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

UNITED OVERSEAS BANK LTD (SGX:U11)

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 (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%.

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.

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.

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.

Following a review of assumptions on NIM and credit costs, we raise UOB's FY21F net profit forecast by 7% but maintain our FY20 earnings projection. Our revised target price of S$21.00 is based on a GGM-derived P/BV of 0.85x.
See UOB Share Price; UOB Target Price; UOB Analyst Reports; UOB Dividend History; UOB Announcements; UOB Latest News.

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