• 4Q23 adjusted earnings of S$1,498mn were slightly above our estimates due to higher fee income and other non-interest income, but offset by lower-than-expected NII and higher allowances. FY23 adjusted PATMI was 102% of our FY23e forecast. 4Q22 DPS was up 13% YoY to 85 cents; the full-year FY23 dividend rose 26% YoY to 170 cents, with the dividend payout ratio stable at 50%.
• Positives include fee income growth of 17% YoY and other non-interest income rising by 54% YoY, while negatives were NII declining by 6% YoY as NIMs fell 20bps and allowances increasing 17% YoY. Management has provided FY24e guidance of low-single-digit loan growth, NIM to sustain at the current level of ~2% as funding costs have stabilised and expectations for rates to maintain till 2H24, double-digit fee income growth from the Citi acquisition, stable cost-to-income ratio of around 41-42% and credit cost to come in at the lower end of 25-30bps.
• Maintain BUY with a lower target price of S$34.90 (prev. S$35.90). We lower FY24e earnings by 9%. Our NII is reduced as we assume softer NIMs and increased allowances, offset by higher fees and other non-interest income. We assume 1.41x FY24e P/BV and ROE estimate of 13.9% in our GGM valuation. FY24 will be another year of growth from stable NIMs, loan recovery, and double-digit fee income growth will boost earnings.

The Positives

+ Fee income continues the strong recovery. Fees grew 17% YoY, largely due to higher credit card fees, which hit a new record of S$125mn (+69% YoY), boosted by higher card spending on an enlarged regional franchise due to the Citi integration. Wealth management fees recovered modestly by 21% YoY, while loan-related fees grew 5% YoY amid cautious investor sentiment. Fee income now makes up 17% of total income (4Q22: 15%). On a full-year basis, fee income rose 4%, driven by record-high credit card fees, underscored by higher customer spending, expanded regional franchise, and higher wealth fees. This was partly offset by softer loan-related fees amid cautious corporate sentiment.

+ Other non-interest income surges YoY. Other NII surged 54% YoY as customer-related treasury income sustained momentum while trading and liquidity management activities continued to deliver good performance. On a full-year basis, other NII spiked 85% to S$2bn from all-time high customer-related treasury income and strong performance from trading and liquidity management activities.

+ New NPAs dipped 2% YoY. New NPA formation fell by 2% YoY to S$389mn as asset quality stabilised during the quarter. The NPL ratio improved by 10bps YoY and QoQ to 1.5%. Asset quality remained resilient, with SP/NPA improving slightly to 32%. 4Q23 NPA coverage is at 101%, and unsecured NPA coverage is at 209%.

The Negatives

- NII declines YoY as NIMs soften. NII dipped 6% YoY from NIM, falling 20bps YoY and 7bps QoQ to 2.02% mainly from loan margin compression due to competition for high-quality credits and loans remaining flat YoY. The decline in loan growth from Singapore was offset by growth in North Asia and the rest of the world. UOB is guiding for a low-single-digit loan growth for FY24e.

- Credit costs increase due to lower GP write-back. Total allowances rose by 17% YoY to S$202mn mainly due to a lower general allowance write-back of S$9mn (4Q22: write-back of S$80mn) despite specific allowance falling by 16% YoY to S$212mn. Credit costs rose by 4bps YoY to 25bps, with full-year FY23 credit costs coming in at UOB’s guidance of 25bps (+5bps YoY). Nonetheless, the total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans. UOB has guided for credit costs to come in at the lower end of 25-30bps for FY24e.

- Expenses up 4% YoY. Excluding one-offs, expenses rose 4% YoY to S$1,473mn. The increase was across the board, including staff costs, revenue-related and IT-related expenses. Nonetheless, the cost-to-income ratio (CIR) was relatively stable and rose 0.6% points YoY to 43.2% on the back of strong income growth, with full-year CIR improving by 1.8% points to 41.5%. UOB has guided CIR to remain stable at around 41% to 42% for FY24e and for the one-time costs from the Citigroup acquisition to roll off substantially.

Outlook

PATMI: We expect UOB’s profits to grow 8% in 2024e on the back of stable margins, loan growth recovery, stronger fees and stable provisions. We expect credit costs to come in around the guidance of 25bps. UOB has guided for loan growth of low single digits and NIM of around 2% for FY24e.

