United Overseas Bank Limited – Fee income decline staunched

 

 

The Positives

+ Fee income recovery on track, 14% QoQ growth. Fees fell 3% YoY largely due to lower wealth and fund management fees as investor sentiment remained subdued, 1Q23’s decline is significantly smaller than 4Q22’s YoY decline of 16%. Nonetheless, fee income saw its first QoQ increase in four quarters, rising 14% QoQ largely due to a recovery in wealth management fees of 27% QoQ as investor sentiments started to improve. Likewise, loan-related fees rebounded 14% QoQ, while credit card fees sustained its momentum despite seasonally softer quarter.

+ Other non-interest income surged in 1Q23. Other NII increased 457% YoY and 98% QoQ largely due to the higher customer-related treasury income, which was driven by hedging

demands. Management also noted good performance from trading and liquidity management activities, which boosted trading and investment income to an all-time high.

+ New NPAs fall 42% YoY. New NPA formation fell by 33% YoY to S$301mn as asset quality stabilised during the quarter. The NPL ratio remained stable YoY and QoQ at 1.6%. Asset quality remained resilient with SP/NPA dipping slightly to 32%. 1Q23 NPA coverage is at 96% and unsecured NPA coverage at 212%.

 

The Negatives

- First NIM QoQ decline since 3Q21. NII grew 43% YoY, despite a decline in loans growth of 1% YoY, while NIM surged 56bps YoY to 2.14% but declined QoQ for the first time in 6 quarters by 8bps (QoQ: 3Q22: +28bps, 4Q22: +27bps, 1Q23: -8bps) mainly from liquidity surplus placed into high quality assets and increase in funding costs. Loan growth decline was due to corporates paring down their borrowings, while trade and mortgage loans were stable. The consolidation of Citi assets added 9% to the ASEAN loan book in 1Q23. UOB has lowered its loan growth guidance for FY23e from a mid-single digit to low to a mid-single digit.

- Credit costs increase due to higher SPs and GPs. Total allowances rose by 32% YoY to S$192mn mainly due to specific allowance increasing by 11% YoY to S$164mn on a few non-systemic accounts and general allowance of S$28mn (1Q22: write-back of S$2mn). This resulted in credit costs increasing by 6bps YoY to 25bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 1.0% of performing loans. UOB has maintained its guidance for credit cost of 20-25 bps for FY23e.

- Expenses up 36% YoY. Excluding one-offs, expenses rose 36% YoY to S$1,440mn in 1Q23. The increase was mainly due to continued focus on investments to enhance capabilities to drive strategic initiatives. Staff costs rose 38% YoY while IT-related expenses rose 32% YoY during the quarter. Nonetheless, the cost-to-income ratio (CIR) improved 3.9% YoY to 40.9% on the back of strong income growth. UOB has maintained its guidance for a CIR of 43-44% for FY23e, and to trend below 42% by FY24e.

United Overseas Bank Limited – Rise in NII offset by higher allowances

 

 

The Positives

+ NII spiked 53% YoY; NIM surged by 66bps. NII grew 53% YoY, despite a slowdown of loans growth to 3% YoY, while NIM surged 66bps YoY to 2.22% (QoQ: 1Q22: +2bps, 2Q22: +9bps, 3Q22: +28bps, 4Q22: +27bps). Loan growth YoY was broad-based across most territories, while the consolidation of Citi assets added 11% to the ASEAN loan book in 4Q22. UOB has maintained its guidance of mid-single digit loan growth for FY22e.

+ Other non-interest income increased by 62%. Other NII increased 62% YoY largely due to the higher customer-related treasury income which was driven by hedging demands. However, other NII fell 34% QoQ as it normalized after an exceptional 3Q22 that benefitted from market volatility.

+ New NPAs fall 42% YoY. New NPA formation fell by 42% YoY to S$395mn as asset quality stabilised during the quarter. The NPL ratio remained stable YoY at 1.6%. Asset quality remained resilient with SP/NPA stable at 34%. 4Q22 NPA coverage is at 98% and unsecured NPA coverage at 207%.

 

The Negatives

- Fee income continues to decline. Fees fell 16% YoY largely due to lower wealth and fund management fees as investor sentiment remained subdued alongside a seasonally softer quarter. Loan-related fees also fell 17% YoY this quarter. Nonetheless, credit card fees were higher 40% YoY mainly from higher customer spends which were boosted by the Citi consolidation.

