UOB - DBS Research 2020-02-24: Prudence In Tougher Times

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - Prudence In Tougher Times

Active de-risking of balance sheet in 4Q19 was a prudent move.
COVID-19 will hit revenues, credit costs.
Declared final dividend of 55 Scts and special dividend of 20 Scts for FY19, full-year dividends of S$1.30/share represented c.51% dividend payout ratio.
Maintain BUY, revised Target Price of S$27.20.

UOB (SGX:U11)'s 4Q19 net profit of S$1.0bn (+10% y-o-y/-10% q-o-q) was largely in line with expectations. Net interest income of S$1.6bn improved 2% y-o-y/-3% q-o-q as UOB continued to see pressure on net interest margin (NIM). NIM declined 1bps to 1.76% in 4Q19 (3Q19: 1.77%) as loan yields continue to see pressure.
UOB expects downward pressure on customer margins this year – we forecast a 5-bp decline in NIM for FY20F. UOB will work on improving non-loan NIM into FY20F and relook at its deposit base to evaluate opportunities to release more expensive customer deposits.
Operating costs were slightly lower by 3% q-o-q, bringing cost-to-income ratio to 45.9% due to lower revenues (3Q19: 44.2%).

While net fee and commission income and other non-interest income improved y-o-y, they were 14% lower q-o-q on lower loan-related (loan book declined during the quarter) and wealth management fees due to a seasonally slow fourth quarter, as well as lower trading and investment income.
Going into FY20F, UOB will recognise S$77m wealth management income per year from its agreement with Prudential over the next 15 years.

Loan book grew 3% y-o-y/-2% q-o-q. Despite having attained mid-single-digit loan growth for 9M19, UOB took the active decision to moderate loan origination towards end-FY19 and reduced its North Asia loan exposure due to macro uncertainties, as well as certain large corporate accounts in Singapore. We believe the step is prudent and demonstrates UOB’s commitment to preserve the strength of its balance sheet.
UOB will also refocus on Southeast Asia which saw strong growth in 2H19, continue to monitor market opportunities and tap its well-connected regional network. Meanwhile, customer deposits were up 6% y-o-y/2% q-o-q, resulting in lower LDR of 85.4% (3Q19: 89.3%).

Full-year total credit costs increased by 2bps to 18bps, due to higher special allowances written during the year. For 4Q19, general allowances (stage 1+2) were lower q-o-q at S$6m, 1bps (3Q19: S$11m, 2bps) while special allowances (stage3) were higher q-o-q in 4Q19: S$161m, 23bps (3Q19: S$149m, 21bps).

NPL ratio was unchanged at 1.5% (3Q19: 1.5%) as new NPL formation was at S$437m (3Q19: S$180m, average of S$381m for the last six quarters) attributed mainly to one large corporate account, offset by upgrades/recoveries of S$400m. The recovery was attributed to a US building and construction customer loan, which was classified as NPA previously with little credit costs written as it was well-collateralised.
According to UOB, there is "no widespread concern” in its portfolio.

Capital ratios stood strong with CET1 ratio at 14.3% (3Q19: 13.7%), and total CAR at 17.4% (3Q19: 16.9%). ROE for FY19 was 11.6% (FY18: 11.3%).

UOB believes that loan growth outlook for FY20F is likely to be moderate. According to UOB, 10% of its loans are to customers in directly affected sectors such as hotels, hospitality, tourism, F&B, retail, and travel-related sectors. In Hong Kong, its exposure is mainly to large corporates while in Singapore, it mostly has exposure to large corporates as well as SMEs. Its regional exposure is more related to SMEs. UOB has over 400 customer accounts in Hong Kong specifically.

With 2H19’s total credit costs trending towards a low 20bps, UOB’s base case for FY20F’s total credit costs is 25-30bps as it believes there will be indirect impact in this region arising from China’s slowdown. UOB believes that it has sufficient cushion for Hong Kong, where it has built in some macro-overlay slowdown in general allowances previously. We forecast c.25bps of total credit costs for FY20F.

We arrive at our revised Target Price of S$27.20 based on the Gordon Growth Model (11% ROE, 3% growth, 10% cost of equity). This is equivalent to c.1.1x FY20F P/BV, which is slightly below its average 10-year forward P/BV multiple.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
Our earnings revision of c.-3% to FY20F is largely on the back of lower revenues and higher credit cost assumptions due to the ongoing COVID-19 situation.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-02-24

SGX Stock Analyst Report BUY MAINTAIN BUY 27.20 DOWN 29.200