Fee income: UOB expects fee income to continue its recovery and for the growth to be led by credit card fees and wealth and fund management fees as the market sentiment recovers. Wealth management AUM has grown 14% YoY to S$176bn. UOB has successfully integrated their Citi portfolios in Malaysia and Indonesia, with Thailand and Vietnam to be completed by FY24, which could further expand their regional franchise. As such, they have guided for double-digit fee income growth in FY24e, which could add ~S$220mn to revenue.

Loan growth: UOB expects to see demand for loans pick back up with rate cuts expected in 2H24 and is guiding for loans to grow 1-3% in Singapore and 4-5% in the region. However, we expect a slowdown in the first few quarters of FY24 as rates remain high with the recovery to come in 2H24. Management have guided low-single-digit loan growth for FY24e.

• 3Q23 adjusted earnings of S$1,479mn were slightly above our estimates due to higher fee income and higher NII offset by lower-than-expected other non-interest income growth and higher allowances. 9M23 adjusted PATMI was 77% of our FY23e forecast.
• Positives include NII growth of 9% YoY and fee income rising by 14% YoY, while negatives were the flat other non-interest income growth and allowances increasing 12% YoY. Management has maintained its FY23e guidance, while providing FY24e guidance of mid-single digit loan growth from a growing customer franchise and focus on high-quality customers, NIM to remain at current levels as funding costs have stabilised and expectations for rates to maintain till 2H24, double-digit fee income growth from the Citi acquisition, stable cost-to-income ratio and credit cost at around 25-30bps.
• Maintain BUY with an unchanged target price of S$35.90. Our FY23e estimates remain unchanged. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation. Continued NIM and NII improvement and fee income recovery will boost earnings.

The Positives

+ NII and NIM continue to grow YoY. NII grew 9% YoY, despite a decline in loan growth of 2% YoY, while NIM rose 14bps YoY to 2.09% but declined 3bps QoQ due to lower margin on excess liquidity. Loan growth decline was from Singapore and Indonesia offset by growth in the rest of ASEAN. UOB has maintained its loan growth guidance for FY23e at low to mid-single digit and is guiding for a mid-single digit loan growth for FY24e.

+ Fee income recovers to near an all-time high. Fees grew 14% YoY largely due to higher credit card fees which hit a new record of S$104mn (+89% YoY) while loan-related fees rebounded and grew 5% YoY. Wealth management fees recovered modestly amid cautious investor sentiment. On a QoQ basis, fee income rose 13% from broad-based growth across all segments. Fee income now makes up 17% of total income (3Q22: 16%).

+ New NPAs fall 27% QoQ. New NPA formation fell by 27% QoQ to S$267mn as asset quality stabilised during the quarter. The NPL ratio remained stable QoQ but rose by 10bps YoY to 1.6%. Asset quality remained resilient with SP/NPA increasing slightly to 34%. 3Q23 NPA coverage is at 102% and unsecured NPA coverage at 205%.

The Negatives

-  Other non-interest income growth flat YoY and declined QoQ. Other NII growth was flat YoY as customer-related treasury income sustained momentum while trading and liquidity management activities continued to deliver good performance. However, other NII fell 25% QoQ as growth in customer-related treasury income was more than offset by lower valuation on investments due to market volatility.

- Credit costs increase due to higher SPs despite GP write-back. Total allowances rose by 12% YoY to S$151mn mainly due to specific allowance increasing by 80% YoY to S$229mn despite a general allowance write-back of S$78mn for the quarter. The increase in specific allowance was a pre-emptive move to rebalance collateral value in US and Hong Kong/China. Management said that the accounts were not distressed or non-performing. This resulted in credit costs increasing by 2bps YoY to 19bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans. UOB has maintained its guidance for credit cost of around 25bps for FY23e and has guided for 25-30bps for FY24e.

- Expenses up 4% YoY. Excluding one-offs, expenses rose 4% YoY to S$1,416mn. The increase was across the board, including staff costs, revenue-related and IT-related expenses. Nonetheless, the cost-to-income ratio (CIR) improved 1.6% points YoY to 41.0% on the back of strong income growth. UOB has guided for cost-to-income ratio to remain stable in FY24e and for the one-time costs from the Citigroup acquisition to substantially roll off.

