United Overseas Bank - UOB Kay Hian 2020-11-05: 3Q20 NIM Bottomed But Exposure To Moratorium Loans Peaked

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

United Overseas Bank - 3Q20 NIM Bottomed But Exposure To Moratorium Loans Peaked

  • UOB’s exposure to moratorium loans has reduced from 16% to 10% of total loans on a group-wide basis as the automatic loan moratorium has ended in Malaysia and Thailand. NPL ratio is expected to peak at slightly above 2% (previous: doubling to 3%).
  • Management has reaffirmed guidance for credit cost at 60bp for 2020. However, this was revised downwards from 60bp to 30-40bp for 2021.
  • Management expects UOB to benefit from lower credit costs in 2021.







UOB 3Q20 RESULTS

  • UOB (SGX:U11) reported a net profit of S$668m, down 40% y-o-y. Bloomberg consensus earnings estimate is at S$570m.

NIM has turned the corner.

  • UOB's NIM expanded 5bp q-o-q to 1.53% as surplus fixed deposits were trimmed with stabilisation in funding environment (liquidity management). Loan/Deposit Ratio improved by 0.9ppt q-o-q to 86.7%.

Loans grew 2% y-o-y but was flat on sequential basis.

  • The y-o-y expansion was contributed by Singapore (+2% y-o-y), Malaysia (+3% y-o-y), Thailand (+2% y-o-y) and Vietnam (+20% y-o-y).

Fees rebounded q-o-q as economies reopen across region.

  • Fees declined 7% y-o-y but rebounded 15% q-o-q as activities resumed post-lockdown. Group retail achieved growth of 5% y-o-y and 39% q-o-q (wealth management: +41% q-o-q, credit cards: +25% q-o-q). Fees from group wholesale declined 19% y-o-y and 6% q-o-q (loans related: -14% q-o-q).
  • Other non-interest income dropped 27% y-o-y due to lower net trading income and investment income.

Maintains lean cost structure.

  • Operating expenses declined 13% y-o-y due to disciplined cost management and lower staff costs. Cost/income ratio was stable at 44.6%.

Asset quality stays resilient.

  • Credit cost was unchanged at 68bp, similar to 2Q20. UOB took in total provisions of S$339m, mainly a pre-emptive build-up of general provisions, which strengthened loan loss coverage by 15ppt q-o-q to 111%. NPL ratio receded by 0.1ppt q-o-q to 1.5% in 3Q20 as NPL formation was benign at S$74m (loan moratoriums were still in force during the quarter), and there was a pick-up in upgrades & recoveries of S$216m.


HIGHLIGHTS FROM UOB RESULTS BRIEFING


UOB's management guidance.

  • UOB's management guided on mid-single-digit loan growth of 5% for 2021, driven by:
    1. foreign direct investments from supply chain realignment as many companies adopt a China Plus One strategy and set up manufacturing operations across the region;
    2. industry consolidation/acquisitions due to fallout from the COVID-19 pandemic; and
    3. digital companies benefitting from the COVID-19 pandemic.

Exposure to moratorium loans much reduced.

  • UOB’s exposure to moratorium loans has reduced from 16% to 10% of total loans on a group-wide basis as automatic loan moratorium has ended in Malaysia and Thailand. Customers have resumed loan repayment. In Malaysia, exposure to moratorium loans has dropped from 60% to 10% of total loans. Likewise, exposure to moratorium loans has declined from 30% to 20% for Thailand.
  • Impact on asset quality is manageable as 90% of moratorium loans are secured by collaterals or government guarantees. However, estimated probability of default for moratorium loans remains unchanged at 10-15%.

Lowered guidance on credit costs.

  • UOB has conducted a bottom-up account by account review of its loan portfolio. It has restructured loans for viable borrowers with short-term strain on cash flows, thus spreading out potential NPL formation. Management concluded that NPL ratio will peak at slightly above 2% (previous: doubling to 3%), which is 50-60bp above the current NPL ratio of 1.5%.
  • Management has reaffirmed guidance for credit cost at 60bp for 2020. However, guidance for credit cost was revised downwards from 60bp to 30-40bp for 2021. In aggregate, guidance for credit costs over a 2-year period in 2020-21 was reduced from 120bp to 90-100bp. Thus, management expects UOB to benefit from lower credit costs in 2021.
  • The lower credit cost is supported by:
    1. loan loss coverage has improved 15ppt q-o-q to 111%; and
    2. valuation of collaterals has remained relatively stable, supported by quantitative easing and abundance of liquidity.

Accelerate omni-channel approach to service customers.






Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-11-05
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000



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