Cautiously optimistic
- 1Q22 revenue of S$2.4bn and net profit of S$906m below consensus
- Double-digit decline in trading & investment income to normalise next quarter
- FY22F guidances remain intact from last quarter
- Maintain BUY with TP of S$37
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 a strong recovery of the business momentum amidst economies reopening, but we also remain watchful of inflationary pressures. Our house view currently stands at 225bps in 2022 and 100bps 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 94% is likely to limit downside risks and provide share price support. As of 1Q22, the 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 TP of S$37.00. Our TP of S$37.00 is based on the Gordon Growth Model (11.4% ROE, 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 lower our estimates by 1%-3% on higher staff costs and lower 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.