United Overseas Bank - Maybank Kim Eng 2020-02-26: Navigating Volatility


United Overseas Bank - Navigating Volatility

Regional integration, cautious BS provides shelter

  • MKE hosted UOB (SGX:U11)’s management to a post results investor call.
  • UOB claims they are prepared to face Covid-19 volatility by reshaping balance sheet mix to be more ASEAN centric, client liquidity support and preserving capital. It is investing in integrated regional solutions in a bid to capture intra-regional flows and supply chain shifts to ASEAN.
  • Heavy investments in technology should put them on a solid footing to compete with neo digital banks, while increasing focus on green finance should open new revenue opportunities.
  • Near-term volatility notwithstanding, UOB remains our top pick for strong execution and long-term dividend visibility.

Managing in uncertainty

  • According to management, UOB’s Tier-1 Covid-9 exposure (from hospitality, retail, travel etc.) is 10% of loans. We estimate a 90bps credit charge (the 2008-2009 average during GFC) on this segment would impact 2020E earnings by 5%. However, this ignores government budget measures and UOB’s own SGD3bn assistance program to support customer liquidity.
  • UOB has also been de-risking its North Asia exposure (loans fell 7% h-o-h here vs. +4% in ASEAN). It has a strong track record of managing risks during times of uncertainty but given low levels of visibility re Covid-19, we raise 2020E credit charges 14%, to 27bps) from already bearish levels.

Investing in regional integration

  • UOB is investing in integrated solutions for regional customers that include loans, transaction banking as well as on the ground intelligence and market entry. These solutions contributed 28% of Wholesale Banking income in 2019 (+10% y-o-y). We believe this strategy should provide it with a competitive advantage in capturing flows from domestic SMEs going regional as well as supply chain relocations from North Asia.
  • UOB’s digital banking platform – TMRW – has been built to be rapidly scalable, allowing for a new, lower cost customer acquisition in underserved markets such as Thailand, Indonesia and Vietnam.

Maintain BUY, with revised SGD29.17 TP

  • We have lowered 2020-2021E EPS by 1-6% for higher credit charges and tighter NIMs. UOB’s commitment to a 50% pay out and strong CET1 levels makes dividends sustainable and visible, in our view. Its track record of prudent management may result in potential upside surprises going forward, in our view.
  • Maintain BUY. Following revised earnings, we lower our multi-stage DDM Target Price (COE 9.7%, 3% terminal) to SGD29.17.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-02-26
SGX Stock Analyst Report BUY MAINTAIN BUY 29.17 DOWN 30.50