Cautious but confident
- NIM expansion gained traction in 2Q22 but market penalised share price, likely for downward revisions of loan growth, fees and credit cost guidance.
- More conservative provisioning policy to cater for potential macroeconomic downside. No systemic asset quality risks raised. China portfolio is sound.
- Reiterate Add. Having factored in weaker non-II and opex, rising NIM momentum is a re-rating catalyst. Valuation is attractive at 1x FY22F P/BV.
UOB does not expect a recession in its key markets
UOB remains confident of ASEAN’s long-term potential and does not expect a recession in its key markets in 2H22, although growth will likely slow. With regional customers taking a more cautious stance amid recession fears, UOB had also toned down its FY22F loan growth guidance to mid-single digit (from mid-to-high single digit previously). UOB also expects low single-digit yoy fee growth in FY22F (from high single-digit previously) given softer wealth management volumes as customers stay risk-off. The bank reiterated its stable cost-to-income ratio guidance in FY22F (FY21: c.44%) notwithstanding earnings upside to come from rising NIM expansion. This imputes steeper opex to come in 2H22F for rising staff costs and higher IT, AML, compliance and cybersecurity costs.
We expect NIMs to rise to c.1.73%/2% in FY22F/23F
NIM expansion remains UOB’s key earnings lever, offsetting the softer non-II and opex mentioned above. On this end, we have factored in the Fed funds rate increasing to c.3.5% by end-2022, a slight cut to c.3.25% by end-2023, and c.3% by end-2024. Correspondingly, we project UOB’s qoq NIM expansion to peak in 4Q22F at c.1.9%, leading to full-year NIM of c.1.73% in FY22F (+17bp yoy) as its book reprices, and higher towards c.2% in FY23F (+25bp yoy). Risk to our call is a more drastic Fed funds rate cut than assumed above.
More conservative provisioning policy, no stresses in China book
While there were no systemic risks identified in its portfolio, UOB has turned more conservative in its provisioning policy to incorporate any macroeconomic changes, raising its credit cost guidance to c.25bp in FY22F (from c.20-25bp previously). Of its c.S$12.6bn mainland China customer loan portfolio (c.4% of total loans), loans to Chinese SOE developers (includes projects abroad in HK/SG) and private developers came up to c.S$3bn in 2Q22F (c.1% of total loans, broadly split evenly). Apart from a distressed exposure reported in the media, we understand that credit quality of its China portfolio is sound. A potential sector that could raise provisions, if any, is the construction sector – mainly smaller contractors – given sustained supply chain and labour shortage issues.
Reiterate Add with a GGM-based TP of S$35.60
While we factor in stronger NIMs in FY22-24F, earnings upside in FY22F is offset by the rise in opex, credit costs, softer fees, and the inclusion of c.S$200m stamp duty for the acquisition of Citi’s Malaysian franchise (expected legal incorporation by end -FY22F vs. our expectation of FY23F previously).