• Positive repayment trends post-moratoriums underscore our expectation of asset quality pressures moderating in FY21F, allaying BV risks from SMEs.
• Reiterate ADD on UOB with a higher GGM-based target price of S$27.72. Resumption of 50% dividend payouts when MAS lifts dividend cap is a re-rating catalyst.
• We peg UOB's target price to a sustainable forward ROE of 10%, factoring in a recovery towards pre-pandemic valuations of 1.1x P/BV over FY17-19.

Better Asset Quality Clarity Underpins Y-o-y Earnings Recovery

• We view UOB (SGX:U11)'s management’s downwards revision of its credit cost guidance to 90-100bp over FY20-21F (from 120-130bp) as a clear indication of easing asset quality pressures ahead, even with the expiry of Singapore loan moratoriums at end-Dec 20.
• Key considerations we have taken into account include the positive repayment trends upon expiry of moratoriums in Malaysia and Thailand in Sep-Oct 20, and accompanying extended and targeted government support measures, such as grace periods for those retrenched, termed-out repayment tenures for SMEs, and lengthened jobs support aid.
• UOB’s proportion of loans under moratorium dipped to 10% (from 60%) in Malaysia, and 20% (from 50%) in Thailand, resulting in group loans under moratorium falling to 10% in Oct 20 (from 16% in 2Q20).
• Nonetheless, we expect an uptick in NPLs towards 2% (from 1.5%) due to some targeted restructuring ahead of the moratorium expiries; front-loaded impairments in FY20F should cover the specific impairments required.

NIM Optimism From the Release of Expensive Funding

• In contrast to its peers, UOB had been able to manage its NIMs upwards in 3Q20, in spite of tailwind pressures on asset yields (particularly in its corporate book) from the Fed rate cuts in Mar 20. Its margins were lifted by the release of expensive US$ funding, which was built up earlier this year. For context, UOB’s US$ deposit base rose 16% in 1H20, compared with up to 7% at peers — allowing for substantial funding cost savings at UOB.
• UOB's NIMs will likely stay stable in FY21F as benchmark rates bottom out, significantly moderating the y-o-y compression to an expected 4bp (vs. 21bp decline in FY20F). Incremental fee income as social distancing measures ease, sustained treasury income and rising wealth management flows (avg. S$174m/quarter in FY20F vs. avg. S$137m/ quarter in FY17) will lead to UOB's revenue growth in FY21F.

Reiterate ADD on UOB With a Higher GGM-based Target Price of S$27.72

• Better asset quality visibility and stabilisation in NIMs underscore our view that the worst may be over for UOB, supporting our expectations of net profit recovering 18% y-o-y in FY21F, towards double-digit ROEs by FY23-24F.
• We believe incremental newsflow from COVID-19 vaccine developments are confidence boosters for sectors (e.g. financial) more geared to a broad economic recovery. Reiterate ADD on UOB, with a higher target price of S$27.72, pegged to a 10% ROE, implying 1.1x FY21F P/BV (average valuation over FY17-19) as vaccine optimism paves the way for an economic recovery.
• Upside catalyst/downside risk are quicker-than-expected vaccinations/sustained border closures.

Source: CGS-CIMB Research - 27 Nov 2020