Operations Are at Inflection. ASEAN NPL Risk Remain

• UOB (SGX:U11)’s 1H21 PAT was in-line with MKE and ahead of Street. Operating conditions are improving, especially in Singapore, North Asia and other developed markets. The momentum here is set to increase in 2H21 with wider economic opening. However, UOB’s exposure in SE Asia may take longer to recover given fresh lockdowns and resurging COVID there.
• Nevertheless, UOB's strong provisioning and capital levels should provide sufficient offset for this risk.
• Dividend risks are on the upside. BUY.

Operationally Resilient…

• UOB's 2Q21 PPOP was 11% higher, but fell 3% q-o-q. This was largely driven by a higher base in trading income in 1Q21. Net interest income saw growth with NIMs holding steady, while loans saw a 6% y-o-y uptick. Singapore, North Asia and other developed markets are driving this, particularly from demand by large institutional clients.
• Continued economic reopening and vaccination progress should catalyse faster growth in lending in 2H21, in our view.
• Similarly, we expect UOB's fee income momentum to rise particularly from wealth management (where UOB is launching more digital mass-premium products) and loan fees. These should support 2021E PPOP to grow 13% y-o-y following a 10% fall in 2020, we estimate.

…but Need to Watch ASEAN Regional Risks

• UOB's credit charges fell to Singapore have come in materially better than expected. As a result, management’s 2021E credit cost guidance has been lowered to 25bps vs 30bps in 1Q21.

Maintain BUY With Unchanged Target Price of S$29.34

• UOB has reverted back to a 50% dividend payout ratio following the expiry of MAS restrictions. This is positive and aligns the Group to meet our 2021E dividend estimate of S$1.20.

• Risks here are on UOB. Given improving operating conditions and strong provisioning levels, maintain BUY.

Source: Maybank Kim Eng Research - 4 Aug 2021