United Overseas Bank - RHB Invest 2020-02-21: De-risking By Reducing North Asia Loans


United Overseas Bank - De-risking By Reducing North Asia Loans

  • UOB (SGX:U11)'s FY19 net profit of SGD4.34bn was in line with expectations, accounting for 100% of ours and consensus’ forecasts.
  • We lowered our sustainable ROE assumption to 11.2% (from 11.6%), in line with 4Q19’s 10.6% and the softer economic environment after the COVID-19 outbreak.
  • UOB remains our preferred pick amongst Singapore banks – we believe its current cautious lending stance adds to balance sheet strength.

UOB's 4Q19 net profit rose 10% y-o-y, but 2020 to be impacted by COVID-19.

  • The 4Q19 net profit strength was mainly due to a 49% y-o-y surge in net trading income, and a reversion to SGD49m 4Q19 gain from investment securities vs a 4Q18 loss of SGD59m. 4Q19 net interest income rose 2% y-o-y, driven by a 3% y-o-y loan expansion. See UOB Announcements.
  • Going forward, management remains bullish on wealth management fees expansion. However, given the uncertain economic environment, we cut our FY20F net profit by 8% to SGD3.89bn.

NIM to narrow in 2020.

  • 4Q19 NIM of 1.76% was 1bp narrower q-o-q and 4bps narrower y-o-y. FY19 NIM was 4bps narrower y-o-y due to lower interest rates and increased competition.
  • Management guided for FY20 NIM to be c.5bps narrower than FY19’s 1.78% – we forecast FY20 NIM of 1.73%.

We expect soft FY20 loan growth.

  • 4Q19 loans expanded 3% y-o-y. The 2% q-o-q contraction was due to UOB taking a de-risking posture by reducing its North Asia loan exposure. However, UOB indicated that they will continue to focus on ASEAN asset growth. UOB guided for FY20 loan growth of below 5%, and is taking a cautious stance amidst the slowing economy. We forecast FY20 loan growth of 2%.
  • UOB guided for FY20 specific provisions of 25-30bps of loans. This compares with FY19’s 17bps. We forecast FY20 NPL ratio of 1.8% (vs FY19’s 1.5%), and raised our FY20F provisions by 32% to SGD830m.


  • Final and special of SGD0.55 and SGD0.20/share respectively – the scrip dividend scheme will not apply. The dividend will be paid on 21 May. FY19 total dividend is SGD1.30, vs FY18’s SGD1.20. See UOB Dividend History. Management re-iterated its stance of a 50% payout ratio.
  • We forecast a FY20 dividend yield of 5%.

We have a target 2020F P/NBV of 1.07x

  • We have a target 2020F P/NBV of 1.07x (vs 7-year average of 1.23x), based on our current estimates. This is based on our sustainable ROE of 11.2%, which compares with FY19’s 11.6% and 4Q19’s 10.6% – we believe COVID-19 could exert downside ROE pressure over the next few quarters.
  • Keep NEUTRAL, new GGM-derived Target Price with 3% downside offset by c.5% yield, based on 1.07x 2020F P/NBV.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-21
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 25.20 DOWN 25.800