• 2Q23 adjusted earnings of S$1,507mn were slightly above our estimates due to higher other non-interest income and higher NII offset by lower-than-expected fee income growth and higher allowances. 1H23 adjusted PATMI was 54% of our FY23e forecast. 2Q23 DPS was up 42% YoY to 85 cents.
• Positives include NII growth of 31% YoY and other non-interest income surging by 113% YoY, while negatives include fee income decline of 8% YoY and allowances increasing 38% YoY. Management has maintained its loan growth guidance of low to mid-single digit and credit costs at around 25bps, while lowering its guidance of NIMs to 2.10-2.15% (prev. 2.10-2.20%) and fee income growth from double digit to high single-digit growth for FY23e.
• Maintain BUY with a higher target price of S$35.90, from S$35.70. We raise FY23e earnings by 4% as we raise other non-interest income estimates but lower NII, fee income and increase provisions estimates for FY23e. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation.

The Positives

+ NII surges on the back of strong NIM expansion. NII grew 31% YoY, despite a decline in loans growth of 1% YoY, while NIM surged 45bps YoY to 2.12% but declined 2bps QoQ due to excess liquidity deployed to high quality assets. Loan growth decline was due to weakness in Singapore and North Asia offset by growth in the rest of ASEAN. UOB has maintained its loan growth guidance for FY23e at low to mid-single digit.

+ Other non-interest income surged in 2Q23. Other NII increased 113% YoY largely due to higher customer-related treasury income and strong performance from trading and liquidity management activities this quarter. Management also noted record high customer-related treasury income from increased hedging demands and good performance from trading and liquidity management activities.

+ New NPAs fall 45% YoY. New NPA formation fell by 45% YoY to S$364mn as asset quality stabilised during the quarter. The NPL ratio remained stable YoY and improved 10bps QoQ to 1.6%. Asset quality remained resilient with SP/NPA increasing slightly to 33%. 2Q23 NPA coverage is at 99% and unsecured NPA coverage at 209%.

The Negatives

- Fee income fell YoY and QoQ. Fees fell 8% YoY largely due to lower loan-related fees and wealth management fees as investor sentiments remained subdued, offset by a continued increase in credit card fees. On a QoQ basis, fee income fell 5% from lower wealth fees as investor sentiments remained muted offset by sustained momentum in credit card fees.

- Credit costs increase due to higher SPs and GPs. Total allowances rose by 38% YoY to S$238mn mainly due to specific allowance increasing by 22% YoY to S$202mn largely due to a major Thailand corporate account and general allowance of S$36mn (2Q22: S$7mn). This resulted in credit costs increasing by 8bps YoY to 30bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 1.0% of performing loans. UOB has increased its guidance for credit cost from 20-25 bps to around 25bps for FY23e. Management said that the major Thailand corporate account is in the manufacturing sector and was hit by fraud, for which they had to fully provide for, nonetheless they do not see any systemic risk from this account.

- Expenses up 22% YoY. Excluding one-offs, expenses rose 22% YoY to S$1,448mn. The increase was due to continued focus on investments to enhance capabilities to drive strategic initiatives. Nonetheless, the cost-to-income ratio (CIR) improved 2.9% points YoY to 40.9% on the back of strong income growth. UOB has maintained its guidance for a CIR of 43-44% for FY23e, and to trend below 42% by FY24e.

• 1Q23 adjusted earnings of S$1,577mn were slightly above our estimates due to higher other non-interest income and lower allowances offset by lower-than-expected NII growth. 1Q23 adjusted PATMI was 28% of our FY22e forecast.
• Positives include fee income recovery of 14% QoQ and other non-interest income surging by 457% YoY, while negatives include a slowdown in NIM to 2.14% for 1Q23 and loan growth decline of 1% YoY. Nonetheless, 1Q23 NII was up 43% YoY but fell by 6% QoQ. Management has lowered its loan growth guidance from mid-single digit to low to mid-single digit, while maintaining its guidance of NIMs at around 2.1-2.2%, double-digit fee income growth, stable cost-to-income ratio and credit costs at 20-25bps for FY23e.
• Maintain BUY with an unchanged target price of S$35.70. Our FY23e estimates remain unchanged. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation. Continued NIM and NII improvement and fee income recovery will boost earnings.

The Positives

+ Fee income recovery on track, 14% QoQ growth. Fees fell 3% YoY largely due to lower wealth and fund management fees as investor sentiment remained subdued, 1Q23’s decline is significantly smaller than 4Q22’s YoY decline of 16%. Nonetheless, fee income saw its first QoQ increase in four quarters, rising 14% QoQ largely due to a recovery in wealth management fees of 27% QoQ as investor sentiments started to improve. Likewise, loan-related fees rebounded 14% QoQ, while credit card fees sustained its momentum despite seasonally softer quarter.

