UOB - CGS-CIMB Research 2020-11-04: The Worst Could Be Over; Upgrade To ADD

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - The Worst Could Be Over; Upgrade To ADD

Key guidance from UOB's management was for lower credit costs of 90-100bp in FY20-21F (vs.120bp), lower worst-case NPL (c.2%) and bottomed-out NIMs.
We upgrade UOB to ADD with a higher target price of S$22.52. NIMs should stabilise at c.1.53% going into FY21F (FY20F: 1.57%) as asset yield declines find a floor.
Limited credit migration and modest growth should keep UOB's CET1 at c.13-14%, primed for resumption of 50% dividend payout provided MAS’s cap expires.

See UOB 3Q20 - CGS-CIMB Research 2020-11-04: A Reversal In NIM Trends for UOB's result highlights.
The expiry of the government-initiated moratorium in Malaysia and Thailand paved the way for a reduction in total group loans under moratorium to c.10% in Oct 20 (from c.16% in Jul 20). With better visibility of repayment trends post-forbearance schemes, account-by-account reviews and targeted restructuring measures, UOB (SGX:U11)'s management guides for improved credit costs of c.90-100bp in FY20-21F (previously c.120-130bp), with c.60bp in FY20F and moderating to c.30-40bp in FY21F. The bulk of this will still comprise general provisions, which will be earmarked for the potential rise in NPLs towards c.2% (from 1.5% currently).
We expect UOB's 4Q20F credit costs to hover at current levels in anticipation of some restructuring ahead of the winding-down of Singapore moratorium at end-Dec 20.

The 5bp q-o-q NIM expansion to 1.53% in 3Q20 came mainly from the release of more expensive US$ funding shored up earlier this year for the longer-dated US$ assets. The expansion was aided by overall flattish asset yields (despite declining benchmark rates) as slight improvement in SME-related yields was offset by margin pressure in the corporate segment.
Continued funding management and a steepening of the yield curve could see NIM holding steady at c.1.53% going into FY21F (from our expected 1.57% in FY20F).
UOB's management guides for mid-single-digit loan growth in FY21F, to come from a larger focus on Southeast Asia trade-related financing as well as from greater volumes of manufacturers relocating their supply chains into the region.

Fee income rebounded in 3Q20 (+16% q-o-q, -7% y-o-y) and should sustain non-II in 4Q20F as business activity regains momentum. Staff costs and technology-related costs are key drivers of UOB’s opex; both may rise slightly on better business performance and new project initiatives; UOB is hopeful of keeping its CTI ratio at c.45-46% in FY20F.

Better asset quality visibility and stabilisation in NIMs underscore our view that the worst may be over for UOB. Modest loan growth and minimal credit migration should see CET1 ratio holding at 13-14%, paving the way for resumption of 50% dividend payout if MAS’s dividend cap is not extended beyond 1Q21F.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
Our GGM-based Target Price for UOB rises to S$22.52 as we cut our credit cost estimates, adjust NIM assumptions and roll over to FY21F.
A prolonged economic downturn hindering business recovery is a key downside risk.
See also: DBS & OCBC - CGS-CIMB Research 2020-11-05: Earnings Beat From Trading & Impairments.

Andrea CHOONG CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-04

SGX Stock Analyst Report ADD UPGRADE HOLD 22.52 UP 20.580