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


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.

Better asset quality visibility as regional moratoriums expire

  • 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.

NIMs should hold steady into FY21F as asset yields stabilise

  • 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.

Sustained fee income should offset potential impairment

  • 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.

Upgrade UOB to ADD; resumption of 50% dividend payout a key catalyst

CGS-CIMB Research Reports on Singapore Banks 3Q20 Results

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