+ Other non-interest income surged in 1Q23. Other NII increased 457% YoY and 98% QoQ largely due to the higher customer-related treasury income, which was driven by hedging

demands. Management also noted good performance from trading and liquidity management activities, which boosted trading and investment income to an all-time high.

+ New NPAs fall 42% YoY. New NPA formation fell by 33% YoY to S$301mn as asset quality stabilised during the quarter. The NPL ratio remained stable YoY and QoQ at 1.6%. Asset quality remained resilient with SP/NPA dipping slightly to 32%. 1Q23 NPA coverage is at 96% and unsecured NPA coverage at 212%.

The Negatives

- First NIM QoQ decline since 3Q21. NII grew 43% YoY, despite a decline in loans growth of 1% YoY, while NIM surged 56bps YoY to 2.14% but declined QoQ for the first time in 6 quarters by 8bps (QoQ: 3Q22: +28bps, 4Q22: +27bps, 1Q23: -8bps) mainly from liquidity surplus placed into high quality assets and increase in funding costs. Loan growth decline was due to corporates paring down their borrowings, while trade and mortgage loans were stable. The consolidation of Citi assets added 9% to the ASEAN loan book in 1Q23. UOB has lowered its loan growth guidance for FY23e from a mid-single digit to low to a mid-single digit.

- Credit costs increase due to higher SPs and GPs. Total allowances rose by 32% YoY to S$192mn mainly due to specific allowance increasing by 11% YoY to S$164mn on a few non-systemic accounts and general allowance of S$28mn (1Q22: write-back of S$2mn). This resulted in credit costs increasing by 6bps YoY to 25bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 1.0% of performing loans. UOB has maintained its guidance for credit cost of 20-25 bps for FY23e.

- Expenses up 36% YoY. Excluding one-offs, expenses rose 36% YoY to S$1,440mn in 1Q23. The increase was mainly due to continued focus on investments to enhance capabilities to drive strategic initiatives. Staff costs rose 38% YoY while IT-related expenses rose 32% YoY during the quarter. Nonetheless, the cost-to-income ratio (CIR) improved 3.9% YoY to 40.9% on the back of strong income growth. UOB has maintained its guidance for a CIR of 43-44% for FY23e, and to trend below 42% by FY24e.

• 4Q22 adjusted earnings of S$1,398mn were slightly below our estimates due to lower fee income and higher allowances offset by NII growth. FY22 adjusted PATMI was 96% of our FY22e forecast. 4Q22 DPS was up 25% YoY to 75 cents; full-year FY22 dividend rose 13% YoY to 135 cents.
• 4Q22 NII was up 53% YoY from a NIM increase of 66bps YoY to 2.22% and loan growth of 3% YoY. Fee income fell 16% YoY due to lower WM and loan-related fees, while other non-interest income was up 61% YoY. Management is guiding mid-single digit loan growth with higher NIM of 2.2%, double-digit fee income growth, stable cost-to-income ratio and stable credit costs for FY23e.
• Maintain BUY with an unchanged target price of S$35.70. We raise FY23e earnings by 3% as we increase NII and fee income estimates for FY23e. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation. Continued NIM and NII improvement and fee income recovery will boost earnings.

The Positives

+ NII spiked 53% YoY; NIM surged by 66bps. NII grew 53% YoY, despite a slowdown of loans growth to 3% YoY, while NIM surged 66bps YoY to 2.22% (QoQ: 1Q22: +2bps, 2Q22: +9bps, 3Q22: +28bps, 4Q22: +27bps). Loan growth YoY was broad-based across most territories, while the consolidation of Citi assets added 11% to the ASEAN loan book in 4Q22. UOB has maintained its guidance of mid-single digit loan growth for FY22e.

+ Other non-interest income increased by 62%. Other NII increased 62% YoY largely due to the higher customer-related treasury income which was driven by hedging demands. However, other NII fell 34% QoQ as it normalized after an exceptional 3Q22 that benefitted from market volatility.

+ New NPAs fall 42% YoY. New NPA formation fell by 42% YoY to S$395mn as asset quality stabilised during the quarter. The NPL ratio remained stable YoY at 1.6%. Asset quality remained resilient with SP/NPA stable at 34%. 4Q22 NPA coverage is at 98% and unsecured NPA coverage at 207%.

The Negatives

- Fee income continues to decline. Fees fell 16% YoY largely due to lower wealth and fund management fees as investor sentiment remained subdued alongside a seasonally softer quarter. Loan-related fees also fell 17% YoY this quarter. Nonetheless, credit card fees were higher 40% YoY mainly from higher customer spends which were boosted by the Citi consolidation.

