ASEAN and SMEs Could Drive Margins, Growth

• UOB (SGX:U11)’s 9M21 PAT was in-line with MKE expectations. Its strong ASEAN franchise stands to benefit from higher loan growth, better NIMs and increasing fees with the region opening up as vaccinations accelerate. Asset quality should also remain supportive in such a backdrop.
• Concurrently, UOB’s investments in its digital-first strategy could see it gaining share in the mass-premium customer segment in the region and drive higher risk adjusted returns.
• We raise UOB's target price and maintain BUY rating.

Geared Towards ASEAN Growth

• UOB's 3Q21 loans grew 9% y-o-y supported by Singapore and North Asia. ASEAN (19% of loan book) remained flat given slower economic re-opening. With vaccination progress, management expects the centre of gravity for growth to shift to ASEAN.
• NIMs fell 1bps q-o-q and remain pressured due to lower loan spreads as banks chase the same large, higher rated customers. We think NIMs could turnaround as credit demand from SME picks up. 13% of UOB’s loans are in this segment. In the 5-years post GFC, UOB’s SME loans expanded at 16% CAGR vs 14% for corporate. Increased regional deal flow, cross-border transactions and travel should boost fees, we believe.

Potential for Higher Risk Adj. Returns From Digital

• UOB is investing S$500m over the next 5-years in its TMRW platform as part of its digital-first Indonesia soon. Overall, UOB’s digital platform should lower service costs and increase potential for cross selling, we believe.

Maintain BUY and Raise Target Price

• We have lowered 2022-23E PAT forecast for UOB by 1% to incorporate higher opex target price, UOB would trade at 1.2x P/B – its long-term mean valuation. Maintain BUY.

Source: Maybank Kim Eng Research - 3 Nov 2021