UNITED OVERSEAS BANK LTD (SGX:U11)
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
- Overall fee income performance was commendable in FY20 (flattish y-o-y) given the challenging operating environment, and we expect this momentum to strengthen in quarters to come. We raise UOB's FY21-22F earnings per share forecast by ~4-5% to reflect slightly lower credit costs and better NIM expectations, and stronger y-o-y net profit growth of +25% y-o-y in FY221F.
- See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
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
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LIM Siew Khee
CGS-CIMB Research
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https://www.cgs-cimb.com
2021-02-26
SGX Stock
Analyst Report
27.720
SAME
27.720
