UNITED OVERSEAS BANK LTD (SGX:U11)
UOB - Surge In Net Interest Margins
- UOB (SGX:U11)'s 3Q22 earnings of S$1,403mil were in line with our estimates due to higher net interest margin (NIM) and healthy net interest income (NII) growth. 9M22 PATMI is 72% of our FY22e forecast.
- NII was up 39% y-o-y from a NIM increase of 40bps y-o-y to 1.95% and loan growth of 6% y-o-y. Fee income fell 10% y-o-y while other non-interest income was up 58% y-o-y. Management is guiding mid-single digit loan growth with higher NIMs, stable cost-to-income ratio and stable credit costs.
- UOB has guided NIM to continue to expand each quarter and to reach an exit NIM of 2.5% to 3.0% by the end of 2022. We estimate 4Q22 NII to jump 65% y-o-y. Management is guiding for ROE of 13% in FY23 and 14% for FY24 from this year’s 11%.
- Maintain BUY on UOB with an unchanged target price of S$35.70.
UOB's 3Q22 – The Positives
NII increased 39% y-o-y, led by steady loan growth.
- NII grew 39% y-o-y, led by continued loans growth of 6% y-o-y, while NIM surged 40bps y-o-y to 1.95% (q-o-q: 1Q22: +2bps, 2Q22: +9bps, 3Q22: +28bps). Loan growth q-o-q was mainly from term and trade loans, while y-o-y loan growth was broad-based across Singapore, Greater China and the Western world as business regained momentum.
- UOB has maintained its guidance of mid-single digit loan growth for FY22e.
Other non-interest income increased by 58%.
- Other NII increased 58% y-o-y largely due to the higher customer-related treasury income. A similar q-o-q increase of 58% was due to record high customer-related treasury income, as well as improved performance from trading and liquidity management activities amid market volatilities.
Credit costs improve due to lower SPs.
- Total allowances fell by 12% y-o-y to S$135mil resulting in credit costs improving by 3bps y-o-y to 17bps. This was mainly due to specific allowance decreasing by 18% y-o-y to S$127mil. Total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans.
- UOB has lowered its credit cost guidance to 20bps for FY22e (previously 25bps).
New NPAs fall 15% y-o-y.
- New NPA formation fell by 15% y-o-y and 68% q-o-q to S$214mil as asset quality stabilised during the quarter. Resultantly, the NPL ratio fell by 0.2% q-o-q to 1.5%. Asset quality remained resilient with SP/NPA stable at 33%. 3Q22 NPA coverage is at 98% and unsecured NPA coverage at 207%.
UOB's 3Q22 – The Negatives
Fee income continues to decline.
- Fees fell 10% y-o-y largely due to lower wealth and fund management fees. The decline of 8% q-o-q was mainly due to loan-related fees moderating from last quarter’s high, while wealth management fees remained soft amid subdued market sentiment.
- However, loan-related fees continued to show stable growth of 5% y-o-y, spurred by trade and investment growth, while credit card fees were higher 6% y-o-y as customer spending rebounded with borders reopening.
CASA ratiodeclined y-o-y.
- Current Account Savings Accounts (CASA) ratio fell 6% y-o-y to 49.8% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 6% y-o-y to S$375bn.
- Management has mentioned that they are concentrating on increasing FD campaigns and that the increase in FDs was higher than the drop in CASA.
UOB – Outlook
PATMI:
- UOB profit should continue to grow in 2022e on the back of stabilising margins, stronger fees and lower provisions. We expect FY22e NII to expand 34% y-o-y. We expect credit costs to come in below the guidance of 20bps. The company is not intending to write-back provisions.
NIMs:
- UOB's management expects further improvement in NIMs in the later part of 2022. They are expecting NIM to sustain growth each quarter and to exit FY22 with a NIM of 2.5% to 3.0%. 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 12%) resulting in an increase in our FY22e PATMI forecast for UOB by 17%.
Loan growth:
- Management expects to see strong demand for loans as cross-border activities pick up. ASEAN loan 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-single digit loan growth for FY22e.
China exposure:
- UOB’s mainland China exposure stands at S$23.1bn or 5% of total assets, of which S$7.7bn is bank exposure and S$12.2bn is non-bank exposure. The top 5 domestic banks and 3 policy banks account for ~60% of total bank exposure while non-bank exposure’s client base includes top-tier state-owned enterprises, large local corporates, and foreign investment enterprises.
- Management has mentioned they have ~S$3bn in loans to mainland Chinese developers (1% of group loans) with low borrower concentration and they do not see any risk of it turning into NPL.
Maintain BUY recommendation on UOB with unchanged target price of S$35.70.
- We maintain our BUY recommendation on UOB with an unchanged target price of S$35.70.
- We raise FY22e earnings by 6% as we increase NII estimates for FY22e. We assume 1.45x FY22e P/BV and ROE estimate of 12.1% in our GGM valuation.
- We raised FY23e earnings by 12% as we increased NII estimates for FY23e. Our ROE estimate for FY23e is raised from 11.5% to 12.7%. The COE is nudged up from higher risk-free rate and lower equity-risk premium.
- Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.
- See
Glenn Thum
Phillip Securities Research
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https://www.stocksbnb.com/
2022-10-31
SGX Stock
Analyst Report
35.700
SAME
35.700
