United Overseas Bank - Cautious But Confident
- UOB (SGX:U11) remains confident of ASEAN’s long-term potential and does not expect a recession in its key markets in 2H22, although growth will likely slow.
- With regional customers taking a more cautious stance amid recession fears, UOB had also toned down its FY22F loan growth guidance to mid-single digit (from mid-to-high single digit previously). UOB also expects low single-digit y-o-y fee growth in FY22F (from high single-digit previously) given softer wealth management volumes as customers stay risk-off.
- UOB reiterated its stable cost-to-income ratio guidance in FY22F (FY21: ~44%) notwithstanding earnings upside to come from rising NIM (net interest margin) expansion. This imputes steeper opex to come in 2H22F for rising staff costs and higher IT, AML (anti-mony laundering), compliance and cybersecurity costs.
- NIM expansion remains UOB’s key earnings lever, offsetting the softer non-II (non-interest income) and operating expenditures mentioned above. On this end, we have factored in the Fed funds rate increasing to ~3.5% by end-2022, a slight cut to ~3.25% by end-2023, and ~3% by end-2024. Correspondingly, we project UOB’s q-o-q NIM expansion to peak in 4Q22F at ~1.9%, leading to full-year NIM of ~1.73% in FY22F (+17bp y-o-y) as its book reprices, and higher towards ~2% in FY23F (+25bp y-o-y).
- While there were no systemic risks identified in its portfolio, UOB has turned more conservative in its provisioning policy to incorporate any macroeconomic changes, raising its credit cost guidance. Of its ~S$12.6bn mainland China customer loan portfolio (~4% of total loans), loans to Chinese SOE (state-owned enterprises) developers (includes projects abroad in Hong Kong and Singapore) and private developers came up to ~S$3bn in 2Q22F (~1% of total loans, broadly split evenly). Apart from a distressed exposure reported in the media, we understand that credit quality of its China portfolio is sound. A potential sector that could raise provisions, if any, is the construction sector – mainly smaller contractors – given sustained supply chain and labour shortage issues.
- Reiterate ADD rating on UOB with a GGM-based target price of S$35.60. While we factor in stronger NIMs in FY22-24F, earnings upside in FY22F is offset by the rise in opex, credit costs, softer fees, and the inclusion of ~S$200m stamp duty for the acquisition of Citi’s Malaysian franchise (expected legal incorporation by end -FY22F vs expectation of FY23F previously). Valuation is attractive at 1x FY22F P/BV.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2022-07-29 2022-07-29
Previous report by CGS-CIMB:
2022-07-14 UOB 2Q22 Earnings Preview - Expect Wider NIMs To Come
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