UOB - DBS Research 2020-07-21: NIM & Higher Provisions To Weigh On 2Q20 Results

UNITED OVERSEAS BANK LTD (SGX:U11) | SGinvestors.io UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - NIM & Higher Provisions To Weigh On 2Q20 Results

  • Expect to see sharp decline in NIM of ~19bps q-o-q in 2Q20 as loans reprice on lower benchmark rates.
  • UOB likely to see higher credit costs for 2Q20 compared to peers.
  • Possibility of a UOB's dividend cut in FY20F.



Maintain HOLD with higher Target Price of S$20.90.

  • We maintain our HOLD call on UOB (SGX:U11) with a Target Price of S$20.90, as we believe there are limited catalysts for the stock currently amid the zero-rate environment, and uncertainty over the asset quality of its loan book (management guidance of 50-60bps each year through FY21F).
  • In UOB's upcoming 2Q20 results, we believe a q-o-q NIM decline of ~19bps will surprise on the downside, while higher credit costs q-o-q will continue to weigh on UOB's earnings.
  • We believe a S$1.10 base DPS provides a key support for UOB (FY19: S$0.20 special DPS paid on top of base DPS) which UOB will try to maintain though there is a possibility of a dividend cut, due to reduced FY20F earnings wherein UOB’s dividend policy is for a 50% dividend payout ratio, subject to a minimum CET1 ratio of 13.5% and sustainable outlook. See UOB Dividend History.


Where we differ:

  • We remain cautious over the impact of asset quality on UOB’s books, given the current COVID-19 situation and likelihood of a deep recession in Singapore.


Valuation:



Potential catalyst:

  • Sustained positive deliveries. Lower–than-expected credit costs could drive earnings. Sustained ROE improvement will continue to drive UOB's share price.


Key Risks to Our View:

  • Deteriorating asset quality. A larger-than-expected NPL arising from generic sectors and/or commodity-related exposure, as well as a worse-than-expected COVID-19 pandemic situation globally could unwind expectations of credit cost and NPL declines, thus posing risks to earnings.
  • Further, unemployment arising from recession could pose risks to mortgages and unsecured consumer lending, among others.
  • UOB to report 2Q20 results on 6 Aug. See 1H2020 Earnings Schedule for STI Constituents.


Read also : Singapore Banks - Sharp Decline In NIMs In 2Q20




Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-07-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 20.90 UP 17.500



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