UOB - DBS Research 2021-05-06: Strong Start To The Year


UOB - Strong Start To The Year

  • UOB's strong 1Q21 net profit of S$1.0bn ahead of consensus.
  • ROE recovery continues to be on track with firm rebound in earnings expected in FY21F.
  • Management remains committed to ~50% dividend payout ratio, subject to MAS’s guidelines.
  • Maintain BUY, target price S$29.20.

Strong 1Q21 results beat consensus.

  • UOB (SGX:U11)'s 1Q21 net profit of S$1,088m improved 18% y-o-y/47% q-o-q, ahead of expectations, on record net fee and commission income (driven by wealth management and loan-related fees), robust loan growth, strong momentum in investment banking fees and stronger treasury flows, trading income and higher gains from investment securities and lower provisions.
  • Net interest income of S$1.5bn rose 4% y-o-y/1% q-o-q, driven by higher loan growth and improvement in loan margin. NIM was stable q-o-q at 1.57%.
  • Operating costs were flat y-o-y/increased 4% q-o-q as management continues to keep a tight rein over expenses, resulting in cost-to-income ratio of 43.8% (4Q20: 46.7%) due to higher revenues. Capital ratios stood strong with CET1 ratio at 14.3%.

Strong rebound in non-interest income.

  • Record net fee and commission income improved 22% q-o-q/24% y-o-y, driven by wealth management (AUM increased 10% y-o-y to S$136bn) and loan-related fees (large investment banking and loan-related deals across SG, HK, US).
  • Other non-interest income improved 49% q-o-q/7% y-o-y driven by stronger customer flows, trading income and higher gains from investment securities

Broad-based loan growth.

  • During the quarter, UOB saw broad-based loan growth of 4% q-o-q/5% y-o-y, arising from Singapore and North Asia as management continues to see sentiment and business activities pick up and trade flows resuming between ASEAN and Greater China. Loans under relief were stable at 6% of total loans (unchanged from previous quarter).

Guiding for lower provisions in FY21F.

  • UOB's management lowered FY21F guidance to < 30bps due to resilient portfolio (management previously guided for credit costs of ~30-40bps for FY21F.
  • As of FY20, S$1,579m had been provided for (57bps), in line with ~60bps guidance).
  • During 1Q21, UOB's credit costs eased due to outlook stability, lower special allowances due to payment recoveries and lower NPL formation. Total loan allowances stood at S$207m, 29bps (4Q20: S$391m, 55bps), comprising general allowances (stage 1+2): S$136m, 19bps (4Q20: S$150m, 21bps), taken in part due to larger loan assets during the quarter, and special allowances (stage3): S$71m, 10bps (4Q20: S$241m, 34bps). Recoveries contributed 7bps, otherwise special allowances would have been 17bps.

Takeaways from UOB's analyst briefing

Other guidances intact.

  • UOB's management continues to guide for high single-digit loan growth, stable NIM, double-digit growth in non-interest income, stable cost-to-income ratio. Loans pricing continues to be a challenge, though management can look to improve on cost of funding but to a smaller extent compared to previous quarters.

Thoughts on provisions.

  • UOB's management shared scenarios under which it is likely to reverse general allowances:
    1. if some of the bottom-up portfolio review companies turn bad in line with expectations (book SPs, reverse GPs that have been set aside in anticipation),
    2. if management feels that COVID-19 has stabilised in respective countries.
  • During 1Q21, management did not upgrade any models/reduce overlays for general allowances and will wait to see more signs of stabilisation in 2Q21 as there is still sufficient capital for UOB to grow assets. Should the macro environment turn better alongside better COVID-19 pandemic management, actual 2021 general allowances could be nearer to 25bps.

Dividends, capital and acquisitions.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2021-05-06
SGX Stock Analyst Report BUY MAINTAIN BUY 29.200 SAME 29.200