- Credit costs increase due to higher SPs. Total allowances rose by 84% YoY to S$173mn mainly due to specific allowance increasing by 49% YoY to S$253mn on a few non-systemic accounts despite a general allowance write-back of S$80mn during the quarter (4Q21: write-back of S$76mn). This resulted in credit costs increasing by 9bps YoY to 21bps. Nonetheless, total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans. Full year FY22 credit cost was unchanged at 20bps and UOB has guided for credit cost of 20-25 bps for FY23e.

- Expenses up 29% YoY. Excluding one-offs, expenses rose 29% YoY to S$1,418mn in 4Q22, at the upper end of UOB’s guidance for FY22. The increase was mainly due to higher variable bonuses and pay adjustments for staff to remain more competitive and prevent the outflow of staff. IT-related expenses also increased during the quarter. Nonetheless, the cost-to-income ratio (CIR) improved 2.4% YoY to 42.6%, with full-year FY22 CIR at 43.4%. UOB has guided for a similar CIR of 43% – 44% for FY23e, and to trend below 42% by FY24e.

United Overseas Bank Limited – Surge in Net Interest Margins

 

 

The Positives

+ NII increased 39% YoY, led by steady loan growth. NII grew 39% YoY, led by continued loans growth of 6% YoY, while NIM surged 40bps YoY to 1.95% (QoQ: 1Q22: +2bps, 2Q22: +9bps, 3Q22: +28bps). Loan growth QoQ was mainly from term and trade loans, while YoY loan growth was broad-based across Singapore, Greater China and the Western world as business regained momentum. UOB has maintained its guidance of mid-single digit loan growth for FY22e.

+ Other non-interest income increased by 58%. Other NII increased 58% YoY largely due to the higher customer-related treasury income. A similar QoQ increase of 58% was due to record high customer-related treasury income, as well as improved performance from trading and liquidity management activities amid market volatilities.

+ Credit costs improve due to lower SPs. Total allowances fell by 12% YoY to S$135mn resulting in credit costs improving by 3bps YoY to 17bps. This was mainly due to specific allowance decreasing by 18% YoY to S$127mn. Total general allowance for loans, including RLARs, was prudently maintained at 0.9% of performing loans. UOB has lowered its credit cost guidance to 20bps for FY22e (previously 25bps).

+ New NPAs fall 15% YoY. New NPA formation fell by 15% YoY and 68% QoQ to S$214mn as asset quality stabilised during the quarter. Resultantly, the NPL ratio fell by 0.2% QoQ to 1.5%. Asset quality remained resilient with SP/NPA stable at 33%. 3Q22 NPA coverage is at 98% and unsecured NPA coverage at 207%.

The Negatives

- Fee income continues to decline. Fees fell 10% YoY largely due to lower wealth and fund management fees. The decline of 8% QoQ was mainly due to loan-related fees moderating from last quarter’s high, while wealth management fees remained soft amid subdued market sentiment. However, loan-related fees continued to show stable growth of 5% YoY, spurred by trade and investment growth, while credit card fees were higher 6% YoY as customer spending rebounded with borders reopening.

- CASA ratio declined YoY. Current Account Savings Accounts (CASA) ratio fell 6% YoY to 49.8% mainly due to the high interest rate environment and a move towards fixed deposits (FD). Nonetheless, total customer deposits increased 6% YoY to S$375bn. Management has mentioned that they are concentrating on increasing FD campaigns and that the increase in FDs was higher than the drop in CASA.

United Overseas Bank Limited – Boosted by higher net interest income

 

 

The Positives

+ NII increased 18% YoY, led by steady loan growth. NII grew 18% YoY, led by continued loans growth of 8% YoY, while NIM improved 11bps YoY to 1.67%. Loan growth QoQ was mainly from term and housing loans, while YoY loan growth was broad-based across geographies as business regained momentum. UOB has lowered its guidance to mid single-digit loan growth for FY22e (previously mid to high single-digit).

+ Other non-interest income increased 170% QoQ. Other NII increased 6% YoY due to the strong momentum for customer-related income as hedging demand rose. Other NII increased 170% QoQ on the back of customer-related growth and normalisation from 1Q22’s short-term impact on hedges and unrealised mark-to-market on investments.

