UOB - Maybank Research 2022-02-16: Bolder Returns; A Strong Platform Geared Towards Higher ROEs

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UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - Bolder Returns; A Strong Platform Geared Towards Higher ROEs

• UOB (SGX:U11)’s 2021 earnings were in-line with Street. The Group’s gearing to ASEAN recovery (19% of loans, ex-Singapore), exposure to higher margin SMEs and an expanded retail franchise following the Citibank asset acquisition puts it in a strong position to benefit from rising rates and re-opening.
• With ROEs set to expand (12% 2023E vs 9.8% 2021), we expect UOB to trade at higher multiples, while dividend payout risks are on the upside.

Rising rates, regional integration, rising NIMs

• UOB is well positioned to benefit from rising interest rates with a sizable CASA base (56% of deposits) and leading market share in SMEs, which give it better pricing power. Management claims a 25bps increase in rates could add S$150m-200m to net interest income (NII). For 2021, a 100bps hike could have added +13% to NII. Our macro SORA estimates are +54bps in 2022E.
• Concurrently, we think UOB’s strong ASEAN integration should allow it to benefit from higher margins as borders and trade open up. Despite lockdowns, 2021 cross-border income increased 10% contributing to third of wholesale banking income.
• We forecast NIMs to expand 11bps y-o-y and 13bps y-o-y in 2022E & 2023E respectively compared to just 2-3bps earlier.

Watch asset quality as growth returns

• UOB's NPLs increased to 1.6% vs 1.5% in 3Q21 due to specific distress of a property related client in Singapore plus some regional UOB is unlikely to materially release these reserves in the near-term, we believe.

Maintain BUY call on UOB with higher target price

• A normalised interest environment, expanding fee income franchise (especially with the Citi integration in 2H22) plus cost savings through digitalisation (20% of customers already performing cost-avoiding transactions online), should allow UOB to BUY.
• See
  • UOB's Share Price,
  • UOB's Target Price,
  • UOB's Analyst Reports,
  • UOB's Dividend History,
  • UOB's Announcements,
  • UOB's Latest News.
• At our target price, UOB would trade at 1.4x 2022E P/B. In the last cycle with normalised interest rates between 2005-2007, UOB traded up to 2.1x.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2022-02-16

SGX Stock Analyst Report BUY MAINTAIN BUY 36.69 UP 31.150