• Stay NEUTRAL, with new SGD29.30 TP from SGD32.70, 6% upside and c.5% yield. 1H22 results were within expectations, supported by a recovery in domestic economy and regional trade flows, as well as higher interest rates. While key markets are not expected to fall into recession, slower growth ahead led to a downward revision in guidance. Exposure to China’s property market turmoil is limited. Given continued uncertainty, stock price would likely be range bound in the near term, even as valuation is now more reasonable.

• 1H22 earnings within expectations. Net profit of SGD1,113m (+23% QoQ, +11% YoY) in 2Q22 brought 1H22 earnings to SGD2,018m (flat YoY), which accounted for 48% and 46% of our and Street FY22F earnings. We deem the results in line given expectations of stronger NII in 2H22. Reported ROAE was 9.9% vs FY21’s 10.2%, while CET-1 was maintained at 13.1%. An interim dividend of SGD0.60 was declared, representing a payout of 50%.

• Key trends in 2Q22. NII grew a strong 11% QoQ as NIM expanded 9bps QoQ on rising interest rates while loan growth moderated to +0.5% QoQ (1Q22: +3%). Trading and investment (T&I) income rebounded sharply to SGD214m (1Q22: SGD44m) with customer-related income +7% QoQ as hedging demand rose, and there was no repeat of the 1Q22 impact from hedges and mark-to-market losses on investments. Fee income dipped 1% QoQ as higher fees from loans/trade and credit cards were offset by the 14% QoQ drop in wealth fees. With opex up a smaller 12% QoQ, CIR improved to 43.8% (1Q22: 44.8%) leading to a stronger 17% QoQ rise in PIOP. A 23% QoQ drop in provisions on a SGD35m net write-back of specific allowance on securities and others led to the 23% QoQ bottomline growth (Figure 1).

• FY22 guidance dialled down. Management’s base case is for key markets to see slower growth, rather than fall into recession. With sentiment dented by the macroeconomic headwinds, loan growth guidance is revised to mid- single digit growth for 2022 (from mid-to-high single digit growth) while credit cost guidance is refined to 25bps (from 20-25bps). NIM is set to rise another 9bps to 1.76% in 3Q22 and reach 1.90% in 4Q22. Fee income is now expected to grow by a low single digit (see Figure 2 for details).

• Asset quality resilient. United Overseas Bank’s China real estate portfolio stands at SGD3.0bn or 1% of group loans, with no concentration risk. About 50% are to state owned entities and 50% to private owned entities. Except for exposure to the Shimao Group Holdings, which is now under legal action, the rest of the portfolio is performing. The group has another SGD9.0bn exposure from network clients that have projects in China. Management remains very comfortable with asset quality and does not see the need for material top up of overlays.

• Earnings and TP. Our FY22F-24F earnings are relatively unchanged as upward revision in NII was offset by higher provisions (Figure 3). Our TP is lower to SGD29.30 (from SGD32.70) as we refreshed GGM assumptions for expectations of slower growth. The TP incorporates a 4% ESG premium, based on our in-house proprietary methodology.

Source: RHB Research - 1 Aug 2022