CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have maintained their “buy” call on United Overseas Bank (UOB) as they see the bank being “on track” towards high-single-digit loan growth in FY2021.
“We expect UOB to post [around] $995 million net profit for 1Q2021 (+45% q-o-q, +16% y-o-y). Its loan growth is on track to meet its full-year guidance of a high single-digit growth,” write the analysts in a report dated April 19.
“Delivery of its pipeline of deals built over the past quarters is materialising, with the bulk of the year’s drawdowns likely to come in in 1HFY2021. We expect 3.5% q-o-q loan growth in 1QFY2021 (4QFY2020: -1.2% q-o-q), supported by commercial real estate term loans,” they add.
The analysts, who have also kept their target price of $27.72, see the bank’s valuations as being “more attractive” than its peers at 1.0 times FY2021 price-to-book value (P/BV).
SEE:Analysts shave UOB forecasts on operating challenges & limited upside, but remain positive at 'buy'
“We expect similar 1QFY2021 revenue trends across Singapore banks, with better net interest income (NII), stronger fee income, and sturdy treasury income. At the pre-provision operating profit (PPOP) line, UOB could perform better (+14% q-o-q) due to its weaker trading income performance in 4QFY2020,” they say.
“We believe the variance would be the banks’ different approach towards credit costs, as UOB will likely keep impairments steady at [around] 30 basis points (bp) per quarter, varying its GP amounts according to non-performing loan (NPL) accretion.”
“We expect OCBC to do the same, while DBS steps this down gradually,” they add, while highlighting that UOB is their top pick among all three local banks.
Stabilising NIM and stronger 1QFY2021 non-II performance compared to peers
On balance, Choong and Lim estimate UOB’s net interest margin (NIM) to be flattish q-o-q at 1.57% in the 1QFY2021.
“While volumes from the longer-tenured term financing allows for some pick-up in asset yields, pricing competition for high-quality top tier corporate clients remains stiff,” they write.
“Nonetheless, we understand that fixed deposits continue to run off, providing residual savings on funding costs. We think that LDR ratio should rise from [around] 85% as at end-4QFY2020 going forward as credit demand picks up amid a gradual recovery in business activity.”
The analysts also expect the bank’s fee income to pick up by 7% q-o-q and 8% y-o-y in the 1QFY2021 on the back of strong wealth management income arising from advisory services to corporate clients, and supported by steady customer trading activity and loan-related fees.
“As treasury income likely benefited from the robust market sentiment, we estimate that non-II rose 21% q-o-q (+9% y-o-y),” they say.
The bank’s base case of 30 bp credit costs in the 1QFY2021 is likely to remain “intact”, note Choong and Lim.
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“UOB had earlier reiterated its base case of [around] 30bp credit costs in FY2021 (FY2020: 56bp), equally spread over the year, incorporating delayed NPL formation of [around] $2 billion given the loan moratoriums,” they write. “This will materialise in heftier quarterly specific provisions when the NPLs arise, or otherwise topped up with pre-emptive general provisions (GP). We understand its asset quality deterioration (or NPL accretion) was not material in 1QFY2021.”
As at 4.36pm, shares in UOB are trading 3 cents higher or 0.11% up at $26.26, or 1.03 times P/B, according to Choong and Lim’s estimates
