• 1Q23 adjusted earnings of S$1,577mn were slightly above our estimates due to higher other non-interest income and lower allowances offset by lower-than-expected NII growth. 1Q23 adjusted PATMI was 28% of our FY22e forecast.
• Positives include fee income recovery of 14% QoQ and other non-interest income surging by 457% YoY, while negatives include a slowdown in NIM to 2.14% for 1Q23 and loan growth decline of 1% YoY. Nonetheless, 1Q23 NII was up 43% YoY but fell by 6% QoQ. Management has lowered its loan growth guidance from mid-single digit to low to mid-single digit, while maintaining its guidance of NIMs at around 2.1-2.2%, double-digit fee income growth, stable cost-to-income ratio and credit costs at 20-25bps for FY23e.
• Maintain BUY with an unchanged target price of S$35.70. Our FY23e estimates remain unchanged. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation. Continued NIM and NII improvement and fee income recovery will boost earnings.

The Positives

+ Fee income recovery on track, 14% QoQ growth. Fees fell 3% YoY largely due to lower wealth and fund management fees as investor sentiment remained subdued, 1Q23’s decline is significantly smaller than 4Q22’s YoY decline of 16%. Nonetheless, fee income saw its first QoQ increase in four quarters, rising 14% QoQ largely due to a recovery in wealth management fees of 27% QoQ as investor sentiments started to improve. Likewise, loan-related fees rebounded 14% QoQ, while credit card fees sustained its momentum despite seasonally softer quarter.

+ Other non-interest income surged in 1Q23. Other NII increased 457% YoY and 98% QoQ largely due to the higher customer-related treasury income, which was driven by hedging

demands. Management also noted good performance from trading and liquidity management activities, which boosted trading and investment income to an all-time high.

+ New NPAs fall 42% YoY. New NPA formation fell by 33% YoY to S$301mn as asset quality stabilised during the quarter. The NPL ratio remained stable YoY and QoQ at 1.6%. Asset quality remained resilient with SP/NPA dipping slightly to 32%. 1Q23 NPA coverage is at 96% and unsecured NPA coverage at 212%.

The Negatives

– First NIM QoQ decline since 3Q21. NII grew 43% YoY, despite a decline in loans growth of 1% YoY, while NIM surged 56bps YoY to 2.14% but declined QoQ for the first time in 6 quarters by 8bps (QoQ: 3Q22: +28bps, 4Q22: +27bps, 1Q23: -8bps) mainly from liquidity surplus placed into high quality assets and increase in funding costs. Loan growth decline was due to corporates paring down their borrowings, while trade and mortgage loans were stable. The consolidation of Citi assets added 9% to the ASEAN loan book in 1Q23. UOB has lowered its loan growth guidance for FY23e from a mid-single digit to low to a mid-single digit.

– Credit costs increase due to higher SPs and GPs. Total allowances rose by 32% YoY to S$192mn mainly due to specific allowance increasing by 11% YoY to S$164mn on a few non-systemic accounts and general allowance of S$28mn (1Q22: write-back of S$2mn). This resulted in credit costs increasing by 6bps YoY to 25bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 1.0% of performing loans. UOB has maintained its guidance for credit cost of 20-25 bps for FY23e.

– Expenses up 36% YoY. Excluding one-offs, expenses rose 36% YoY to S$1,440mn in 1Q23. The increase was mainly due to continued focus on investments to enhance capabilities to drive strategic initiatives. Staff costs rose 38% YoY while IT-related expenses rose 32% YoY during the quarter. Nonetheless, the cost-to-income ratio (CIR) improved 3.9% YoY to 40.9% on the back of strong income growth. UOB has maintained its guidance for a CIR of 43-44% for FY23e, and to trend below 42% by FY24e.

Source: Phillip Capital Research - 2 May 2023