UOB - Maybank Kim Eng 2021-02-25: Steady Path. There Are Green Shoots, But Watch For Tail Risks


UOB - Steady Path. There Are Green Shoots, But Watch For Tail Risks

There are green shoots, but watch for tail risks

  • UOB (SGX:U11)’s 2020 profit after tax was in-line with MKE/Street's expectation. Green shoots are evident from sequential improvements to NIMs and resilient loan growth amidst a weak macro environment.
  • UOB’s regional integration has been a key driver for this and stands to benefit further as economic activity picks up as well as when the North-South supply chain momentum escalates.
  • While overall asset quality is good, UOB’s larger proportion of moratorium and internally restructured loans plus higher gearing towards SMEs may present some tail risks that needs to be watched.
  • Maintain HOLD.
  • We prefer OCBC (SGX:O39). See report: OCBC Bank - Maybank Kim Eng 2021-02-24: On The Path To Recovery.

Operationally resilient

  • UOB’s net interest margins (NIMs) improved +2bps q-o-q in 4Q20 from lower funding costs. This may signal the bottom. Management expects to maintain current levels in 2021E from further funding cost management and a steeper yield curve.
  • Rising loan growth may also provide support. We estimate 2021E loans to expand 7% y-o-y (vs. 5% in 2020) led by Singapore and North Asia. UOB is seeing rising demand from clients in segments such as logistics, data centres, suburban real estate as well as rising appetites from corporates to undertake acquisitions.
  • Singapore’s hub status and strengthening North-South supply chain relocations should also be a key driver for loans and fees to grow going forward. Indeed, UOB’s cross border integration drove 29% of 2020 wholesale income, according to Management.

Improving asset quality, but there are risks

  • UOB’s non-performing loans (NPLs) came in below estimates in 2020. However, 4Q20 saw corporate new NPLs increase 8x q-o-q. These are mostly in COVID frontline sectors such as construction, SMEs, transport and Oil & Gas.
  • Its loans under moratorium or in internal restructuring schemes have fallen from 9% of loans in Dec 2020 to 6% in Jan 21. While this is welcome, it is still a material portion of UOB’s portfolio. Hence, asset quality risks as these credits come out of moratoriums or restructuring need to be watched, in our view.

Maintain HOLD on new Target price: S$26.24

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-02-25
SGX Stock Analyst Report HOLD MAINTAIN HOLD 26.24 UP 25.570