- Credit costs increase due to higher SPs. Total allowances rose by 84% YoY to S$173mn mainly due to specific allowance increasing by 49% YoY to S$253mn on a few non-systemic accounts despite a general allowance write-back of S$80mn during the quarter (4Q21: write-back of S$76mn). This resulted in credit costs increasing by 9bps YoY to 21bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans. Full year FY22 credit cost was unchanged at 20bps and UOB has guided for credit cost of 20-25 bps for FY23e.

- Expenses up 29% YoY. Excluding one-offs, expenses rose 29% YoY to S$1,418mn in 4Q22, at the upper end of UOB’s guidance for FY22. The increase was mainly due to higher variable bonuses and pay adjustments for staff to remain more competitive and prevent the outflow of staff. IT-related expenses also increased during the quarter. Nonetheless, the cost-to-income ratio (CIR) improved 2.4% YoY to 42.6%, with full-year FY22 CIR at 43.4%. UOB has guided for a similar CIR of 43% – 44% for FY23e, and to trend below 42% by FY24e.

• 3Q22 earnings of S$1,403mn were in line with our estimates due to higher net interest margin (NIM) and healthy net interest income (NII) growth. 9M22 PATMI is 72% of our FY22e forecast.
• NII was up 39% YoY from a NIM increase of 40bps YoY to 1.95% and loan growth of 6% YoY. Fee income fell 10% YoY while other non-interest income was up 58% YoY. Management is guiding mid-single digit loan growth with higher NIMs, stable cost-to-income ratio and stable credit costs.
• UOB has guided NIM to continue to expand each quarter and to reach an exit NIM of 2.5% to 3.0% by the end of 2022. We estimate 4Q22 NII to jump 65% YoY. Management is guiding for ROE of 13% in FY23 and 14% for FY24 from this year’s 11%.
• Maintain BUY with an unchanged target price of S$35.70. We raise FY22e earnings by 6% as we increase NII estimates for FY22e. We assume 1.45x FY22e P/BV and ROE estimate of 12.1% in our GGM valuation. We raised FY23e earnings by 12% as we increased NII estimates for FY23e. Our ROE estimate for FY23e is raised from 11.5% to 12.7%. Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.

The Positives

+ NII increased 39% YoY, led by steady loan growth. NII grew 39% YoY, led by continued loans growth of 6% YoY, while NIM surged 40bps YoY to 1.95% (QoQ: 1Q22: +2bps, 2Q22: +9bps, 3Q22: +28bps). Loan growth QoQ was mainly from term and trade loans, while YoY loan growth was broad-based across Singapore, Greater China and the Western world as business regained momentum. UOB has maintained its guidance of mid-single digit loan growth for FY22e.

+ Other non-interest income increased by 58%. Other NII increased 58% YoY largely due to the higher customer-related treasury income. A similar QoQ increase of 58% was due to record high customer-related treasury income, as well as improved performance from trading and liquidity management activities amid market volatilities.

+ Credit costs improve due to lower SPs. Total allowances fell by 12% YoY to S$135mn resulting in credit costs improving by 3bps YoY to 17bps. This was mainly due to specific allowance decreasing by 18% YoY to S$127mn. Total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans. UOB has lowered its credit cost guidance to 20bps for FY22e (previously 25bps).

+ New NPAs fall 15% YoY. New NPA formation fell by 15% YoY and 68% QoQ to S$214mn as asset quality stabilised during the quarter. Resultantly, the NPL ratio fell by 0.2% QoQ to 1.5%. Asset quality remained resilient with SP/NPA stable at 33%. 3Q22 NPA coverage is at 98% and unsecured NPA coverage at 207%.

The Negatives

- Fee income continues to decline. Fees fell 10% YoY largely due to lower wealth and fund management fees. The decline of 8% QoQ was mainly due to loan-related fees moderating from last quarter’s high, while wealth management fees remained soft amid subdued market sentiment. However, loan-related fees continued to show stable growth of 5% YoY, spurred by trade and investment growth, while credit card fees were higher 6% YoY as customer spending rebounded with borders reopening.

- CASA ratio declined YoY. Current Account Savings Accounts (CASA) ratio fell 6% YoY to 49.8% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 6% YoY to S$375bn. Management has mentioned that they are concentrating on increasing FD campaigns and that the increase in FDs was higher than the drop in CASA.

