UOB 2Q22 Earnings Preview - Expect Wider NIMs To Come
- Macroeconomic headwinds of persistent inflation, Fed Fund rate hike uncertainties and recession risk remain the key influencers of depressed bank valuations. Correspondingly, we expect continued risk-off sentiment amid the market volatility, likely resulting in relatively soft wealth management income.
- That said, we expect more significant NIM expansion and steady fee income from transaction-driven loan-related fees (e.g. corporates buying grade-A office space), credit card fees (particularly stronger forex income from a rebound in travel-related spending) and trade-related fees (pick-up in intraregional and general working capital lines) to offset the weakness in wealth fees.
- We think that management’s outlook on GDP and loan growth (whether a contraction is likely) amid a possible recession will be key in providing re-rating visibility for the sector. Asset quality is also likely to be in focus in the earnings briefing as borrower repayment capabilities may be pressured by the rapidly rising interest rates.
- Nonetheless, our analysis factored in significantly higher NIMs (+17bp y-o-y in FY22F/+27bp y-o-y in FY23F), which may still cushion risks of higher impairments, if any.
- We expect UOB (SGX:U11) to report net profit of ~S$1.07bn in 2Q22F (+19% q-o-q, +6% y-o-y).
- Loan growth will likely be slower (we expect ~1.8% q-o-q in 2Q22F) as corporate demand remains impacted by supply chain disruptions from the lockdown in China.
- On NIMs, we expect UOB to post a larger ~9bp q-o-q expansion to 1.67% in 2Q22F (1Q22: +2bp q-o-q) and anticipate the rise to be more pronounced in 3Q22F given the lagged pass-through of the 50bp/75bp Fed rate hikes in May/Jun 22. We understand that ~75-80% of UOB’s loan portfolio is on floating-rate.
- Mainland China exposure stood at ~S$13bn in 1Q22 (~4% of UOB's group loans); its customers largely comprise network customers that expanded from ASEAN into China. NIM expansion and the gradual re-opening of Hong Kong/China are bright spots for the sector. Materially higher credit costs given a recession is a key downside risk.
- UOB maintains a 50% dividend payout ratio. Reiterate ADD rating on UOB with S$35.60 GGM-based target price. We think that ~1x FY22F P/BV offers an attractive entry point into the sector as NIM expansion materialises.
- (UOB will release its 1HFY2022 financial results on 2022-07-29. For SGX companies's upcoming financial results release schedule, see Earnings Calendar.)
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 2022-07-14 2022-07-14
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