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

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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.

• UOB has launched digital bank TMRW in Indonesia. Digital services UOB Mighty and TMRW have seen a rise in engagement and transactions. Management will explore the usage of alternative credit models and new data to serve the upwardly mobile middle class, such as young families and young professionals, across the region.
• See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
• See also
  • DBS Group - UOB Kay Hian 2020-11-05: 3Q20 Credit Costs Have Peaked And Are Trending Lower.
  • Oversea-Chinese Banking Corp (OCBC) - UOB Kay Hian 2020-11-06: Net Profit Forecast For 2021 Raised Due To Lower Credit Costs.

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