UNITED OVERSEAS BANK LTD (SGX:U11)
United Overseas Bank - Asset Quality Clarity To Mitigate Earnings Pressure
- UOB (SGX:U11)'s 3Q20 earnings of S$668mn brought 9M profit to S$2.23bn, 74% of our FY20e estimate – in line. Results were in line with consensus as well.
- UOB's net interest income fell 13% y-o-y to S$1.47bn as NIM was compressed by 24bps.
- Fee and commission income improved 16% q-o-q as business recovered from CB, offsetting a 24% q-o-q drop in trading income.
- Credit cost of 68bps brought GP reserves past S$3bn to provide a post-moratorium relief buffer.
- Maintain ACCUMULATE for UOB with higher GGM Target Price of S$21.10 (previously S$20.40). We hold FY20e estimates but raise FY21e by 15% to factor in expected lower allowances.
Positives
Gradual recovery in income
- UOB's fee and commission income of S$514mn was down 7% y-o-y but up 16% q-o-q. As economic activity resumes across the region, we expect further improvements to near pre-COVID-19 levels.
Allowances on impaired loans remained low
- SP recognised amounted to S$134mn or 19bps of loan book. This was lower than the 21bps or S$149mn a year ago. The remaining S$342mn of allowances for GP represented a 49bp credit cost, improving GP reserves to S$3,091mn (including RLAR) and non-performing asset coverage to 111% from 96% in Q2.
Negative
NII fell 13% y-o-y as NIM was down 24bps to 1.53%
- Low interest rates continued to affect NII, which dropped 13% y-o-y. Nevertheless, better liquidity management lifted NIM by 5bps q-o-q from a low of 1.48% in Q2. We expect NIM to stabilise at 1.50-1.55% on the back of stable interest rates and funding conditions.
Outlook
Credit-cost guidance lowered on better insights on asset quality
- UOB's loans under moratorium fell from 16% of its loan book in Q2 to 10% in Q3. The fall came largely from Malaysia as loans in Malaysia exited moratorium at end-September.
- The remaining loans under moratorium were mostly from Singapore and Thailand. The bank is confident it can manage asset quality, given that around 90% of them are secured. It has lowered credit-cost guidance from 50-60bps for this year to 30-40bps for FY21.
Investment Action
- Maintain ACCUMULATE on UOB with higher target price of S$21.10 (previously S$20.40). We hold our FY20e earnings estimate but raise FY21e forecast to reflect lower credit costs of 30-40bps.
- See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
- Our Target Price remains pegged to GGM (FY21e P/B of 0.89x).
Tay Wee Kuang
Phillip Securities Research
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https://www.stocksbnb.com/
2020-11-09
SGX Stock
Analyst Report
21.10
UP
20.400
