2Q22F: Expect wider NIMs to come
- Stronger NIM expansion (we expect c.+9bp qoq) and steady fees (credit cards, loan- and trade-related) should offset wealth management weakness.
- Significant quantum of NIM rise ahead may cushion macro downside risks.
- Management outlook on credit growth in 2H22F and asset quality risks (mortgage repayment, Mainland China) could provide re-rating visibility.
- Reiterate Add with S$35.60 GGM-based TP. We think that c.1x FY22F P/BV offers an attractive entry point into the sector as NIM expansion materialises.
Risk-off in wealth management could be offset by pick-up in fees
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.
Can NIM expansion cushion macro downside risks?
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 (e.g. Singapore fixed-rate [for first 2-3 years] mortgages raised to c.3% in Jun 22 vs. c.1.5% in Jan 22). Nonetheless, our analysis factored in significantly higher NIMs (+17bp yoy in FY22F/+27bp yoy in FY23F), which may still cushion risks of higher impairments, if any. A NIM of c.1.7%/2% in FY22F/23F (vs. our current expectation of c.1.6%/ 1.8%) and a run-rate credit cost of 25/30bp in FY22F/23F would still raise our FY22F/23F EPS forecasts by c.5%/7%.
We expect c.9bp NIM expansion, c.23bp credit costs in 2Q22F
We expect net profit of c.S$1.07bn in 2Q22F (+19% qoq, +6% yoy). Loan growth will likely be slower (we expect c.1.8% qoq 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 c.9bp qoq expansion to 1.67% in 2Q22F (1Q22: +2bp qoq) 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 c.75-80% of UOB’s loan portfolio is on floatingrate. UOB maintains its c.20-25bp credit cost guidance for FY22F at this juncture; we expect a benign c.23bp in 2Q22F (1Q22: 19bp). Mainland China exposure stood at c.S$13bn in 1Q22 (c.4% of group loans); its customers largely comprise network customers that expanded from ASEAN into China. NIM expansion and the gradual reopening 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.
