Analysts from CGS-CIMB Research, OCBC Investment Research (OIR), Maybank Kim Eng, and RHB Group Research are largely positive on UOB after the bank posted its FY2020 results on Feb 25.
See: UOB posts 33% lower FY20 earnings of $2.92 billion due to lower margins, reduced customer activities; declares final dividend of 39 cents
That said, the brokerages have maintained their ratings at “add”, “buy”, “hold” and “neutral” respectively.
All four brokerages have also pegged UOB’s target price or fair value estimate to hit above $26. CGS-CIMB has maintained its target price of $27.72, while OCBC has upped its fair value estimate to $27.30. In the same vein, Maybank Kim Eng and RHB have upped their target price estimates to $26.24 and $26.40 respectively, from $25.57 and $21 previously.
For CGS-CIMB’s Andrea Choong and Lim Siew Khee, UOB’s 4QFY2020 earnings of $688 million was in line with their expectations and 6% above consensus, while the bank’s FY2020 results met 100% and 101% of the brokerage’s and consensus’s forecasts respectively.
The bank’s final dividend of 78 cents for the full-year ended December represents a dividend payout ratio of around 45%.
In their report dated Feb 25, Choong and Lim noted that the bank’s net interest margin (NIM), which increased 4 basis points q-o-q, stood the strongest among its peers during the quarter.
UOB’s 4QFY2020 NIM, at 1.57%, stood above the street’s estimated expansion of 2 to 3 basis points q-o-q.
“Relative to peers that still saw declines in total income, UOB posted flattish q-o-q total income of $2.2 billion (-8% y-o-y). The rise in net interest income or NII (+3% q-o-q) and fee income was offset by weaker treasury income,” they note.
On the back of the bank’s positive results, Choong and Lim say they project “neutral or positive” movement in the bank’s share price.
In FY2021, CGS-CIMB’s Choong and Lim expect stronger loan volumes and a robust fee income during the year.
“An improving macroeconomic landscape underpins management’s high single-digit loan growth guidance in FY2021 (FY2020: +4.8%). Growth is expected to be driven by delayed working capital financing needs and cross-border supply chain investments in ASEAN and Greater China,” they write.
“Apart from loan growth, structural upside to return on equities (ROEs) in the short-term includes an improvement in NII as margins stabilise, and stronger growth in fee income from its wealth management franchise (management expects double-digit yoy growth) and increased capex and investment demand from corporates,” they add, noting that reduced impairment expenses of $1 billion in FY2021 compared to FY2020’s $1.5 billion will drive profitability in FY2021.
The way they see it, “[UOB’s] overall fee income performance was commendable in FY2020 (flattish y-o-y) given the challenging operating environment, and we expect this momentum to strengthen in quarters to come. We raise FY2021-FY2022 earnings per share (EPS) by 4-5% to reflect slightly lower credit costs and better NIM expectations, and stronger y-o-y net profit growth of +25% y-o-y in FY2022,” they say.
Upbeat on FY2021 outlook
For OCBC’s research team, UOB’s FY2020 earnings of $2.92 billion came in within its expectations, with the bank’s loans under moratorium being reduced to 6% in January 2021 compared to the 10% as at October 2020.
“With easing credit concerns and improvement in momentum since the start of the year, management struck an upbeat tone for FY2021 and has guided for lower credit costs, high single-digit loan growth, and stable NIMs around 1.5% in FY2021,” it writes.
The team also sees the bank’s pledge to revert back to its 50% dividend payout policy once the Monetary Authority of Singapore (MAS) has given the green light, as a plus.
“We continue to see scope for UOB’s share price to gain ground this year, with potential catalysts from improving fee income momentum, loans growth recovery, stabilizing NIMs and easing concerns on asset quality trends in its ASEAN loan book.”
“Overall, we remain constructive on the financials sector and expect the recovery theme to gather strength over the course of the year, supported by progress in vaccines rollout, dividends normalization and a steepening yield curve,” it says.
Charting a steady path
Maybank Kim Eng’s Thilan Wickramasinghe may have kept his “hold” call on the bank due to the tail risks arising from the bank’s larger proportion of moratorium and interally restructured loans, as well as higher gearing towards small- and medium-enterprises (SMEs), he also sees green shoots from UOB’s improvement to NIMs and resilient loan growth.
While the bank is “operationally resilient”, Wickramasinghe also sees risks as UOB registered corporate new non-performing loans (NPLs) increase eight times q-o-q.
“These are mostly in Covid-19 frontline sectors such as construction, SMEs, transport and O&G. Its loans under moratorium or in internal restructuring schemes have fallen from 9% of loans in December 2020 to 6% in January 2021.”
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“While this is welcome, it is still a material portion of UOB’s portfolio. Hence, asset quality risks as these credits come out of moratoriums or restructuring need to be watched, in our view,” he says.
That said, like CGS-CIMB’s Choong and Lim, Wickramasinghe has upped his earnings per share (EPS) estimates by 2% to 6% for the FY2021 and FY2022.
“UOB’s robust 14.7% CET1 gives it room to raise dividend payouts whenever regulatory dividend caps expire, which is a key upside catalyst. Slower recovery of SMEs is a downside catalyst,” he says.
Projecting a healthy rebound in FY2021
Despite its “neutral” call, the team at RHB is largely positive on UOB’s prospects as the bank closed the FY2020 on a positive note.
As such, the team at RHB has projected a 28% y-o-y earnings rebound in FY2021 and a further 11% y-o-y growth in FY2022.
“Taking into account management’s guidance for FY2021, we increase FY2021-FY2022 net profit by 11% and 10%. Our target price rises to $26.40 (from /421.00), based on a GGM- derived P/BV of 1.05 times vs the historical mean of 1.08 times. Key investment risks: A resurgence in COVID-19 cases that derail economic recovery and exert pressure on asset quality,” it says.
As at 3.41pm, shares in UOB are trading 39 cents higher or 1.6% up at $25.07.
