UOB - DBS Research 2020-11-04: 3Q20 Ahead Of Expectations; Guiding For Better-Than-Expected Outlook

UNITED OVERSEAS BANK LTD (SGX:U11)

UOB - 3Q20 Ahead Of Expectations; Guiding For Better-Than-Expected Outlook

UOB's 3Q20 net profit of S$668m (-40% y-o-y/ -5% q-o-q) ahead of expectations.
5-bp q-o-q NIM improvement; wealth management and card fees q-o-q improvement offset by lower loan-related fees and trading income.
Continued to write S$477m provisions in 3Q20 to build up provisions buffer.

UOB (SGX:U11)'s 3Q20 net profit of S$668m declined 40% y-o-y/5% q-o-q, ahead of expectations. Net interest income of S$1.5bn was largely flat (-13% y-o-y/ +1% q-o-q) as NIM improved 5bps q-o-q to 1.53% (2Q20: 1.48%) as UOB let go of excess liquidity that weighed on NIM (recall that UOB deliberately built up excess liquidity during April and May). Average customer deposit rate has declined to ~1% from c. 1.11% in 2Q20.
Operating costs decreased by 13% y-o-y/3% q-o-q from disciplined cost management and lower staff costs and controlled discretionary spending, resulting in cost-to-income ratio (CIR) of 44.6% (2Q20: 46.0%).
For the full year, management sees CIR at 45-46%. Capital ratios stood strong with CET1 ratio at 14.0% amidst a lower ROE of 6.9% (FY19: 11.6%).

UOB's fee income declined by 7% y-o-y/ improved by 15% q-o-q from a low base in 2Q20 due to COVID-19. Wealth management and credit card fees of S$188m/S$95m improved 41%/25% q-o-q, beyond 3Q19’s levels. This was offset by lower loan-related fees and trading and investment income, which were affected by lower loan demand, as well as larger recovery from market volatility respectively.
Overall, non-interest income of S$786m declined 15% y-o-y/2% q-o-q.

Credit demand remained weak during the quarter, though UOB saw some new mortgage bookings alongside improving property transactions, which will be drawn down subsequently. Year-to-date (since Jan 2020), loans have grown 4.4%. As of 3Q20, oil and gas exposure was largely flat, accounting for 3.0% of total loans (2Q20: 3.5%). Looking into FY21F, management is aiming for a mid-single-digit loan growth.
Deposits grew 5% y-o-y/declined 1% q-o-q. As a result, gross loan-to-deposit ratio was largely flat at 88.0% (2Q20: 87.0%). During 3Q20, CASA increased to account for 51.0% of total deposits (2Q20: 49.6%).

Total allowances increased to S$468m, representing total credit costs of 68bps (2Q20: 67bps); on the back of high general allowances of 49bps (2Q20: 54bps), to reflect challenging macroeconomic conditions. For 9M20, total credit costs stood at 57bps, in line with management’s full-year guidance.
During the quarter, there were no significant new NPA formations (S$74m compared to an average of S$318m for the last six quarters). We believe this is largely due to various loan moratoriums in place. NPA coverage ratio stood at 111% as of 3Q20 (2Q20: 96%).

UOB's management previously guided for 120-130bps credit costs cumulatively over the next two years. Credit cost guidance is revised to 60bps this year, and another 30-40bps needed in FY21F. As of 3Q20, NPL ratio was at 1.5% and management is of the view that it may peak at ~2.0% (recall that previously, management estimated that NPL might double in a worst-case scenario).

Loans under moratorium (3Q20): SG/MY/TH/Others: ~5/1/2/2% of loan book (2Q20: 5/7/3/2% of loan book). UOB's management believes asset quality impact is manageable as “the bulk (~90%) is secured with collateral or government guarantees”, probability of default from loans under moratorium is still assessed to be ~10-15%, unchanged from 2Q20. With the new credit costs and estimated peak NPL ratio, management believes that NPL coverage ratio will still be sufficient.

Asset yield is likely to remain flattish though SME loan yields have increased by a few bps during the quarter while FIs and large corporate segment loan yields are still competitive. 4Q20 cost of funds is unlikely to go down significantly from 3Q20 though management is continuing to manage out more expensive deposits in 4Q20.

Given the revised outlook, UOB's management is ready to revert to its previous dividend policy, barring any extension of MAS’s dividend cap.
Recall that the previous dividend policy was ~50% payout ratio, subject to strong CET1 (~13%) and no further deterioration in portfolio asset quality. Management believes if credit deterioration is in line with the new guidance, CET1 will exceed 13%.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2020-11-04

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