Asset Quality, Operations May Positively Surprise

• UOB (SGX:U11)’s 1Q21 PAT beat expectations. It is seeing a strong operating rebound – especially in Singapore and North Asia – and this is likely to strengthen as economic activity opens up, we believe.
• Its ASEAN exposure – where COVID is resurging – poses some near term risks, but strong provisioning and capital levels provide cushioning and potential upside from reserve write-backs down the road.
• UOB’s credible execution of its digital banking strategy and regional integration should support stronger medium term growth from increased customer acquisition and North-South supply chain shifts.
• We raise our UOB target price to S$29.34 from S$26.24. Upgrade to BUY.

Strong Operating Rebound

• UOB's fee income rebounded 24% y-o-y on the back of wealth (+19% y-o-y) and loan/trade fees (+27%). Lower rates, increasing economic activity and supportive markets should continue to drive momentum here, in our view.
• Loans expanded 5% y-o-y led by Singapore and North Asia. As markets on a firmer recovery footing, these should continue to drive growth. As vaccines progress in ASEAN, we expect incremental loan demand to firm up.
• UOB’s strong cross-border integration stands to be a key regional beneficiary from North-South supply chains shifts in the medium term, in our view. Indeed, cross border income contributed a third of wholesale income. We raise 2021-2023E PPOP by 3-4% to reflect these trends.

Improving Asset Quality

• 1Q21 new NPL formation fell 60% potential to positively surprise on asset quality going forward. We lower UOB's 2021-23E credit charges by 2-5bps.

Raise UOB's Target Price to S$29.34. Upgrade to BUY

• Our changes to assumptions raise UOB's TMRW digital bank (adding 200k customers/year) and regional integration has us increasing mid-cycle dividend growth by 1-3% in our multi-stage DDM (COE 8.6%, 3% terminal). As a result, we raise UOB's target price to S$29.34 (from S$26.24).
• With 13% upside, upgrade UOB to BUY.

• At our target price, UOB trades at 1.2x P/B – at its long term mean.

Source: Maybank Kim Eng Research - 6 May 2021