UOB - DBS Research 2020-08-06: Upgrade On Undemanding Valuations


UOB - Upgrade On Undemanding Valuations

  • UOB's 2Q20 net profit of S$703m was below expectations (-40% y-o-y, -18% q-o-q).
  • Expect some asset deterioration in 2H20 and 1H21.
  • Dividend per share of 39 Scts declared (1H20: 55 Scts) due to dividend cap imposed by MAS.
  • Upgrade UOB to BUY; Target Price of S$22.20 on undemanding valuations of c.0.8x FY21F P/BV.

UOB's 2Q20 earnings were below expectations.

  • UOB (SGX:U11)'s 2Q20 net profit of S$703m declined 12% y-o-y/6% q-o-q, below expectations. Net interest income of S$1.5bn declined 12% y-o-y/ 9% q-o-q as NIM declined 23bps q-o-q to 1.48% (1Q20: 1.71%) on lower interest rates, on top of excess liquidity that weighed on NIM as UOB deliberately built up excess liquidity during April and May. NIM was worse than what we had previously expected.
  • Geographically, Singapore and Southeast Asia revenues declined c.15%/8% y-o-y due to Circuit Breaker/movement restrictions amidst lower interest rates.
  • Operating costs decreased slightly by 8% y-o-y/4% q-o-q on broad-based decline in expenses, resulting in cost-to-income ratio of 46.0% (1Q20: 45.1%) due to lower revenues.
  • Capital ratios stood strong with CET1 ratio at 14.0% amidst a lower ROE of 7.1% (FY19: 11.6%).

Weaker fee income offset by trading income.

  • Fee income declined 15% y-o-y/14% q-o-q due to lower business activities across the board due to Circuit Breaker/movement restrictions with credit card fees leading the biggest decline of 37% y-o-y/28% q-o-q. This was partially offset by good trading income during the quarter which led to non-interest income variance of -11% y-o-y/+20% q-o-q.
  • Overall, non-interest income of S$804m declined 14% y-o-y/1% q-o-q. According to management, June and July’s fee income activity levels were strong due to resumption of economic activities across the broad from the low base in 2Q20. However, as travelling accounts for a substantial portion of card fees, this is unlikely to recover to pre-COVID 19 levels in the near term.

Loan book grew 4% y-o-y/1% q-o-q, driven by loans in Thailand and Indonesia.

  • Year-to-date (since Jan 2020), loans have grown 4.5%. UOB continues to see some new credit demand coming from selected corporates into 2H20. As of 2Q20, oil and gas exposure was largely flat, accounting for 3.5% of total loans (1Q20: 3.6%). UOB continues to target quality loan growth for the next 6-12 months.

Deposits grew 6% y-o-y/flat q-o-q

  • Deposits grew 6% y-o-y/was flat q-o-q, in line with loans, resulting in a slight increase in loan-to-deposit ratio of 87.0% (1Q20: 86.3%). During 2Q20, CASA increased to account for ~50% of total deposits (1Q20: 47%).

More general allowances written during the quarter.

  • Total allowances increased to S$468m, representing total credit costs of 67bps (1Q20: 35bps); on the back of higher general allowances of 54bps (1Q20: 4bps, excluding regulatory loan loss reserve [RLAR] taken), to reflect deteriorating macroeconomic conditions.
  • For 1H20, total credit costs stood at 52bps, in line with management’s full-year guidance. During the quarter, there were no significant new NPA formations (S$131m compared to average of S$398m for the last six quarters). We believe this is largely due to various loan moratoriums in place. NPA coverage ratio stood at 96% as of 1Q20 (1Q20: 88%).

Takeaways from UOB's analyst briefing

NIM expected to improve over next two quarters.

  • Management indicated that there may be 2-3bps improvement every quarter over the next two quarters. Should rates remain around today’s levels, management is confident that net interest income will improve q-o-q in 3Q20. Management is looking to price up credit spreads in coming quarters, which may support NIM.

Exposure breakdown.

  • 51/15/34% of UOB’s loan book are to large corporates/SMEs/individuals. Building and construction loans make up 25% of loans with average loan-to-value (LTV) of 50%, of which 80% are in Singapore and Hong Kong. SME loans are mostly in Malaysia and Singapore, where SMEs have a turnover of S$10- 100m (not micro SMEs). About 90% of SME loans under relief are secured/mitigated by the government’s risk-sharing schemes.
  • Mortgages had an average LTV of 60% as of 2Q20 and are mostly for owner-occupied properties. Unsecured individual loans and credit card loans are ~2% of total loans.

16% of loans in moratorium; most of the loans are heavily securitised.

  • About 10% of loans in Singapore are under moratorium, with the remainder in Malaysia and Thailand which have automatic opt-in moratoriums. Management estimates that ~10% of these loans may become NPLs. Based on observations, loans under moratorium have largely stabilised at current levels. Of the Enterprise Singapore loans, ~60% have been drawn down during the quarter.

Credit cost guidance.

  • During 1Q20, management guided for 50- 60bps credit costs each year through FY21F. Assuming the pandemic is largely under control, credit cost guidance cumulatively for the next two years is c.120-130bps/S$2-3bn, of which S$682m of loan provisions had been taken in 1H20.
  • Peak NPL ratio may double from existing levels and this is likely to happen within the next 1.5 years.

CET1 ratio and dividends outlook.

  • UOB's CET1 ratio is likely to decline from here (14.0%) but management believes it should remain above the bank’s comfortable CET1 level of ~12.5%. Looking ahead, FY21F dividends are subject to MAS’s deliberation.

UOB - Valuation and recommendation

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-08-06
SGX Stock Analyst Report BUY UPGRADE HOLD 22.20 UP 20.900