• 2Q22 earnings of S$1,113mn were in line with our estimates due to higher net interest margin and healthy net interest income growth. 1H22 PATMI is 43% of our FY22e forecast.
• NII was up 18% YoY from a NIM increase of 11bps YoY to 1.67% and loan growth of 8% YoY. Fee income fell 1% QoQ while other non-interest income was up 170% QoQ. Management is guiding single-digit loan growth with higher NIMs, stable cost-to-income ratio and slightly higher provisions.
• UOB has guided NIM to expand at 9bps each quarter and to reach an exit NIM of 1.90% by the end of 2022. We estimate 2H22 NII to jump 22% YoY.
• Maintain BUY with an unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation. There is upside to our estimates from further GP write-backs and higher NIMs. Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.

The Positives

+ NII increased 18% YoY, led by steady loan growth. NII grew 18% YoY, led by continued loans growth of 8% YoY, while NIM improved 11bps YoY to 1.67%. Loan growth QoQ was mainly from term and housing loans, while YoY loan growth was broad-based across geographies as business regained momentum. UOB has lowered its guidance to mid single-digit loan growth for FY22e (previously mid to high single-digit).

+ Other non-interest income increased 170% QoQ. Other NII increased 6% YoY due to the strong momentum for customer-related income as hedging demand rose. Other NII increased 170% QoQ on the back of customer-related growth and normalisation from 1Q22’s short-term impact on hedges and unrealised mark-to-market on investments.

+ Loan fees increased 10% YoY. Fees were stable QoQ but fell 2% YoY despite loan fees growth of 3% QoQ and 10% YoY and record credit card fees as customer spending increased with borders reopening. However, this was partially offset by lower wealth and fund management due to subdued market conditions. UOB has lowered its guidance to low single-digit growth in fee income for FY22e (previously high single-digit growth).

The Negatives

- Credit costs increased by 2bps YoY. Total allowances increased by 20% YoY to S$173mn resulting in credit costs increasing by 2bps YoY to 22bps. This was mainly due to specific allowance increasing by 20% YoY to S$166mn. Total general allowance for loans, including RLARs, were prudently maintained at 0.9% of performing loans. UOB has maintained its credit cost guidance of 25bps for FY22e.

- New NPAs of S$661mn in 2Q22. New NPA formation increased by 83% YoY and 43% QoQ to S$661mn mainly due to a major but non-systemic corporate account. Resultantly, the NPL ratio rose by 0.1% to 1.7%. Nonetheless, asset quality remained resilient with SP/NPA stable at 30%. 2Q22 NPA coverage is at 91% and unsecured NPA coverage at 185%.

Outlook

PATMI: UOB’s profit should continue to grow in 2022e on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% YoY. We expect credit costs to come in below guidance of 25bps. Management has said that as it is being conservative, they are not intending to write-back provisions but will not be adding a significant amount during the second half of 2022.

NIMs: Management expects improvement in NIMs only in the later part of 2022. They are expecting NIM to sustain growth at 9bps each quarter and to reach 1.90% by the end of 2022. UOB said that a 25bps rise in interest rates could raise NII by $150mn-200mn (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mn (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Loan growth: Management expects to see strong demand for loans as cross-border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers. UOB has guided mid single-digit loan growth for FY22e.

China exposure: UOB’s mainland China exposure stands at S$24.8bn or 5% of total assets, of which S$8.2bn is bank exposure and S$12.6bn is non-bank exposure. The top 5 domestic banks and 3 policy banks account for ~70% of total bank exposure while non-bank exposure’s client base include top-tier state-owned enterprises, large local corporates and foreign investment enterprises. Management has mentioned they have ~S$3bn in loans to mainland Chinese developers (1% of group loans) with low borrower concentration and they do not see any risk of it turning to NPL.

• 1Q22 earnings of S$906mn were lower than our estimates due to lower-than-expected fee and other non-interest income. 3M22 PATMI is 19% of our FY22e forecast.
• NII was up 1% QoQ from an NIM increase of 2bps QoQ to 1.58% and loan growth of 3% QoQ. Fee income was flat QoQ while other non-interest income was down 43% QoQ. Management guidance of single-digit loans growth with stable NIMs and provisions remains unchanged.
• Maintain ACCUMULATE with unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation. There is upside to our estimates from further GP write-backs and higher NIMs. Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.

