United Overseas Bank - CGS-CIMB Research 2021-05-06: Towards Double-Digit ROEs


United Overseas Bank - Towards Double-Digit ROEs

  • UOB's 1Q21 net profit reached a pre-COVID-19 level of S$1bn. Steady PPOP growth supported by record wealth management income, strong treasury, higher NII.
  • UOB views asset quality as stabilising, lowers its FY21 credit cost guidance to below 30bp. UOB will take a conservative approach on writebacks.
  • Reiterate ADD on UOB. The combination of lower specific provisions and non-II growth hints of a return to ~10% ROE in FY21F. Removal of dividend cap a catalyst.

UOB's 1Q21 earnings boosted by record wealth management income

  • UOB (SGX:U11)’s 1Q21 net profit of S$1.0bn (+47% q-o-q/+19% y-o-y) was in line with our S$995m estimate but beat Bloomberg consensus’ by 9%. 1Q21 formed 28%/27% of our/ consensus forecasts.
  • Fee income was a record high (+22% q-o-q/+24% y-o-y), supported by robust wealth management fees from a pick-up in equity markets and strong momentum in loan-related fees, which were in turn boosted by investment banking (IB) and loan-related deals.
  • NII rose 1% q-o-q on the back of steady NIM (1.57% in 1Q21, flattish q-o-q) and 5.8% q-o-q loan growth.
  • Credit costs of 29bp were in line with our expectation.

Robust deal pipeline to sustain strong revenue growth

  • We expect strong credit demand by large corporates and institutional clients to sustain UOB’s growth momentum over the year, placing it on track to achieve its high-single-digit loan growth target whilst maintaining ~14% CET-1 ratio.
  • Overall, UOB guides for double-digit y-o-y non-II growth to drive the rebound in profitability in FY21. Its 1Q21 wealth management income growth was quite evenly split between mutual funds, bancassurance, and structured products – UOB believes this should sustain over the coming quarters.
  • Barring a rise in benchmark rates, NIM should stay broadly stable y-o-y, although some quarterly variance can be expected as incremental funding cost improvements remain challenged by stiff pricing competition for better-quality assets.

Asset quality stabilising; conservative approach on writebacks

  • UOB’s proportion of loans under moratorium was largely unchanged q-o-q (c.6% of total loans, inclusive of its own relief programme). A stabilising asset quality outlook has given UOB the confidence to lower its credit cost guidance for FY21 to below its base case of 30bp, still accounting for a potential rise of S$2bn in NPLs.
  • Any writebacks will be dependent on a stabilisation of the pandemic situation in each of its operational countries (on its effects on cashflow disruptions) and the global macroeconomic outlook.
  • Risks of a second wave of COVID-19 infections in Singapore and extension of government support measures in HK suggest that provisioning risks remain. Writebacks seem unlikely at this juncture, although a 30bp base case could be a slightly conservative credit cost estimate.

Reiterate ADD on UOB with higher GGM-based Target price of S$28.84

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-06
SGX Stock Analyst Report ADD MAINTAIN ADD 28.84 UP 27.720