United Overseas Bank - OCBC Investment 2021-01-11: Recovery Play


United Overseas Bank - Recovery Play

  • Quick +20% gains in UOB's share price since we reiterated our Buy call on 4th November 2020.
  • Raising our fair value further to imply 1.2x price/book, reflecting a more positive growth outlook for UOB (SGX:U11) in FY21E.
  • Overall, we remain constructive on the financials sector and expect the recovery theme to gather strength over the course of the year, supported by progress in vaccines rollout, dividends normalization and a steepening yield curve.

Raising our UOB's fair value further to imply 1.2x price/book

  • Valuations remain reasonable with the UOB's share price trading close to book value and offering an attractive risk reward proposition for patient investors.
  • Following our chief economist’s latest upgrade in our bank’s growth outlook and interest rate forecasts - which has positive implications for the financials sector over the medium term, we raise our fair value for UOB to imply a higher 1.2x price/book multiple (in line with its past 10-year historical average multiple).

We see scope for UOB’s share price to catch up this year

  • We see scope for UOB's share price to catch up this year, with potential catalysts from improving clarity on asset quality trends in its ASEAN loan book and eventual normalization of sector dividends.
  • Overall, we maintain our constructive medium term view on the financials sector and expect continued recovery in its earnings outlook over the course of the year, driven by better fee income growth and stabilizing net interest margins, and asset quality remaining under control.

Tone of management’s guidance has improved, stable NIMs and lower credit risks are expected for 2021E

  • Credit risks are looking better than previously anticipated, management has guided for total credit costs to be better than its prior credit costs estimation of 120-130bps over two years (2020E- 2021E), with credit costs of ~60bps and 30-40bps expected for 2020 and 2021 respectively.
  • Overall UOB is comfortable it has sufficiently provisioned to cover potential loans deterioration when the loans moratorium schemes expire next year.

NIM pressure is stabilizing with flattish NIM trend expected ahead.

  • Costs should 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.
  • UOB will release FY20 results in February and we plan to refine our estimates further to incorporate management’s FY21E outlook.

Potential easing of dividend restriction will be a positive catalyst

  • Potential easing of dividend restriction will be a positive catalyst for the sector, with encouraging trends of late from global central banks – UOB pays dividends on a half-yearly basis, and the next payout will still be subject to the regulatory dividend cap when it reports full year FY20 results. UOB has indicated it would like to resume its past 50% payout subject to CET1 ratio > 13% and regulators’ guidance at a later stage.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-01-11
SGX Stock Analyst Report BUY MAINTAIN BUY 26.30 UP 24.500