+ Loan fees increased 10% YoY. Fees were stable QoQ but fell 2% YoY despite loan fees growth of 3% QoQ and 10% YoY and record credit card fees as customer spending increased with borders reopening. However, this was partially offset by lower wealth and fund management due to subdued market conditions. UOB has lowered its guidance to low single-digit growth in fee income for FY22e (previously high single-digit growth).

 

The Negatives

- Credit costs increased by 2bps YoY. Total allowances increased by 20% YoY to S$173mn resulting in credit costs increasing by 2bps YoY to 22bps. This was mainly due to specific allowance increasing by 20% YoY to S$166mn. Total general allowance for loans, including RLARs, were prudently maintained at 0.9% of performing loans. UOB has maintained its credit cost guidance of 25bps for FY22e.

- New NPAs of S$661mn in 2Q22. New NPA formation increased by 83% YoY and 43% QoQ to S$661mn mainly due to a major but non-systemic corporate account. Resultantly, the NPL ratio rose by 0.1% to 1.7%. Nonetheless, asset quality remained resilient with SP/NPA stable at 30%. 2Q22 NPA coverage is at 91% and unsecured NPA coverage at 185%.

Outlook

PATMI: UOB’s profit should continue to grow in 2022e on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% YoY. We expect credit costs to come in below guidance of 25bps. Management has said that as it is being conservative, they are not intending to write-back provisions but will not be adding a significant amount during the second half of 2022.

NIMs: Management expects improvement in NIMs only in the later part of 2022. They are expecting NIM to sustain growth at 9bps each quarter and to reach 1.90% by the end of 2022. UOB said that a 25bps rise in interest rates could raise NII by $150mn-200mn (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mn (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Loan growth: Management expects to see strong demand for loans as cross-border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers. UOB has guided mid single-digit loan growth for FY22e.

China exposure: UOB’s mainland China exposure stands at S$24.8bn or 5% of total assets, of which S$8.2bn is bank exposure and S$12.6bn is non-bank exposure. The top 5 domestic banks and 3 policy banks account for ~70% of total bank exposure while non-bank exposure’s client base include top-tier state-owned enterprises, large local corporates and foreign investment enterprises. Management has mentioned they have ~S$3bn in loans to mainland Chinese developers (1% of group loans) with low borrower concentration and they do not see any risk of it turning to NPL.

United Overseas Bank Limited – Let down by weaker fee and non-interest income

 

Results at a glance

Source: Company, PSR

The Positives

+ NII increased 1% QoQ, led by steady loan growth. NII grew 1% QoQ and 10% YoY, led by continued loans growth of 3% QoQ and 9% YoY, while NIM improved 2bps QoQ to 1.56%. Loan growth was led by corporate loans in Singapore, Greater China and Western countries, while QoQ loan growth was mainly from trade and term loans in Singapore. UOB has maintained its guidance of mid to high single-digit loan growth for FY22e.

+ Credit costs improved 10bps YoY. Total allowances fell by 11% YoY to S$178mn resulting in credit costs improving by 10bps YoY to 19bps. However, allowances were higher QoQ, mainly due to higher GP write-backs in the previous quarter (S$2mn in 1Q22 vs S$76mn in 4Q21). Total general allowance for loans, including RLARs, were prudently maintained at 0.9% of performing loans. UOB has maintained its credit cost guidance of 20-25bps for FY22e.

 

The Negatives

- Fee income fell 8% YoY. Fee and commission income fell 8% YoY, particularly from wealth and fund management due to the subdued market conditions. Fees, however, were stable QoQ as a strong demand for lending and advisory business propelled higher loan-related fees which were moderated by seasonally lower credit card spend and lower wealth and fund management fees due to the dampened market sentiment. UOB has lowered its guidance to high single-digit growth in fee income for FY22e (previously double-digit growth).

- Other non-interest income fell 70% YoY. Other NII fell 70% YoY due to the impact on hedges, resulting in lower non-customer-related trading and investment income while customer-related treasury income was stable. Other NII fell 43% QoQ as customer-related growth of 18% QoQ was more than offset by impact from hedges as interest rates rose and unrealized mark-to-market on investments.

- New NPAs of S$462k in 1Q22. New NPA formation increased by 219% YoY but fell 31% QoQ to S$462mn. Nonetheless, NPL ratio remained stable at 1.6%. 1Q22 NPA coverage is at 94% and unsecured NPA coverage at 216%, compared with DBS’ NPA coverage of 114% and unsecured NPA coverage of 193% for the same period.