Results at a glance

Source: Company, PSR

The Positives

+ NII increased 1% QoQ, led by steady loan growth. NII grew 1% QoQ and 10% YoY, led by continued loans growth of 3% QoQ and 9% YoY, while NIM improved 2bps QoQ to 1.56%. Loan growth was led by corporate loans in Singapore, Greater China and Western countries, while QoQ loan growth was mainly from trade and term loans in Singapore. UOB has maintained its guidance of mid to high single-digit loan growth for FY22e.

+ Credit costs improved 10bps YoY. Total allowances fell by 11% YoY to S$178mn resulting in credit costs improving by 10bps YoY to 19bps. However, allowances were higher QoQ, mainly due to higher GP write-backs in the previous quarter (S$2mn in 1Q22 vs S$76mn in 4Q21). Total general allowance for loans, including RLARs, were prudently maintained at 0.9% of performing loans. UOB has maintained its credit cost guidance of 20-25bps for FY22e.

The Negatives

- Fee income fell 8% YoY. Fee and commission income fell 8% YoY, particularly from wealth and fund management due to the subdued market conditions. Fees, however, were stable QoQ as a strong demand for lending and advisory business propelled higher loan-related fees which were moderated by seasonally lower credit card spend and lower wealth and fund management fees due to the dampened market sentiment. UOB has lowered its guidance to high single-digit growth in fee income for FY22e (previously double-digit growth).

- Other non-interest income fell 70% YoY. Other NII fell 70% YoY due to the impact on hedges, resulting in lower non-customer-related trading and investment income while customer-related treasury income was stable. Other NII fell 43% QoQ as customer-related growth of 18% QoQ was more than offset by impact from hedges as interest rates rose and unrealized mark-to-market on investments.

- New NPAs of S$462k in 1Q22. New NPA formation increased by 219% YoY but fell 31% QoQ to S$462mn. Nonetheless, NPL ratio remained stable at 1.6%. 1Q22 NPA coverage is at 94% and unsecured NPA coverage at 216%, compared with DBS’ NPA coverage of 114% and unsecured NPA coverage of 193% for the same period.

Outlook

PATMI: UOB’s profit should continue to grow in 2022e on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% YoY. We continue to expect credit costs to come in below guidance of 20-25bps. There is earnings upside from writebacks of the S$1bn in management overlay of general provisions. Management has said that as it is being conservative, the intention is only to write-back some but not all of the GPs during the second half of 2022.

NIMs: Management expects improvement in NIMs only in the later part of 2022. UOB said that a 25bps rise in interest rates could raise NII by $150mn-200mn (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mn (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Loan growth: Asset quality is expected to stabilise, and management expects to continue to see strong demand for loans as cross-border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers. UOB has guided mid to high single-digit loan growth for FY22e.

Investment Action

Maintain ACCUMULATE with unchanged target price of S$35.70.

We maintain our ACCUMULATE recommendation with an unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation.

• FY21 earnings of S$4.08bn missed our estimates by 6% due to lower-than-expected trading and investment income. 4Q21 DPS stable at 60 cents.
• Management guidance is single digit loans growth with stable NIMs and provisions.
• Maintain ACCUMULATE with a higher GGM TP of S$35.70, from S$31.30. We raised FY22e earnings by 8% as we increased NII and fee income estimates for FY22e. We assume 1.46x FY22e P/BV in our GGM valuation, up from 1.26x. Our ROE estimate is raised from 10.2% to 11.5%. There is upside to our estimates from S$300mn writeback and higher NIMs. Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.

The Positives

+ NII increased 5% QoQ, led by steady loan growth. NII grew 5% QoQ and 11% YoY, led by continued loans growth of 2% QoQ and 10% YoY, while NIM improved 1bp this quarter to 1.56%. Full-year NII increased 6% YoY led by healthy loan growth with NIM remaining stable. UOB has guided mid to high single-digit loan growth for FY22E.

+ Fee income grew 13% YoY. Fee and commission income grew 13% YoY, particularly from wealth and loan-related fees as investment and trade activities pick up. Fees, however, were stable QoQ as higher loan-related and credit card fees were moderated by seasonally softer wealth fees. Full-year fee income grew 21% YoY to a record S$2.41bn, driven by double-digit growth in most activities. UOB has guided double-digit growth in NII for FY22e.

+ GP write-back of S$76mn in 4Q21. GP write-back of S$76mn resulted in full-year GPs reducing by 90% YoY to S$95mn. Total allowances were at S$94mn in 4Q21 vs S$153mn in 3Q21. Credit costs on allowances dropped by 8bps QoQ to 12bps. Full-year credit costs were lower by 37bps at 20bps as FY20 included pre-emptive allowance for non-impaired loans. Total general allowance for loans, including RLARs, were prudently maintained at 1% of performing loans. UOB has guided credit cost of 20-25bps for FY22e due to lower SPs.

