UOB - OCBC Investment 2020-11-04: Sequential Improvement


UOB - Sequential Improvement

  • UOB's 3Q operating profit of S$1.25bn improved 3% q-o-q, with pick-up in fee income and margins.
  • Additional credit allowances were taken to strengthen provision coverage further.
  • Total share of loans under moratoriums improved to ~10% in 3Q (vs ~16% in 2Q).
  • Balance sheet remains robust with ample liquidity and strong CET1 ratio of 14%, while undemanding valuations have largely reflected the lowered growth expectations and a gradual recovery path.

Improved momentum from previous quarter as economic activities gradually resumed

  • UOB (SGX:U11)'s 3Q operating profit (OP) gained 3% from previous quarter, boosted by higher fees as economic activities gradually resumed, but remained 14% lower from a year ago. In terms of business segments performance for 3Q: group retail grew a decent 10% q-o-q, while wholesale banking was flattish (-1% q-o-q) and global markets fell -19% q-o-q. With higher provisions taken, 3Q net profit came in at S$668mn, declining -5% q-o-q/-40% y-o-y.

NIM rose 5bps q-o-q as excess liquidity was shedded

  • Customer loans was flat q-o-q/up 2% y-o-y. Net interest income continued to see pressure from a year ago, declining 13% y-o-y but improved +1% q-o-q as excess liquidity was shedded. 3Q NIM improved 5bps to 1.53%, underscoring management’s prior guidance as liquidity buffers were eased with a more stable funding environment.
  • Fee income grew 15% from previous quarter led by better wealth management and credit card fees, while trading income contracted.

NPL ratio still benign supported by government relief schemes in the region

  • Credit costs of ~68bps gained a slight +1bp q-o-q/+45bps y-o-y, mainly from pre-emptive allowances for non-impaired loans. With government loan relief schemes still in place, NPL ratio was low at 1.5% (vs 1.6% last quarter) helped by some recoveries this quarter.
  • Total share of loans under moratoriums improved to ~10% in 3Q (vs ~16% in 2Q), with the majority (~90%) secured with collateral or government guarantees. In Singpaore, deadline for applications for loan moratorium and liquidity assistance were extended into 2021, while eligible borrowers in Malaysia can apply to banks for extension until end of 2020 (following the automatic loan moratorium expiry as of end September 2020). Eligible SMEs in Thailand are allowed to seek extension until middle of 2021.
  • UOB's exposure to oil and gas reduced further with outstanding loans to the sector making up 3% of total loans as of end September 2020 (vs 4.7% as of June 2018), out of which 70% is to downstream players and traders (two thirds to national oil companies and global firms), while short term structured loans make up most of the remainder.

Higher impairment charges of S$477mn were taken this quarter as expected (+20% q-o-q, vs S$396mn in 2Q20).

  • Coverage ratio was strengthened to 111% (or 264% including collateral). The bank continued to manage operating expenses, with cost-income ratio falling to 44.6% in 3Q (vs 46% in 2Q20). CET1 remained strong at 14%.
  • For 9M20, net profit of S$2.23bn fell 33% y-o-y, with higher impairment charges taken of S$1.158bn (vs 289mn for 9M19) amid the pandemic. 9M20 operating profit of S$3.792bn fell 11% y-o-y. Regions wise, 9M20 operating profit fell 23% y-o-y in Singapore, while Southeast Asia delivered a credible 10% growth (driven by Indonesia, Vietnam and Malaysia, while Thailand was flat) benefiting from assets growth, lower cost of funds and North Asia (mainly Greater China) gained 2% y-o-y.

Gradual recovery path ahead, largely priced in the stock’s undemanding valuations although asset quality concerns should persist into 2021

  • During this period, the bank continues to accelerate its omni-channel approach and has seen increase in engagement and transactions related to its digital services (e.g. UOB Mighty, TMRW).
  • UOB Infinity (an enhanced digital service targeting corporate customers) was recently launched as well. Looking ahead, we expect a moderate uptick in fees supported by economies re-opening.
  • See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.
  • UOB's valuations are undemanding, offering an attractive risk reward proposition for patient investors.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-11-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 21.500 SAME 21.500