May 7, 2021

More surprises?

Asset quality, ops may positively surprise. BUY

UOB’s 1Q21 PAT beat expectations. It is seeing a strong operating rebound – especially in Singapore and North Asia – and this is likely to strengthen as economic activity opens up, we believe. Its ASEAN exposure – where COVID is resurging – poses some near term risks, but strong provisioning and capital levels provide cushioning and potential upside from reserve writebacks down the road. UOB’s credible execution of its digital banking strategy and regional integration should support stronger medium term growth from increased customer acquisition and North-South supply chain shifts. We raise TP to SGD29.34 from SGD26.24. Upgrade to BUY.

Strong operating rebound

Fee income rebounded 24% YoY on the back of wealth (+19% YoY) and loan/trade fees (+27%). Lower rates, increasing economic activity and supportive markets should continue to drive momentum here, in our view. Loans expanded 5% YoY led by Singapore and North Asia. As markets on a firmer recovery footing, these should continue to drive growth. As vaccines progress in ASEAN, we expect incremental loan demand to firm up. UOB’s strong cross-border integration stands to be a key regional beneficiary from North-South supply chains shifts in the medium term, in our view Indeed, cross border income contributed a third of wholesale income. We raise 2021-2023E PPOP by 3-4% to reflect these trends.

Improving asset quality

1Q21 new NPL formation fell 60% vs. 2020 quarterly average. NPLs fell 2% YoY, but management has kept NPL guidance unchanged at 2% for 2021E. This requires a 31% NPL growth in the next three-quarters at the current loan balance. As vaccine deployments progress and border controls relax, we believe there is significant potential to positively surprise on asset quality going forward. We lower 2021-23E credit charges by 2-5bps.

Raise TP to SGD29.34. Upgrade to BUY

Our changes to assumptions raise 2021-23E EPS by 5-7% and we increase 2021E dividend payout to 50% (from 46%) in anticipation of relaxing dividend caps. UOB’s strong execution of its TMRW digital bank (adding 200k customers/year) and regional integration has us increasing mid-cycle dividend growth by 1-3% in our multi-stage DDM (COE 8.6%, 3% terminal). As a result, we raise TP to SGD29.34 (from SGD26.24). With 13% upside, upgrade to BUY. At our TP, UOB trades at 1.2x PB – at its long term mean.

Value Proposition

§ Largest SME lender, with strong, legacy relationships, resulting in higher lending yields than peers.

§ Conservative, focused on traditional, commercial banking. Headed by founding family, who have not historically made aggressive overseas or trading bets.

§ Wide SE Asian regional footprint through fully-owned operations in Malaysia, Thailand, Indonesia as well as HK providing diversified earnings growth.

§ Well integrated regional operation providing cross-border services to an increasingly regional client base

Financial Metrics

§ We expect Gross NPLs to rise from 1.5% in 2019 to 1.6% in 2021E

§ Falling interest rates will drive NIMs to fall from 1.74% in 2019 to 1.54% by 2021E.

§ Loan growth, which expanded 5% YoY in 2020, should pick up steam to 8% in 2021E supported by North Asia, SG

§ Credit charges should fall to 26bps in 2021E after rising to 57bps in 2020

Price Drivers

1. Weaker than expected 2H15, sharp CNY devaluation in August and O&G/commodity NPL worries.

2. Positive sentiment from interest rate hikes, USD strength and economic recovery. Risks from O&G have abated.

3. Concerns of global-trade war, falling loan growth from property cooling measures.

4. Beginning of the Covid-19 pandemic

5. Vaccine led recovery optimism kicking in

Swing Factors

Upside

§ A V shaped recovery should overall business volumes

§ Write-backs of excess provisions as asset quality conditions improve

§ Market share gain opportunities from leveraging USD liquidity

Downside

§ Prolonged Covid-19 epidemic stressing system liquidity

§ Sharp decline in value of trading securities and shocks in fixed-income portfolio.

§ Faster than expected rise in NPLs as customers exit moratoriums.

BUY by Maybank Kim Eng Securities Research. Share price closed at $26.58.