The Negatives

- Loans under moratorium remain unchanged. We believe these belonged to weaker corporates which still require loan relief. As the moratoriums begin to expire, we could see an uptick in NPLs in 2022. Management has mentioned that the loan moratoriums in Singapore have reduced to a negligible amount with the highest amount in Malaysia as the Malaysian government had extended the relief period until early 2022.

- New NPAs of S$670k in 4Q21. New NPA formation increased by 167% QoQ to S$670k mainly from several secured corporate accounts though no concentration risk was observed. Management has mentioned that they are confident that NPAs will be recovered as more than half are in Singapore and belong to one particular asset with the LTV below 50%. NPL ratio increased by 0.1% QoQ to 1.6%.

Outlook

PATMI: UOB’s profit should continue to grow in 2022 on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% YoY. We continue to expect credit costs to come in below guidance of 20-25bps. There is earnings upside from writebacks of the S$1bn in management overlay of general provisions. Management has mentioned that as it is being conservative, the intention is only to write-back some but not all of the GPs during the second half of 2022. Full-year NPA coverage is at 96% and unsecured NPA coverage at 239%, compared with DBS’ NPA coverage of 116% and unsecured NPA coverage of 214% for the same period.

NIMs: Management expects improvement in NIMs only in the later part of 2022. UOB mentioned that a 25bps rise in interest rates could raise NII by $150mn-200mn (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mn (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Loan growth: Asset quality is expected to stabilise, and management expects to continue to see strong demand for loans as cross border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers. UOB has guided mid to high single-digit loan growth for FY22e.

• UOB acquired Citigroup’s consumer banking franchise in Indonesia, Malaysia, Thailand and Vietnam for ~S$5bn.
• Maintain ACCUMULATE with a higher GGM TP of S$31.30, from S$29.00. We raise FY21e earnings by 3.8% as we increase NIM estimates for FY21e. We now assume 1.26x FY21e P/BV in our GGM valuation, up from 1.17x, as we raise our ROE estimates to 10.2%. Recovery path for UOB is on track. Potential upside surprise includes GP writebacks and special dividends.

Details at a glance

• Citigroup's consumer banking franchise in Indonesia, Malaysia, Thailand and Vietnam was acquired for about S$4.915bn (paid in cash, fully funded by UOB’s excess capital)
• Citigroup’s business’ net asset value (NAV) as at deal completion was about S$4bn, S$915mn premium paid
• Deal includes 2.4mn retail customers as of June 2021, and Citigroup’s 5,000 employees, including senior management, in the four countries
• Post purchase, UOB’s CET1 will drop by 70bps to 12.8% from 13.5% in 3Q21
• Completion expected between mid-2022 and early 2024
• Immediate ~S$1bn in incremental annual income uplift

The Positives

+ Gain scale in the four regional markets. With purchase of Citigroup’s consumer banking franchise, UOB is able to accelerate its growth by “five years” in these four countries, where UOB already has a significant presence in. UOB’s management has mentioned that it expects some slowdown in Singapore and North Asia, so this acquisition would position them to further grow their ASEAN presence.

+ EPS and ROE-accretive. The acquisition is immediately accretive to UOB’s EPS and ROE excluding one-off transaction costs, which would mainly be incurred over the first two years. If the one-off costs are to be included, the group would be EPS and ROE-accretive by 2023. UOB has also targeted a higher ROE of >13% and RORWA of ~2% by 2026 with this acquisition.

+ 50% dividend payout ratio to be maintained. With the purchase, UOB’s CET1 ratio has dropped by 70bps to 12.8%. Nonetheless, UOB has mentioned that it is “comfortable” with maintaining the current dividend policy of a 50% dividend payout ratio.

The Negatives

- One-off costs of S$700mn. The acquisition consists of one-off costs amounting to S$700mn. This includes a cost of S$200mn in tax and stamp duties, as well as expenses for integration and branding. Nonetheless, including these costs, UOB expects to be EPS and ROE-accretive by 2023.

Investment Action

Maintain ACCUMULATE with a higher target price of S$31.30, from S$29.00

We raise FY21e earnings by 3.8% as we increase NIM estimates for FY21e. We now assume 1.26x FY21e P/BV in our GGM valuation, up from 1.17x, as we raise our ROE estimates to 10.2%.