United Overseas Bank - Phillip Securities 2022-05-05: Let Down By Weaker Fee & Non-Interest Income

UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank - Let Down By Weaker Fee & Non-Interest Income

UOB (SGX:U11)'s 1Q22 earnings of S$906mil were lower than our estimates due to lower-than-expected fee and other non-interest income. 3M22 PATMI is 19% of our FY22e forecast.
NII was up 1% q-o-q from an NIM increase of 2bps q-o-q to 1.58% and loan growth of 3% q-o-q. Fee income was flat q-o-q while other non-interest income was down 43% q-o-q. UOB's management guidance of single-digit loans growth with stable NIMs and provisions remains unchanged.

Maintain ACCUMULATE rating on UOB with unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation. There is upside to our estimates from further GP write-backs and higher NIMs. Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.

NII grew 1% q-o-q and 10% y-o-y, led by continued loans growth of 3% q-o-q and 9% y-o-y, while NIM improved 2bps q-o-q to 1.56%. Loan growth was led by corporate loans in Singapore, Greater China and Western countries, while q-o-q loan growth was mainly from trade and term loans in Singapore.
UOB has maintained its guidance of mid to high single-digit loan growth for FY22e.

Total allowances fell by 11% y-o-y to S$178mil resulting in credit costs improving by 10bps y-o-y to 19bps. However, allowances were higher q-o-q, mainly due to higher GP write-backs in the previous quarter (S$2mil in 1Q22 vs S$76mil in 4Q21). Total general allowance for loans, including RLARs, were prudently maintained at 0.9% of performing loans.
UOB has maintained its credit cost guidance of 20-25bps for FY22e.

Fee and commission income fell 8% y-o-y, particularly from wealth and fund management due to the subdued market conditions. Fees, however, were stable q-o-q as a strong demand for lending and advisory business propelled higher loan-related fees which were moderated by seasonally lower credit card spend and lower wealth and fund management fees due to the dampened market sentiment.
UOB has lowered its guidance to high single-digit growth in fee income for FY22e (previously double-digit growth).

Other NII fell 70% y-o-y due to the impact on hedges, resulting in lower non-customer-related trading and investment income while customer-related treasury income was stable. Other NII fell 43% q-o-q as customer-related growth of 18% q-o-q was more than offset by impact from hedges as interest rates rose and unrealized mark-to-market on investments.

UOB's new NPA formation increased by 219% y-o-y but fell 31% q-o-q to S$462mil. Nonetheless, NPL ratio remained stable at 1.6%. 1Q22 NPA coverage is at 94% and unsecured NPA coverage at 216%, compared with DBS (SGX:D05)’s NPA coverage of 11 4% and unsecured NPA coverage of 193% for the same period.

UOB’s profit should continue to grow in 2022e on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% y-o-y. We continue to expect credit costs to come in below guidance of 20-25bps. There is earnings upside from writebacks of the S$1bn in management overlay of general provisions.
UOB's management has said that as it is being conservative, the intention is only to write-back some but not all of the GPs during the second half of 2022.

Management expects improvement in NIMs only in the later part of 2022. UOB said that a 25bps rise in interest rates could raise NII by $150mil-200mil (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mil (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Asset quality is expected to stabilise, and management expects to continue to see strong demand for loans as cross-border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers.
UOB has guided mid to high single-digit loan growth for FY22e.

We maintain our ACCUMULATE recommendation on UOB with an unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation.
See

Glenn Thum Phillip Securities Research | https://www.stocksbnb.com/ 2022-05-05

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 35.700 SAME 35.700