• UOB's 4Q20 results slightly ahead of expectations.
• Management expects high single-digit loan growth and stable NIM for FY21F.
• Dividend of S$0.39 per share declared, full-year dividend payout ratio at 45%.

UOB's 4Q20 Earnings Were Ahead of Expectations

• UOB (SGX:U11)'s 4Q20 net profit of S$688m declined 32% y-o-y/improved 3% q-o-q, slightly ahead of expectations. Net interest income of S$1.5bn declined 8% y-o-y/rose 3% q-o-q as NIM improved 4bps q-o-q to 1.57% (1Q20: 1.53%) on lower cost of funds, ahead of our expected improvement, as loans were flat q-o-q.
• UOB's operating costs decreased slightly by 6% y-o-y/increased 4% q-o-q as management continues to keep a tight rein over expenses, resulting in cost-to-income ratio of 46.7% (3Q20: 44.6%) due to lower revenues. Capital ratios stood strong with CET1 ratio at 14.7%.

Resilient fees offset by weak trading income.

• Fee income continued a strong showing on broader recovery of business activities. Net fee and commission income improved 2% y-o-y/10% q-o-q, due to increase in fund management and credit card fees while wealth remained stable; other non-interest income declined 21% y-o-y/33% q-o-q largely on trading and investment income decline from a high base in 3Q20 - trading and bond sales were weak during 4Q20.

Loans under relief continue to decline.

• S$18bn loans were under relief as of Jan 2021: representing 6% of total loans (from 9% in Dec 2021); of which S$3/10/5bn pertained to government relief, UOB relief, and ESG loan schemes which are 90% collateralised.
• Management believes ~10% of loans under relief (S$2bn) may go into new NPL, which will bring NPL ratio to slightly above ~2%, maintained from its guidance in 3Q20.

New NPA formation spiked in the quarter; higher NPL ratio of 1.6%.

• NPL increased to 1.6% from higher new NPA formation (corporates) at S$622m (3Q20: S$74m, average of S$259m for last three quarters). These accounts were in building and construction, general commerce, and transportation, including one small oil and gas (overseas exposure) remnant.
• Management took the decision to put them through NPL early as the companies showed weakness and does not expect some of them to recover subsequently as business models have been disrupted by COVID-19. These exposures are well-collateralised and management does not expect huge losses or observe concentration risks.
• Total loan allowances for 4Q20 was S$391m, 55bps (3Q20: S$476m, 68bps), including general allowances (stage 1+2) of S$150m, 21bps (3Q20: S$342m, 49bps) and special allowances (stage3) of S$241m, 34bps (3Q20: S$134m, 19bps. As of FY20, S$1,579m had been provided for (57bps), in line with ~60bps guidance for FY20.

Takeaways From UOB's Analyst Briefing

UOB's 2021 guidances.

• In Jan 2021, momentum across businesses remained strong. Management continues to observe an improving macroeconomic outlook, emphasising that UOB’s ASEAN-Greater China operating expenses.

Further thoughts on stable NIM guidance.

• UOB's management has guided for stable NIM at ~ 4Q20 exit NIM levels of 1.57% (+/- 2bps). There is still room to improve CASA mix of 53.5% as expensive fixed deposits continue to roll off. However,
• UOB’s management continues to see pricing pressures especially for high-quality loans. Management will continue to optimise its asset-liability mix. Some large corporates are looking into longer tenures (3-5 years) where credit spreads are higher. Should short-term interest rates stay at current levels, there may be opportunity for higher NIMs given the comfort level with LCR and NSFR. However, there may be trade-offs in NIM to grow volumes as UOB is also aiming for a higher loan growth.

Details on loans under relief.

• Management shared that it is one of the largest providers of MCO extension, though delinquencies are still better than expected, Singapore accounts for a very small portion.
• Most if not all companies under UOB’s relief programmes are servicing at least the interest component of loans.
• Recovery in Malaysia and Thailand would be slower.

Credit costs may end up at lower end of guidance.

• Management maintained guidance of 30-40bps credit costs needed in FY21F. The actual credit costs could come in at the lower end of 30bps or even below that, depending on recovery trajectory.

Bright spots in loan growth, guiding for high single-digit loan growth.

• Bright spots include logistics, data centre, urban real estate financing where there have been strong interest. Working capital financing is expected to flow opportunities.

A Recovery Play; ROE Recovery on Track With Improving Profitability

• We believe there is further room to re-rate amid expectations of costs, as UOB targets for high-single digit loan growth amidst the economic recovery.
• We expect UOB's ROE to recover to at least ~9% by FY22F.

Source: DBS Research - 25 Feb 2021