implying ~1.1x price/book, still pegged conservatively close to -1 s.d. to its past 10Y historical average multiple.

In UOB (SGX:U11)'s post results briefing, management shared credit risks are looking better than previously anticipated, and guided for total credit costs to be better than its prior credit costs estimation of 120-130bps over two years (2020-2021).
More granular details were provided, UOB's management has guided for credit costs of ~60bps and 30-40bps for 2020 and 2021 respectively, and is comfortable it is sufficiently provisioned to cover potential loans deterioration when the loans moratorium schemes expire next year.
NIM pressure stabilizing with flattish NIM trend expected ahead. Costs will remain controlled, with the exception of strategic investments on technology to lay the foundation for the next phase of growth.
Mixed outlook was provided for fee income, with modest credit card fees momentum likely (single digit growth expected) although wealth management should remain strong.

We think it is still too early to expect clarity from regulators on the dividend front for Singapore banks. UOB pays dividends on a half-yearly basis, and the next payout (in 1Q21) will still be subject to the regulatory dividend cap when it reports full year FY20 results next year. UOB has indicated it would like to resume its past 50% payout subject to CET1 ratio > 13% and regulators’ guidance at a later stage.
Quick +9% UOB Share Price returns since we reiterated our Buy call on 4th November, with entry points/Buy calls highlighted at various points over the course of this year following the pandemic sell-off in 1Q.

Valuations remain undemanding with UOB Share Price still trading below book value and offering an attractive risk reward proposition for patient investors. With encouraging vaccine developments globally and UOB management’s latest guidance supporting a more constructive growth outlook next year, we have adjusted our estimates and lifted our fair value to S$24.30, implying 1.1x price/book, close to -1 s.d. to its past 10Y historical average multiple.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
Looking ahead, we expect a gradual recovery path with flat net interest income growth and moderate uptick in fee income, supported by economies’ re-opening.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-11-12

SGX Stock Analyst Report BUY MAINTAIN BUY 24.500 UP 21.500