United Overseas Bank - CGS-CIMB Research 2021-02-26: Margin Resilience


United Overseas Bank - Margin Resilience

  • UOB (SGX:U11) is banking on sustained NIMs (~1.57%), stronger loan growth (high single-digits) and robust wealth fees (double-digit y-o-y) to drive FY21F profits.
  • UOB's management guides for credit costs of ~30bp in FY21F, implying ~S$900m of impairments (FY20: S$1.6bn or 55bp). We factor in 35bp for conservatism.
  • Reiterate ADD. Resilient fees and margins support our expectations of ~25% y-o-y net profit growth for UOB vs DBS (+20% y-o-y) and OCBC (+27% y-o-y).

UOB expects stronger loan volumes and robust fee income in FY21F

  • See our earlier note on UOB's 4Q20 results: United Overseas Bank - CGS-CIMB Research 2021-02-05: NIM Stronger Than Peers’. UOB had a post-results briefing. An improving macroeconomic landscape underpins UOB management’s high single-digit loan growth guidance in FY21F (FY20: +4.8%).
  • Growth is expected to be driven by delayed working capital financing needs and cross-border supply chain investments in ASEAN and Greater China.
  • Apart from loan growth, structural upside to ROEs in the short-term includes an improvement in NII as margins stabilise, and stronger growth in fee income from its wealth management franchise (management expects double-digit y-o-y growth) and increased capex and investment demand from corporates.
  • All said, reduced impairment expenses (we expect ~S$1bn in FY21F vs S$1.5bn in FY20) will still ultimately drive UOB's profitability in FY21F.

Best NIM performance amongst peers

  • UOB recorded the strongest NIM expansion amongst peers in 4Q20 (+4bp q-o-q) as funding costs trended lower. While pricing competition remains stiff for good quality exposure, UOB remains optimistic about further maneuvering a smaller fixed deposit base (CASA ratio rose to 54% in 4Q20 from 45% in 4Q19), and guides for fairly stable NIMs (~1.57%) in FY21F, supporting NII recovery.

Group loans under government moratorium down to S$3bn

  • Loans under government moratorium declined to S$3bn in Jan 21 (or 1% of group loans), from S$11bn in Dec 20 (4% of group loans) following the expiry of the said scheme in Singapore at end-20. UOB discloses an additional S$10bn of loans (4% of group loans) under the bank’s own relief programme (includes extended tenures, deferred principal payment, etc.) for viable customers falling out of scope of the government loan moratoriums.
  • UOB now guides for ~30bp credit costs in FY21F, which could be higher if its assessment that S$2bn (albeit its being highly collaterised) of these loans under moratorium or relief may turn into NPLs.
  • While disclosures of components of loans under moratoriums/relief differ across banks, we note that those of DBS fell to 1% of group loans (from 5% in 3Q20) while those for OCBC dipped to 2% (from 9% in 3Q20).

Reiterate ADD on UOB with GGM-based target price of S$27.72

Re-rating catalysts & downside risks

  • The removal of the Monetary Authority of Singapore’s cap on dividends is a key potential re-rating catalyst.
  • A significant deterioration in the credit quality of loans post-expiries of regional moratoriums is a downside risk.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-26
SGX Stock Analyst Report ADD MAINTAIN ADD 27.720 SAME 27.720