UOB - RHB Invest 2020-11-05: Asset Quality Holding Up Well; Still NEUTRAL


UOB - Asset Quality Holding Up Well; Still NEUTRAL

  • Higher pre-emptive provisions offset the fee income recovery, slight uptick in NII and lower staff costs. As such, UOB's 3Q20 earnings dropped 5% q-o-q. Still, a dialdown on credit cost guidance on a better-than-expected asset quality outlook and improving topline growth prospects led to us lifting FY21F earnings and our target price.
  • While asset quality concerns should abate, we believe the stock is fairly valued at 0.8x FY21F P/BV against ROE of c.8%.
  • NEUTRAL, new S$21.00 Target Price from S$18.80, 6% upside with c.5% FY21F yield.

UOB's 9M20 results are above our expectations.

  • UOB (SGX:U11) booked 3Q20 net profit of S$668m (-5% q-o-q, -40% y-o-y) and 9M20 earnings of S$2,226m (-33% y-o-y). 9M20 net profit comprised 79% of our FY20F forecast, but was in line with the Street’s at 77%. 9M20 ROAE was at 7.6% (9M19: 11.9%) while CET-1 was at a solid 14.0%.

3Q20 PIOP up 3% q-o-q, mainly on lower opex.

  • Operating income was flattish q-o-q as higher net interest income (NII) (+1% q-o-q) and net fee income (+15.5% q-o-q) was offset by the 29% q-o-q decline in trading and investment income. NII ticked up on a slight NIM rebound (+5bps q-o-q to 1.53%) while loan growth was flattish q-o-q.
  • Opex slipped by 3% q-o-q, as staff costs fell 5% q-o-q while other discretionary expenses were well-controlled. However, a 20% q-o-q rise in impairment charges resulted in a 5% q-o-q fall in net profit. Loan credit cost was at a higher 68bps, vs 57bps in 2Q20.
  • UOB’s CASA ratio rose to 51%, from 49.6% in 2Q20.

Asset quality is resilient.

  • Loans under COVID-19 relief programmes declined to c.10% of gross loans. The improvement, from c.16% in 2Q20, came mainly from Malaysia, where the automatic moratorium on loans ended on 30 Sep. Non-performing assets (NPA) declined 7% q-o-q, as new NPA formation was capped by loan moratoriums while recoveries increased in 3Q20. As a result, the NPL ratio dipped to 1.5%, vs 1.6% in 2Q20.
  • NPA coverage (including regulatory reserves) strengthened to 111% (2Q20: 96%) boosted by S$321m in additional pre-emptive provisions.

UOB's management guidance.

  • A vigorous bottom-up review of its loans has led to optimism that asset quality ahead will be better than anticipated. Even as an expected rise in NPL ratio to 2% in FY21F would mean S$700m-800m in additional provisions, this should be adequately covered by the S$1.0bn pre-emptive allowances made in FY20. As a result, management revised its FY21F credit cost guidance to 30-40bps, from 60bps. This also suggests that the CET-1 ratio would stay above 13%, allowing UOB to revert to its 50% dividend payout policy in FY21F, if there are no objections from the Monetary Authority of Singapore.
  • NIM is expected to stabilise at 1.53%, helped by improved CASA and stable interest rates.

UOB - Earnings forecast and Target Price.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-05
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 21.00 UP 18.800