United Overseas Bank - OCBC Investment 2020-05-06: 1Q Slight Beat, Cautious Guidance

UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank - 1Q Slight Beat, Cautious Guidance

UOB (SGX:U11)'s 1Q20 slightly ahead, higher credit costs of ~36bps - 1Q total income was stable at SGD2.4bn (flat y-o-y, - 1% q-o-q) while net profit of SGD855mn fell -19% y-o-y, impacted by lower margins and higher credit costs (+12bps q-o-q/+17bps y-o-y) due to a few significant non performing accounts.

UOB's net interest income fell -3% y-o-y on falling margins (-5bps q-o-q to 1.71%), despite healthy loan growth of 4% (largely driven by SG & HK). Incremental loans last quarter were driven by large corporates and top tier customers in developed markets.
UOB's 1Q20 loan mix: 50% large corporates, 15% SMEs (diversified & mostly well secured), 35% consumer.
Fee income grew +8% q-o-q, supported by pre-pandemic momentum in Jan-Feb 2020.

Cautious outlook in its post-results briefing, with base case shifted to pandemic broadly under control by end 2020 and higher credit costs expected for full year of 2020 (50-60bps guidance vs 36bps in1Q20 and stable credit costs in FY19 of 18bps) which is inclusive of risks identified for the oil and gas sector.
UOB's 1Q NPL ratio of 1.6% was largely flat (+0.1% q-o-q & y-o-y). An additional $546mn of allowances was made to strengthen coverage (vs $155mn in 4Q19). Unsecured NPA coverage ratio increased 2% y-o-y to a comfortable 206%.
UOB's balance sheet remains strong, with CET1 ratio at 14.1%.

More disclosures on oil and gas loans were provided, which makes up ~3.6% of group loans and appears manageable – As of end 1Q, UOB has relatively lower oil and gas exposure of $10.2bn (~3.6% of loans, 75% exposure to downstream and oil traders) compared to DBS (SGX:D05)’s disclosure of ~$23bn loans exposure last week (~6% of group loans).
Out of UOB’s outstanding oil and loans of $10.2bn, three-quarters (~$7.6bn) are made to downstream players and traders (~70% are national oil companies and global firms, while the balance comprises of largely short term structured exposure).
Upstream oil and gas industry exposure of about $2.5bn is mainly to national oil companies and international oil companies. Vulnerable accounts have already been classified with collateral values marked down (up to 90%) by end 2017.
Management is relatively comfortable with residual exposures in this segment, and indicated it has adequately provided for its exposure to Hin Leong.

Management intends to manage its dividend payout flexibly (proportion of interim vs final could be adjusted) and expects to maintain some level of dividends even if payout ratio is reduced in the event CET1 ratio falls below 13%.

While balance sheet positions of Singapore banks sector remain solid and value is emerging, continued headwinds from increased credit concerns and earnings pressure from a prolonged COVID-19 containment situation and low-rate environment should limit near term sector performance. Valuations however remain undemanding.
While UOB's share price has recovered some lost ground, +14% since late march on recovery expectations, valuations are undemanding at 0.9x price/book (still below its GFC & 2016 troughs of 1.1x and 1x multiple respectively).
Given limited catalysts near term, investors looking to accumulate should take on a longer term approach and add positions in stages.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-05-06

SGX Stock Analyst Report BUY MAINTAIN BUY 23.00 DOWN 26.300