UOB - OCBC Investment 2021-02-26: More Upbeat On FY21 Outlook

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - More Upbeat On FY21 Outlook

UOB's FY20 net profit of S$2.9bn met expectations, with 4Q20 positives including stabilizing NIM trend and loans under moratorium decline to ~6% of loans.
With easing credit concerns and improvement in momentum since the start of the year, UOB's management struck an upbeat tone for FY21E and has guided for lower credit costs, high single-digit loan growth, and stable NIMs around 1.5% in FY21E.
Raising our fair value estimate of UOB further to S$27.30 implying 1.45x price/book, reflecting a more positive growth outlook in FY21E.

UOB (SGX:U11)'s 4Q20 net profit of S$688mn fell 32% y-o-y/+3% q-o-q, while PPOP fell 9% y-o-y/+4% q-o-q. See UOB's announcements.
Net interest margin (NIM) of 1.57% improved 4bps from previous quarter (~1.53% in 3Q20) driven by deposit repricing and better CASA mix, which exited the quarter at similar level and management guided should be stable in FY21E at around 1.5%.
Loans was stable last quarter (flat) with slightly lower loans in Singapore offset by higher growth of about 6% to other markets (non- Asean, north Asia).
NPL ratio gained slightly to 1.6% due to new NPL formation last quarter. Loans under moratorium continued to improve from 10% in October 2020 to ~6% as of January 2021. Loan loss provisions of S$396mn was taken, implying credit costs of about ~55bps of loans (vs 3Q20’s 68bps).

For the full year of 2020, UOB's net profit of S$2.9bn declined 33% y-o-y on the back of higher total allowances last year (+257%, increased to S$1.55bn, from S$435mn a year ago) to strengthen the balance sheet, which met expectations.
Net interest income declined 8% y-o-y to S$6.04bn due to lower rates, while net fee and commission income fell 2% to S$2bn due to lower consumer spend on credit cards and business activities amid the pandemic.
On the brighter side, UOB's loans under moratorium reduced to ~6% in January 2021 (vs ~10% as of October 2020). Wealth management (+16% y-o-y/flat q-o-q, ~S$188mn) and fund management fees improved. Cost income ratio for 2020 was 45.6%.
UOB's FY20 annualised ROE was 7.4%. CET1 ratio rose to a solid 14.7%, vs 14% as of end 3Q20.

UOB's management guides for better growth outlook in FY21E, following a detailed analysis of its loan book which the bank believes is sufficiently collateralized and resilient.
Management has guided for high single digit loan growth target (driven by its wealth management franchise, improving Asean/Greater China connectivity flows and digital strategy expansion across Asean), double digit growth in wealth fees, stable cost income ratio and lower provisions expected (credit costs of 30-40bps).

Final FY20 dividend of S$0.39 per share was recommended, bringing UOB's FY20 full year dividend to S$0.78 per share (vs 2019’s S$1.30 per share), in line with MAS’s guidance on dividends.
See UOB's Dividend History.

We continue to see scope for UOB's share price to gain ground this year, with potential catalysts from improving fee income momentum, loans growth recovery, stabilizing NIMs and easing concerns on asset quality trends in its ASEAN loan book.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
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.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-02-26

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