Margins Are Expanding, But Watch Asset Quality

• UOB (SGX:U11)’s 1H22 profit after tax (PAT) missed expectations. Largely, this was from weaker non-interest income (NOII), which may remain under pressure for longer. Rapidly improving NIMs are likely to provide offset even as macro conditions get gloomier.
• On the other hand, asset quality is set to become an increasing concern and needs to be closely watched. UOB’s gearing to South East Asian secular growth together with investments in its technology platform and Citi integration should be supportive of medium term positive earnings momentum, we believe.

NIM Acceleration Becoming Evident

• UOB’s reported NIMs increased 11bps y-o-y as higher policy rates started to drive loan repricing. This could likely accelerate in 2H22 as the double 75bps Fed rate hikes in June and July flow through.
• Funding costs should also rise, but UOB’s strong low-cost CASA base (55% of deposits), sticky wholesale franchise and acquisitions through its digital platform ‘TMRW’ (+500k new customers by end-2022) should provide some offset, we believe. We have raised our 2022-24E, NIM assumptions by 9-11bps.
• Non-Interest Income – especially fees from wealth management – could remain under pressure as clients stay sidelined until better macro clarity. Nevertheless, we note UOB's wealth AUM expanded 1% y-o-y in 1H22, which could imply upside surprises to fees when macro conditions turn.

Asset Quality – A Key Concern

• UOB's non-performing loans (NPL) jumped to 1.7% (~ 1.5% 2Q21) largely from a classification of a Chinese property credit.
• UOB’s non-bank exposure to the Mainland is 4% of loans – largely from network customers (such as Singapore corporates with China exposure). Its direct exposure to Chinese developers is 1% where Management claims half are to SOEs and - barring this single credit-the rest are performing.
• Nevertheless, the flip-side of rising interest rates and slowing growth could be asset quality deterioration, particularly in SMEs, construction, consumer etc.
• We raise UOB's 2022-24E NPL assumptions by 9-20%, while allowances for credit losses have been raised 27-34%.

Maintain BUY on UOB With Lower Target Price

• Our changes to assumptions see 2022-24E forecast for UOB's net profit after tax (NPAT) downgraded by 5-9%.
• We roll forward our multi-stage DDM (COE 8.6%, 3% terminal) to 2023E, but lower target price to S$32.28.
• In the medium term, UOB is geared towards SE Asian secular growth, with its digital platform and Citi acquisition coming in to further support. Maintain BUY.

Source: Maybank Research - 29 Jul 2022