United Overseas Bank - RHB Invest 2020-08-06: NIM Squeeze On Interest Rates Fall


United Overseas Bank - NIM Squeeze On Interest Rates Fall

  • UOB's 2Q20 net profit of SGD703m was in line with expectations, with 1H20 net profit accounting for 51% of both our and consensus’ pre-results 2020F.
  • We lower our sustainable ROE assumption to 8.5% from 8.6% – closer to 1H20’s 8% and given Singapore’s 2020 GDP contraction.
  • Keep NEUTRAL with new GGM-derived SGD18.80 Target Price from SGD19.40, 3% downside offset by c.4% yield, based on 0.8x 2020F P/NBV.

UOB’s 2Q20 net profit 40% y-o-y fall was mainly due to a surge in allowances.

  • UOB (SGX:U11)'s 2Q20 pre-provisioning operating profit was down 16% y-o-y, due to weak NII from NIM compression. 2Q20 provisions was 8x that of 2Q19, leading to the y-o-y net profit decline.
  • We cut our FY20-21 earnings forecasts by 8-10%, mainly due to lower NII arising from NIM compression.

NIM was squeezed.

  • UOB's 2Q20 NIM of 1.48% was 23bps narrower q-o-q due to lower interest rates. Loans grew 1% q-o-q. These led to a 9% q-o-q decline for NII. Management guided for 2-3bps NIM widening (from 2Q20 level) per quarter for 3Q20 and 4Q20 – due to lower cost of funds. We forecast FY20 NIM of 1.55% vs FY19’s 1.78%. We forecast a mild FY20 loan expansion of 4%.
  • 2Q20 fee income contracted 14% q-o-q – due to wealth management (26% share) falling 34% sequentially, and credit card (15% share) dropping 28%.

UOB guided for FY20-21 cumulative provisions of 120-130bps of loans.

  • 2Q20 total credit cost was 67bps, up 31bps q-o-q – of which 54bps was for non-impaired loans to cushion anticipated future asset quality weakness. As the loan moratorium expires in Dec 2020, we believe the NPL ratio could rise more significantly.
  • Management guided for a peak NPL ratio of 3-3.2%, and we forecast Dec 2021 NPL ratio at 2.7% (after peaking in 2Q-3Q21). Management guided for 3Q20 and 4Q20 provisions to be close to the 2Q20 level.

Capital ratios remain robust.

  • 2Q20’s CET1 capital adequacy ratio (CAR) was 14%, marginally lower than 1Q20’s 14.1%. Management guided for CET1 CAR to fall marginally over the next few quarters, but expects it to remain above 12.5%.

FY20F dividend yield of 4%.

  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
  • We forecast UOB's FY20 dividend of SGD0.78/share – in line with the Monetary Authority of Singapore’s (MAS) directive to cap FY20 dividend at 60% of FY19’s SGD1.30. MAS has not indicated any guidelines for FY21 dividends, and we assume an increase to SGD0.90/share.
  • The target 2020F P/NBV of 0.8x is c.3SD below the 5-year average of 1.15x. Given the earnings headwinds, we do not believe UOB will trade close to its historical P/NBV in the near term.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-06
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 18.80 DOWN 19.400