A resilient showing
? Stronger fee income, c.S$200m-300m profit from integration of Citigroup’s consumer franchise and c.23 bp NIM expansion to drive FY22-24F earnings.
? Credit costs guided to be stable, with SPs from residual risks smoothened by GP reversals. UOB is likely to retain sizeable part of c.S$1bn mgmt. overlays.
? Reiterate Add with a higher TP. UOB trades at c.1.2x FY22F P/BV, still below its 1.4x valuation as NIM peaked in Apr 18 during the last rate hike cycle.
Earnings to be supported by c.23 bp NIM expansion in FY22-24F
Management guides for FY22F earnings growth to be steered by progressive market recovery and improving consumer sentiment across SEA — driving mid-to-high-single-digit loan growth (FY21: c.10%) and double-digit non-II growth (FY21: +8% yoy), stable credit costs of c.20-25 bp (FY21: 25 bp), and NIM expansion (FY21: -1 bp yoy). UOB guides for a c.4-5 bp NIM expansion with each 25 bp Fed rate hike (or c.150m-200m per hike on an annualised basis). We have factored in 6 Fed rate hikes over FY22-23F and estimate that NIMs could rise a cumulative c.23 bp to c.1.8% over FY22-24F (with the expansion likely
to be backloaded, given an estimated 6 months for the pass-through from Fed hikes to NIMs. However, we think that higher rates could cap banks’ loan growth trajectory; hence, we revise loan growth lower to c.6% in FY22F (from c.8%).
Potential rise in SPs to be neutralised by GP reversals
UOB reiterates its expectations of stable credit costs in FY22F, with further general provision (GP) writebacks to neutralise any asset quality deterioration (uptick of specific provisions [SPs]) — as the bank did in 4Q21. The bank’s share of moratorium loans stayed relatively unchanged (at c.5-6% of total loans), with the bulk of it from Malaysia given the extended government-led relief period. Its moratorium portfolio is highly secured and is not likely to drive significant NPL accretion. UOB held c.S$1bn in management overlays as at end-Dec 21; the bank leans towards keeping a sizeable portion of this as precautionary buffers vs. reversing this, in view that IFRS standards insufficiently provide for adequate coverage in credit downcycles. There was no particular sectoral concentration in its c.S$670m net new NPA accretion in 4Q21, although NPL ratio creeped up to 1.6% as a result. We understand that these exposures that turned into NPA are well secured.
Reiterate Add, with a higher GGM-based TP of S$35.40
While trading and investment income was a drag on FY21F earnings, there was broad based fee income improvement across almost all segments, with wealth management expected to remain as a key driver going forward. Meanwhile, the integration of Citigroups’ consumer franchise should boost retail banking growth come FY23-24F, contributing S$200m-300m in net profit p.a. (excluding a c.S$500m one-off system upgrade opex). In alignment with UOB’s c.50% dividend payout policy for FY22F, we revise FY22F DPS downwards to S$1.25. UOB’s pro-forma CET1 ratio of c.12.8%, accounting for the capital impact due to the Citi acquisition, remains within its 12.5-13.5% targeted range, and allows for potential upside in RWA growth ahead.