• UOB (SGX:U11) sees steady loan growth momentum although regional economic recovery remains uneven. Execution of its wealth strategy will propel growth.
• An improved credit cost guidance, ~80% collaterised portfolio of loans under relief and ~S$1.2bn in management overlays shows asset quality resilience.
• Reiterate ADD on UOB with target price of S$29.00. UOB’s steady earnings trajectory puts it on a clear path back to ~10% ROE. UOB is inexpensive at 1x FY21F P/BV.

UOB's 2Q21 Earnings Steady Q-o-q as NII Offset Dip in Market-related Income

• UOB sailed a steady ship in 2Q21, with net profit stable at S$1.0bn (flat q-o-q, +44% y-o-y) as progressive NII growth (+3% q-o-q, +8% y-o-y) made up for about half of the dip from market-related income (wealth and treasury income).
• The rest of the revenue gap was offset by lower opex (-3% q-o-q, +2% y-o-y) and a reduction in credit cost to 24bp in 2Q21 (1Q21: 29bp). More in OCBC & UOB Earnings Highlights - CGS-CIMB Research 2021-08-04: A Decent Showing; Dividends Reinstated.
• 1H21 formed 50%/52% of our/Bloomberg consensus’ full-year forecasts.

Positive Outlook Backed by Improved Credit Cost Guidance

• There were two positive surprises in 2Q21– higher S$0.60 interim lower our FY21F credit cost forecast from ~28bp to ~25bp.

Loans Under Relief Are ~80% Collaterised

• UOB’s share of loans under relief (excluding Enterprise Singapore loans) came up to ~4% of group loans in 2Q21 (largely unchanged from 1Q21), with over 80% of this portfolio being collaterised. Loans under government-mandated moratoriums accounted for ~1%pt of the relief portfolio and mainly comprised exposures in Malaysia and Thailand.
• Taking into account its capital needs for asset growth in 2H21F (efficient CET1 ratio of ~13%), top-ups of management overlays are likely unnecessary, in our view. We thus raise our FY21F dividend expectations for UOB to S$1.35 (from S$1.10), consistent with the bank’s 50% dividend payout ratio policy, given its well-contained asset quality metrics.

UOB's Wealth Management Fees Settling at a Higher New Normal Level

• UOB sees the wealth management segment as its key fees rising to an average S$220m/quarter in 1H21 vs FY20. We see scope in this being a new normal level.

Source: CGS-CIMB Research - 4 Aug 2021