United Overseas Bank - CGS-CIMB Research 2020-08-10: All Eyes On Loans Under Moratorium

UNITED OVERSEAS BANK LTD (SGX:U11)

United Overseas Bank - All Eyes On Loans Under Moratorium

Down 23bp q-o-q to 1.48% in 2Q20, management believes NIMs have bottomed out – setting the stage for a 2-3bp rebound per quarter in 2H20F.
UOB (SGX:U11) guided for further restructuring as regional moratoriums taper off (16% of group loans); expect elevated GPs as overlays until SPs turn up.
Barring signs of worsening asset quality, we think most of the credit cost negativity has been priced in.
Catalysts are limited; yields are at c.4%. Reiterate HOLD.

We cut NIM estimates to reflect the decline in benchmark rates, but revise our Target Price higher to S$20.58 as we adjust our risk-free rate.

Credit costs came up to 67bp in 2Q20 – 54bp of these were pre-emptive allowances (GP) for potential credit migration ahead as specific provisions dipped to 13bp (1Q20: 31bp largely due to oil trader NPL). Delinquencies remain contained for now but the expiry of regional moratorium schemes and run-off of government-directed liquidity aid will likely keep impairments elevated.
UOB now expects c.60bp in FY20F – within its guidance of 120-130bp (estimated S$2.8bn-3.3bn) over FY20-21F. As of 2Q20, provisions amounted to S$700m (or 15-20% of guidance), indicating c.60-65bp/quarter impairments in 2H20.

To date, c.16% of group loans were under moratorium – management expects 10-15% of these loans require further restructuring/turn into NPLs as the operating landscape transforms post-pandemic. Guidance is for NPL ratio to double to c.3-3.2%, but the bank looks to actively manage these risks via front-loaded provisions.
To sum up, c.10% of loans in SG are under moratorium, > 60% of MY loans remain opted in, and c.30% of its TH book is under forbearance. The run-off of the MY moratorium come end-Sep should point to asset quality trends going forward. We think 60bp in FY20F is realistic for now.

The collapse in benchmark rates led to the 23bp q-o-q decline in NIMs to 1.48% in 2Q20. Management expects margins to improve by 2-3bp per quarter in 2H20F as funding costs decline amid flush liquidity in the system.
On credit growth, UOB’s strategy to pivot to lower-margin but higher-yielding assets (e.g. larger corporates) should aid margin expansion as well. As 70-80% of UOB’s portfolio is on floating rates, the bulk of the yield compression was likely reflected in 2Q20.
We cut FY20F NIMs by 21bp y-o-y to 1.57% (from 1.63%) and raise loan growth to c.7% (from c.3%) as economies reopen.

On balance, we cut NIM and fee income estimates to reflect the drastic decline in interest rates as well as the pronounced effect of regional lockdowns on transaction volumes. We also cut FY20F DPS estimate to 78Scts on the back of MAS’s call on banks to cap dividends. We think credit cost and NIM weakness has been priced in, but re-rating catalysts are limited.
Our Target Price rises as we adjust our risk-free rate for the sector.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

Upside risks are a swift rebound in regional economic activity as country borders reopen.
Downside risks are a second wave of Covid-19 infections in SG banks’ operating economies, hampering customer activity and investment sentiment

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-10

SGX Stock Analyst Report HOLD MAINTAIN HOLD 20.58 UP 19.040