United Overseas Bank - Phillip Securities 2020-11-09: Asset Quality Clarity To Mitigate Earnings Pressure

UNITED OVERSEAS BANK LTD (SGX:U11) | SGinvestors.io 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






Tay Wee Kuang Phillip Securities Research | https://www.stocksbnb.com/ 2020-11-09
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 21.10 UP 20.400



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