UOB - OCBC Investment 2022-04-29: Softer 1Q22 Amid Market Volatilities


UOB - Softer 1Q22 Amid Market Volatilities

  • UOB's 1Q22 net profit declined 10% year-on-year.
  • Higher net interest income growth was offset by lower trading and investment income as market volatility increased following the war in Ukraine.
  • The Citi integration is making good progress. UOB remains optimistic on growth outlook this year, given ongoing re-opening tail winds in ASEAN.
  • Further to its prior update of new sustainable financial goal of S$30b by 2025, UOB has also updated it will announce its net zero plan by the end of this year.

UOB's 1Q22 Results Highlights

  • UOB (SGX:U11)'s 1Q22 net profit of S$906m softened 10% y-o-y or -11% q-o-q, coming in lower than expected. Total income moderated by 5% y-o-y or 3% q-o-q to S$2.4b.
  • Net interest income of S$1.69b increased 10% y-o-y/+1% q-o-q. Customer franchise remained solid, supported by loan growth which grew 9% y-o-y amid disciplined pricing. Net interest margin (NIM) of 1.58% increased slightly from 4Q21’s 1.56% and 1Q21’s 1.57%.
  • Net fee and commission income fell 8% y-o-y, largely due to lower wealth and fund management performance.
  • Compared to previous quarter, total fees was stable. Higher loan related fees (+14% q-o-q) were offset by weaker credit card, wealth management, and fund management fees as higher market volatility impacted market sentiment. Trading and investment income reported a double-digit drop from hedging impact as rates climbed.
  • Asset quality remained resilient, with non-performing loan (NPL) ratio unchanged q-o-q at 1.6%. Credit costs normalized to 19 basis points (bps). Total allowances fell 11% with lower general allowances. Coverage including collateral remained adequate at 216%.
  • Costs were well managed, with cost/income ratio of 44.8% (versus 45% in 4Q21 and 43.8% in 4Q21).
  • UOB's balance sheet remains in good health. Common Equity Tier 1 (CET1) eased modestly to 13.1% as of end 1Q22, which represented a decline of 0.4 percentage points (ppt) q-o-q or -1.2ppt y-o-y.

UOB - Outlook & Recommendation

  • Optimistic outlook driven by ongoing recovery of ASEAN, although geopolitical tensions and global growth uncertainties have driven market uncertainties higher. UOB is making progress in its Citi integration and various digital initiatives. UOB plans to announce its net zero plans by the end of this year, as it continues to work on green efforts and support for its customers.
  • Year to date (as of 28th April 2022 closing), our buy call on UOB has panned out with the share price gains of 12% outpacing the Straits Times Index’s gains of 6.8%. UOB’s valuations at close to its 10-year historical average multiple of 1.25x price/book and estimated forward dividend yield above 4% remains supportive.
  • While we remain constructive on Singapore banks in view of the tailwinds expected from higher rates, which should benefit the sector’s net interest income generation in the coming quarters, we are watchful for implications from higher macro risks which requires closer monitoring ahead.
  • In terms of rate sensitivity, UOB had previously shared that its NIMs could gain 4bps for every 25bps Fed rate increase. The bank’s 2022 guidance reflected 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 accelerating 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/ 2022-04-29
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