United Overseas Bank - RHB Invest 2020-02-04: Wuhan Virus May Dampen Forward Earnings


United Overseas Bank - Wuhan Virus May Dampen Forward Earnings

  • Downgrade to NEUTRAL from Buy with lower target price on 1.11x 2020F P/BV. See UOB Target Price.
  • Economic disruption from the coronavirus outbreak is expected to adversely impact Singapore banks’ operations not just in Greater China, but also Singapore – the tourism sector is one example. We downgrade our ROE expectation to 11.6% (from 12.7%). 2020F earnings are also cut by 3% as we assume slower loan expansion and higher provisions.
  • Amongst banks under our coverage, UOB (SGX:U11) remains our preferred pick.

For 2020F, we lower loan growth assumption, and raise provisions.

  • Singapore’s Minister for Trade and Industry Chan Chun Sing said that the Wuhan virus outbreak is likely to have a much wider and deeper impact on the world economy than the SARS episode of 2003. We note that Singapore was removed from WHO’s list of SARS “Infected Areas” in May 2003 and Singapore’s systemic loan expansion for May 2003 y-o-y was a mild 2.6%, although there was a marked loan recovery to 6.3% y-o-y by Dec 2003.

Softer 3-month SIBOR in 4Q19 to keep NIM narrow.

  • The 3-month Singapore Interbank Offered Rate (SIBOR) averaged 1.8% in 4Q19 (3Q19: 1.92%). This should contribute to softer lending yields and exert downside pressure on NIMs. However, as UOB had in 3Q19 front-loaded its funding, which lowered 3Q19 NIM to 1.77% (from 2Q19’s 1.81%), we believe 4Q19F NIM will not fall much sequentially.
  • For 2020, we forecast UOB’s NIM to be narrower by 6bps y-o-y, due to lagged effects of past FFR cuts.

Expect marginal sequential 4Q19 loan contraction, whilst we cut 2020 loan forecast.

  • Corporate loan repayments at the end of 2019 could have contributed to some marginal 4Q19 loan sequential contraction. Given the economic headwinds, we cut UOB’s 2020F loan growth to 2% (from 4.5%).

UOB has lowest percentage loan exposure to Greater China (amongst 3 banks).

  • 16% of the UOB’s loans are to Greater China. This is lower than DBS (SGX:D05)’ (NEUTRAL, Target Price: SGD25.80) and OCBC (SGX:O39)’s (NEUTRAL, Target Price: SGD11.50) 30% and 25% respectively.
  • Disruptions in China brought about by the Wuhan virus are negative for banks with operations there. As such, despite downgrading UOB to NEUTRAL, it remains our preferred bank pick.

Dividend yield to support share price.

  • We forecast a 2019 dividend of SGD1.30/share (5% yield). See UOB Dividend History.
  • Our valuation on UOB is based on a sustainable ROE assumption of 11.6% vs 9M19’s 11.9% – the reduction is attributed to the Wuhan virus outbreak and increased future competition from digital banks. This yields a 2020F target P/BV of 1.11x, which is lower than the 7-year historical average of 1.23x. From this, we derive our target price. See UOB Target Price.

Lee Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-04
SGX Stock Analyst Report HOLD DOWNGRADE BUY 25.80 DOWN 29.500