United Overseas Bank - UOB Kay Hian 2020-08-07: 2Q20 NIM Compression & Higher Credit Costs


United Overseas Bank - 2Q20 NIM Compression & Higher Credit Costs

  • UOB's 2Q20 results were below consensus estimate. UOB suffered severe NIM compression of 23bp q-o-q due to declining margins and synchronised cuts in interest rates by central banks across the region to combat the negative impact from the COVID-19 pandemic. It set aside general provisions of S$379m (1Q20: S$48m) due to a weakened macroeconomic outlook.
  • Management guided on some upside to NIM in 2H20 after hitting a trough in 2Q20 and credit costs at 60bp for full-year 2020.

UOB's 2Q20 Results

  • UOB (SGX:U11) reported a net profit of S$706m (-40% y-o-y, -18% q-o-q), which is below consensus estimate of S$814m.

NIM affected by lower interest rates across the region.

  • NIM compression was severe at 33bp y-o-y and 23bp q-o-q to 1.48% due to declining margins and synchronised cuts in interest rates by central banks across the region to combat the negative impact from the COVID-19 pandemic. Loans/deposits ratio was stable at 85.8%. Net interest income dropped 12% y-o-y to S$1,456m.

Circuit breaker caused steep drop in fees during April and May.

  • Fee income declined 15% y-o-y due to the slowdown in economic activities during the Circuit Breaker period (7 April to 1 June). There are broad-based declines from credit cards (-37% y-o-y), wealth management (-17% y-o-y) and loans-related fees (-11% y-o-y).
  • Contribution from credit cards was affected by reduced consumer spending, while loans-related fees were affected by slower loan disbursement fees. AUM expanded by 9% y-o-y to S$129b, of which 60% was from overseas customers across its network in Southeast Asia.
  • Net trading income was stable at S$232m.

Setting aside general provisions due to weakened macroeconomic outlook.

  • Total provisions were at S$396m in 2Q20 (mainly general provisions of S$379m), higher than S$286m in 1Q20. It incurred specific provisions of S$90m due to a few major customers in Singapore. This was offset by a write-back in specific provisions for non-performing securities of S$73m. Credit costs have increased from 36bp in 1Q20 to 67bp in 2Q20.
  • Asset quality was benign with new NPLs of S$131m (1Q20: S$573m). NPL ratio deteriorated marginally by 14bp y-o-y and 4bp q-o-q to 1.61%.
  • UOB declared an interim dividend of 39 S cents with an option for scrip dividend.


NIM is expected to have bottomed.

  • UOB guided on mid-single-digit loan growth for 2020. Management expects some upside in NIM after hitting a trough in 2Q20. Fees are expected to rebound moderately in 2H20 as economies gradually reopen after the lockdowns.
  • Assuming the COVID-19 pandemic is brought under control by end-20, credit costs are expected to remain at around 2Q20 levels in 2H20 (60bp for full-year 2020). Pre-emptive general provisions will be set aside ahead of an anticipated weakening of asset quality.

Anticipate pick-up in fee income.

  • Management observed a pick-up in contributions from wealth management and credit cards since June. Relationship managers and wealth advisors have to adapt to change in sales processes caused by the COVID-19 pandemic. Management is hopeful of a pick-up in fees in 3Q20, although travel related activities are expected to remain weak.

Manageable impact from loans under moratorium.

  • UOB has supported more than 1m individual and business customers across the region with loan moratoria and other relief measures that amount to about 16% of total loans. For businesses, they include moratorium for existing secured loans and fresh liquidity in working capital and temporary bridging loans.
  • For individuals, UOB has provided moratorium for residential mortgage borrowers and lowered interest rates on unsecured credit. About 90% of these loans are secured, mainly by properties. Management expects about 10-15% of these loans could become NPLs.

Expect asset prices to remain stable.

  • Management compared the impact from the Global Financial Crisis (GFC) against that from the COVID-19 pandemic. During the GFC, banks suffered stiff credit costs of 150bp in one year due to the severe credit crunch and correction in asset prices across the board for many asset classes.
  • For the COVID-19 pandemic, management expects credit costs of 100-130bp over two years (S$2-3b) due to proactive fiscal and monetary policies across the region and around the world.
  • Management does not expect a drastic correction in asset prices due to abundance of liquidity.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-07
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000