Outlook

PATMI: UOB’s profit should continue to grow in 2022e on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% YoY. We continue to expect credit costs to come in below guidance of 20-25bps. There is earnings upside from writebacks of the S$1bn in management overlay of general provisions. Management has said that as it is being conservative, the intention is only to write-back some but not all of the GPs during the second half of 2022.

NIMs: Management expects improvement in NIMs only in the later part of 2022. UOB said that a 25bps rise in interest rates could raise NII by $150mn-200mn (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mn (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Loan growth: Asset quality is expected to stabilise, and management expects to continue to see strong demand for loans as cross-border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers. UOB has guided mid to high single-digit loan growth for FY22e.

Investment Action

Maintain ACCUMULATE with unchanged target price of S$35.70.

We maintain our ACCUMULATE recommendation with an unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation.

United Overseas Bank Limited – Strong fee income and stable interest income

 

The Positives

+ NII increased 5% QoQ, led by steady loan growth. NII grew 5% QoQ and 11% YoY, led by continued loans growth of 2% QoQ and 10% YoY, while NIM improved 1bp this quarter to 1.56%. Full-year NII increased 6% YoY led by healthy loan growth with NIM remaining stable. UOB has guided mid to high single-digit loan growth for FY22E.

+ Fee income grew 13% YoY. Fee and commission income grew 13% YoY, particularly from wealth and loan-related fees as investment and trade activities pick up. Fees, however, were stable QoQ as higher loan-related and credit card fees were moderated by seasonally softer wealth fees. Full-year fee income grew 21% YoY to a record S$2.41bn, driven by double-digit growth in most activities. UOB has guided double-digit growth in NII for FY22e.

+ GP write-back of S$76mn in 4Q21. GP write-back of S$76mn resulted in full-year GPs reducing by 90% YoY to S$95mn. Total allowances were at S$94mn in 4Q21 vs S$153mn in 3Q21. Credit costs on allowances dropped by 8bps QoQ to 12bps. Full-year credit costs were lower by 37bps at 20bps as FY20 included pre-emptive allowance for non-impaired loans. Total general allowance for loans, including RLARs, were prudently maintained at 1% of performing loans. UOB has guided credit cost of 20-25bps for FY22e due to lower SPs.

The Negatives

- Loans under moratorium remain unchanged. We believe these belonged to weaker corporates which still require loan relief. As the moratoriums begin to expire, we could see an uptick in NPLs in 2022. Management has mentioned that the loan moratoriums in Singapore have reduced to a negligible amount with the highest amount in Malaysia as the Malaysian government had extended the relief period until early 2022.

- New NPAs of S$670k in 4Q21. New NPA formation increased by 167% QoQ to S$670k mainly from several secured corporate accounts though no concentration risk was observed. Management has mentioned that they are confident that NPAs will be recovered as more than half are in Singapore and belong to one particular asset with the LTV below 50%. NPL ratio increased by 0.1% QoQ to 1.6%.

Outlook

PATMI: UOB’s profit should continue to grow in 2022 on the back of stabilising margins, stronger fees and lower provisions. We expect NII to expand 14% YoY. We continue to expect credit costs to come in below guidance of 20-25bps. There is earnings upside from writebacks of the S$1bn in management overlay of general provisions. Management has mentioned that as it is being conservative, the intention is only to write-back some but not all of the GPs during the second half of 2022. Full-year NPA coverage is at 96% and unsecured NPA coverage at 239%, compared with DBS’ NPA coverage of 116% and unsecured NPA coverage of 214% for the same period.

NIMs: Management expects improvement in NIMs only in the later part of 2022. UOB mentioned that a 25bps rise in interest rates could raise NII by $150mn-200mn (or NIM sensitivity of 4bps for every 25bps rate hike). Assuming rate hikes totalling 100bps this year, our FY22e NII can climb S$800mn (or 11%) resulting in an increase in our FY22e PATMI by 17%.

Loan growth: Asset quality is expected to stabilise, and management expects to continue to see strong demand for loans as cross border activities pick up. ASEAN loans growth is expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers. UOB has guided mid to high single-digit loan growth for FY22e.

