United Overseas Bank - OCBC Investment 2022-02-16: FY21 Results Beat


United Overseas Bank - FY21 Results Beat

  • UOB (SGX:U11)'s FY21 net profit of S$4.08bn grew 40% y-o-y.
  • Confident of maintaining 50% dividend payout ratio, given healthy balance sheet and recovery of regional economies expected.
  • New sustainable financing goal of S$30bn by 2025, following prior target achieved two years ahead.
  • Fair value for UOB is raised to S$36.50. Since our “Buy” reiteration this year, the share price has gained ~21%, outperforming the sector, underscoring our prior recommendations to add positions.

UOB's 4Q21 earnings down 3% q-o-q partly due to seasonal effects

  • UOB (SGX:U11)'s 4Q21 operating profit of S$1.34bn gained 12% y-o-y/-3% q-o-q while net profit of S$1.02bn increased 48% y-o-y/-3% q-o-q. Total income of S$2.4bn gained 8% y-o-y/-1% q-o-q. Net interest income increased 11% y-o-y/+5% q-o-q while net fee income was flat q-o-q/+13% y-o-y led by growth in loans and credit card related fees. Expenses increased 2% q-o-q/4% from a year ago.
  • With lower impairment charges of S$112mil (-72% y-o-y/-31% q-o-q), 4Q21earnings of S$1.02bn was 3% softer than previous quarter due to lower trading (-35% q-o-q) and investment income, which offset positives from improved margins and lower credit allowances. For 4Q21, NPL ratio increased to 1.6%, with non performing assets (BPA) coverage of 96% (or 236% including collateral).
  • UOB's FY21 earnings grew 40% y-o-y to S$4.075bn driven by solid income growth and lowered provisions as the business momentum in regional economies and Singapore gradually recovered over the past year. For the full year, net interest income rose 6% y-o-y, with healthy loan growth of 10% (driven by Singapore, North Asia and western markets) and stable net interest margin (NIM).
  • Net fee and commission income grew a solid 21% to a record S$2.41bn, with double digit growth seen in most activities. Loan fees reached a new record of S$698mil, supported by better traction in trade and investment transactions.
  • Wealth management fees increased to a record S$823mil for the bank, with AUM increased to S$139bn as the unit delivered 16% income growth. Other segments such as fund management and credit card fees also rebounded with better financial market activities and improved consumer confidence. Cross border income grew 10% on continued intra-regional trade and investments, accounting for ~30% of group wholesale banking income.
  • Total expenses increased 3% to S$4.31bn. Cost income ratio improved 1.5% points to 44%, reflecting the bank’s disciplined cost management as the group prioritized strategic investments in people and technology, such ramping up its digital offerings in key markets. Looking ahead, the bank expects stable cost income ratio excluding Citi acquisition related costs.
  • Asset quality was stable, with total allowances in 2021 reduced 58% to S$657mil as total credit costs improved from 57bps in 2020 to 20bps. There was higher NPA formation in 4Q21 on some secured corporate accounts (NPA up 6% q-o-q) which brought NPL ratio to 1.6% (vs 3Q21’s 1.5%). Management remains comfortable with current allowances into FY22 and expects credit costs to range 20-25bps.
  • UOB's balance sheet remains healthy. Loan deposit ratio was stable at 87%. CET1 ratio remained robust at 13.5% with leverage ratio of 7.2% more than double the regulatory requirement.
  • Increased sustainability financing target to S$30bn by 2025, following its completion of its earlier sustainable lending goal two years ahead of target. The bank also shared it has achieved operational carbon neutrality in 2021 (scope 1, 2 and non-financed scope 3). Efforts ahead will focus on enhancing disclosures, so as to align with global best in class standards.
  • Confident of maintaining 50% dividend payout ratio - A final dividend of S$0.60/share was announced, which brings UOB's total 2021 dividend to S$1.20/share, implying ~49% dividend payout ratio, normalized from previous year’s 45% that was in line with regulators’ dividend cap.

Fair value for UOB is raised to S$36.50

  • Fair value estimate for UOB is raised to S$36.50, implying 1.33x price/book (close to +0.5 standard deviation to its 10Y historical average multiple of 1.24x).
  • We remain constructive on financials and in particular banks in view of the tailwinds expected from higher rates. In terms of rate sensitivity, UOB shared NIMs could gain 4bps for every 25bps Fed rate increase. The bank’s 2022 guidance reflect improved confidence on the recovery path which include: mid to high single digit loan growth, double digit non interest income growth, stable cost/income ratio and normalized credit costs (20-25bps of loans).
  • Looking ahead, apart from upside from NIM expansion, the gradual reopening of borders within Asean is also supportive of further recovery in regional business flows over the medium term. The focus for the coming months and quarters will be on ensuring a smooth integration of the Citi acquisition, which should eventually deepen its Asean franchise and is expected to complete between mid-2022 to 1Q2024, depending on the pace of individual country’s regulatory clearance.
  • See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-02-16
SGX Stock Analyst Report BUY MAINTAIN BUY 36.50 UP 29.000