Re-rating cycle ahead
- 4Q21 net profit of S$1bn slightly above expectations
- FY22F guidance of mid to high single-digit loan growth and double-digit non-interest income growth
- DPS of 60 Scts declared, full-year dividend payout ratio at 49%
- Maintain BUY, with higher TP of S$37.00
Investment Thesis:
A recovery play and Fed hike beneficiary. We believe there is further room for UOB’s share price to re-rate, as we continue to see strong business momentum and improved profitability in a rate hike environment. Our house view currently stands at five hikes in 2022 and two more in 2023, which will be positive for UOB’s NIM through FY23F and beyond.
Active provisioning supports share price. UOB’s strong NPA coverage of 96% is likely to limit downside risks and provide share price support. As of 2H21, large management overlay of >S$1bn in general provisions will mitigate any potentially unexpected specific provisions. The release of some of this buffer on the back of a positive market outlook may provide an ROE upside in FY22F.
Potential catalyst: Sustained positive deliveries. Lower–than-expected credit costs could drive UOB’s earnings while post-COVID recovery in ROE could boost its share price.
Valuation:
Maintain BUY with a higher TP of S$37.00. Our TP of S$37.00 is based on the Gordon Growth Model (11.4% ROE (prev: 11.0%), 3% growth, 9% cost of equity). This is equivalent to a c.1.4x FY22F P/BV that is c.1SD above its average 12-year forward P/BV multiple.
Where we differ:
We have revised our estimates higher by 2%, factoring in slightly higher non-interest income.
Key Risks to Our View:
Deteriorating asset quality. Larger-than-expected NPLs as well as a worse-than-expected COVID-19 pandemic situation globally could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.