United Overseas Bank Limited – Turning more competitive overnight

 

Details at a glance

 

 

The Positives

+ Gain scale in the four regional markets. With purchase of Citigroup’s consumer banking franchise, UOB is able to accelerate its growth by “five years” in these four countries, where UOB already has a significant presence in. UOB’s management has mentioned that it expects some slowdown in Singapore and North Asia, so this acquisition would position them to further grow their ASEAN presence.

+ EPS and ROE-accretive. The acquisition is immediately accretive to UOB’s EPS and ROE excluding one-off transaction costs, which would mainly be incurred over the first two years. If the one-off costs are to be included, the group would be EPS and ROE-accretive by 2023. UOB has also targeted a higher ROE of >13% and RORWA of ~2% by 2026 with this acquisition.

+ 50% dividend payout ratio to be maintained. With the purchase, UOB’s CET1 ratio has dropped by 70bps to 12.8%. Nonetheless, UOB has mentioned that it is “comfortable” with maintaining the current dividend policy of a 50% dividend payout ratio.

 

The Negatives

- One-off costs of S$700mn. The acquisition consists of one-off costs amounting to S$700mn. This includes a cost of S$200mn in tax and stamp duties, as well as expenses for integration and branding. Nonetheless, including these costs, UOB expects to be EPS and ROE-accretive by 2023.

 

Investment Action

Maintain ACCUMULATE with a higher target price of S$31.30, from S$29.00

We raise FY21e earnings by 3.8% as we increase NIM estimates for FY21e. We now assume 1.26x FY21e P/BV in our GGM valuation, up from 1.17x, as we raise our ROE estimates to 10.2%.

United Overseas Bank-Limited Stable recovery

The Positives

+ NII increased 2% QoQ, led by steady loan growth. Loans grew 3%, underpinned by large corporate loans. NIMs, however, eased 1bp this quarter to 1.55%. Excess liquidity has driven up competition for higher quality loans especially in the FIG (Financial Institutions Group) space. However, lower NIMs offset by fee income and thereby more attractive return on risk weighted assets.

+ Fee income grew 15% YoY. Fee and commission income grew 15% YoY, particularly from wealth and loan-related fees as investment and trade activities pick up. Fees, however, were 1% weaker QoQ as loan-related fees moderated after a record 2Q21.

+ Impairment provisions below our base case of 30bps in FY21e credit cost. Allowances were stable at 20bp. Allowances at S$163mn in 3Q21 vs. S$182mn in 2Q21. The QoQ drop reflected overall resilient asset quality and strong pre-emptive general allowances taken previously. Total general allowance for loans, including RLARs, were prudently maintained at 1% of performing loans.

The Negatives

- Loans under moratorium lowered to 4.8%. We believe these belonged to weaker corporates which still require loan relief. As the moratoriums begin to expire, we could see an uptick in NPLs in the remainder of FY21e. With the Malaysian government announcement of a blanket six-month moratorium until early 2022, the management expects an increase in NPLs among consumers and SMEs in Malaysia, with management expecting an uptick in the NPL ratio to about 1.7-1.8%. Around mid-20% of Malaysia loans are under loan relief (or S$7bn) and management has estimated the impact of the interest waiver scheme in Malaysia to be marginal at less than S$10mn.

 

Outlook

PATMI: UOB’s profit should recover in 2022 on the back of stabilising margins, stronger fees and lower provisions. We expect WM, loan-related and card fees to expand 22% YoY. We continue to expect credit costs to come in below guidance of 25bps. There is earnings upside from writebacks of the S$1bn in management overlay of general provisions. A condition to writeback will be the outlook of the pandemic. General provisions is expected to trend at 80 to 90 basis points of gross loans. This implies around S$450mn of writebacks.

China: UOB’s exposure to Mainland China remains at 6% of total assets, with bank exposure at S$10.7bn and non-bank exposure at S$11.9bn. Nonetheless, customers include mainly domestic and policy banks, top-tier SOEs, large local corporates and foreign investment enterprises. NPL ratio for non-bank Mainland China loans stable at 0.3%.

NIMs: Management only expects improvement in NIMs in the later part of 2022. Asset quality is expected to stabilise and management expects to continue to see strong demand for loans as cross border activities pick up. ASEAN loans growth are expected to be higher with some slowdown in Singapore and North Asia. Growth so far has been skewed towards the developed markets as the ASEAN economy remains muted, but management expects this to change in 2022 as the economy recovers.

