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

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.

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.

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.

Maintain HOLD, Target Price of S$20.90 for UOB. Our revised Target Price of S$20.90 is based on the Gordon Growth Model (8% ROE, 3% growth, 9% cost of equity). This is equivalent to c.0.8x FY21F P/BV that is 2SD below its average 10-year forward P/BV multiple.
Our previous Target Price was pegged to its trough valuation of 0.7x P/BV.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

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

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.

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