United Overseas Bank - RHB Invest 2020-03-20: Macro Concerns To Weaken Earnings


United Overseas Bank - Macro Concerns To Weaken Earnings

  • Stay NEUTRAL with a new GGM-derived SGD20.00 Target Price from SGD25.20, 9% upside with c.6% yield, based on 0.85x 2020F P/NBV.
  • We lowered our sustainable ROE assumption to 10.3% from 11.2%, as we cut FY20F earnings on lower NIM and higher provision assumptions. Our NIM forecast was lowered due to the 15 Mar cut in the federal fund rate (FFR).
  • Travel restrictions globally due to COVID-19 would slow economies and raise provisioning requirements. However, given UOB (SGX:U11)’s more conservative lending, it is our preferred pick within the banking sector.

FFR cut on 15 Mar will lower the SIBOR going forward.

  • The US Federal Reserve cut the FFR twice in March (150bps in total) to the current upper bound of 0.25%. The 3-month SIBOR has fallen to the current 0.995% vs February’s 1.69% average. There may be more downside for the 3-month SIBOR.
  • We cut our FY20F NIM to 1.68% from 1.73% to factor in the two FFR cuts – note that UOB recorded NIM of c.1.71% in FY13 and FY14 when the FFR was close to zero.

We forecast a FY20 loan contraction.

  • Given the global travel restrictions and sharp fall in crude oil price, investments are likely to be scaled back sharply. Malaysia accounts for 11% of UOB’s FY19 global loans, and we may see soft loans from there. We assume an overall loan contraction of 2% in FY20 for the bank.

Provisions to move up.

  • UOB de-risked by reducing its North Asia loans in 4Q19, and this should lead to less deterioration in asset quality. Its O&G loans which have weaker asset quality have already been largely provided for. However, its ASEAN loans could see asset quality deterioration as economic growth stalls. As a result, we raise our FY20F NPL ratio to 1.9% (from 1.8%) and increase our provisions for this period by 19% to SGD990m, or 39bps credit cost.

We cut FY20F net profit by 9% to SGD3.53bn.

  • We cut earnings forecasts further to factor in the recent developments. Even based on our revised numbers, there is further downside to earnings if the COVID-19 pandemic worsens globally.

UOB’s FY20F yield of c.6% may be high, but the risk of falling dividends cannot be ruled out.

  • Based on our SGD1.10/share dividend for FY20F (c.50% payout ratio), UOB’s yield is c.6%. However, there is a risk that a prolonged economic disruption could lead to dividends coming in lower than our expectations.
  • Our Target Price is based on 2020F P/NBV of 0.85x, which is lower than the 5-year average of 1.17x. Our target P/NBV is close to the low of 0.92x recorded during the Global Financial Crisis.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
  • We believe UOB could see short-term price downsides (due to the headwinds mentioned above) before rebounding.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-20
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 20.00 DOWN 25.200