Investment Action

Maintain ACCUMULATE with unchanged target price of S$29.00

We maintain our ACCUMULATE recommendation with an unchanged GGM target price of S$29.00. We are keeping our FY21e forecast unchanged. Our target price remains based on GGM (1.17x FY21e P/BV) valuation.

United Overseas Bank Limited – Asset quality clarity to mitigate earnings pressure

 

Positives

+ Gradual recovery in income

Fee and commission income of S$514mn was down 7% YoY but up 16% QoQ. As economic activity resumes across the region, we expect further improvements to near pre-COVID-19 levels.

+ Allowances on impaired loans remained low

SP recognised amounted to S$134mn or 19bps of loan book. This was lower than the 21bps or S$149mn a year ago. The remaining S$342mn of allowances for GP represented a 49bp credit cost, improving GP reserves to S$3,091mn (including RLAR) and non-performing asset coverage to 111% from 96% in Q2.

 

Negative

- NII fell 13% YoY as NIM was down 24bps to 1.53%

Low interest rates continued to affect NII, which dropped 13% YoY. Nevertheless, better liquidity management lifted NIM by 5bps QoQ from a low of 1.48% in Q2. We expect NIM to stabilise at 1.50-1.55% on the back of stable interest rates and funding conditions.

 

Outlook

Credit-cost guidance lowered on better insights on asset quality

Loans under moratorium fell from 16% of its loan book in Q2 to 10% in Q3. The fall came largely from Malaysia as loans in Malaysia exited moratorium at end-September.

The remaining loans under moratorium were mostly from Singapore and Thailand. The bank is confident it can manage asset quality, given that around 90% of them are secured. It has lowered credit-cost guidance from 50-60bps for this year to 30-40bps for FY21.

 

Investment Action

Maintain ACCUMULATE with higher target price of S$21.10 (previously S$20.40)

We hold our FY20e earnings estimate but raise FY21e forecast to reflect lower credit costs of 30-40bps. Our TP remains pegged to GGM (FY21e P/B of 0.89x).

United Overseas Bank Limited – Business headwinds weigh in

Positives

+ S$90mn of allowances recognised on impaired loans in 2Q20 represents only 13 bps of credit costs.

13 bps of SP recognised in the quarter is lower than the quarterly average of 20 bps recognised over the past four quarters. Remaining S$378mn of GP represents 54 bps of credit cost is within previous credit cost guidance of 50 – 60 bps in both FY20 and FY21.

 

Negatives

- NII fell 12% YoY in 2Q20 as NIM contracted to historical low of 1.48% from 1.81% a year ago (-33 bps).

Apart from the low interest rate environment experienced throughout the quarter, deposit growth of 7% YoY outpaced loans growth of 3% loans growth within the same period, exacerbating the sharp fall in NIM. NIM for 1H20 came in at 1.60%, down 20 bps YoY from 1.80% in 1H19, buffered by a better 1Q20 NIM performance of 1.71%.

Lag effect from re-pricing of deposits and cycling of liquidity from deposits into interbank assets will lift downward pressures on NIM in 2H20, as we expect NIM to recover from 2Q20 lows to 1.58% for the entire FY20.  

- Weakness observed across non-interest income.

Net fee and commission income saw all segments fall by double digit with the exception of fund management (-3% from S$59mn to S$57mn) in 2Q20. Weakness was most pronounced in credit card fees and wealth management fees, which fell by 37% YoY and 17% YoY from S$121mn and S$160mn to S$76mn and S$133mn respectively as business activity was heavily impacted during the Circuit Breaker period during 2Q20.

Other non-interest income also fell by 11% in 2Q20, affected by lower net trading income (-5% YoY from S$245mn to S$232mn).

 

Outlook

Semi-annual dividend of S$0.39 per share declared in compliance of 60% cap on FY19 dividends (S$1.30) by MAS.

Revised dividend amount provides an annualised S$0.78 in dividends for FY20. This represents a Scrip dividend will also be provided without discount as the bank does not feel the need to shore up additional capital while their CET-1 remains at healthy level of 14.0% from 14.1% observed in 1Q20.

We expect the bank to resume 50% payout ratio in FY21, which will see dividend resume to at least S$1.10 per share.

Recognition of allowances to remain at current run-rate over the next two years.

Previous guidance of 50 - 60 bps in credit cost per year (approx. S$1.5bn per year) represents S$350 – S$420mn of allowances per quarter for the next two years. Held together with RLAR of S$379mn, the bank should be well-hedged against asset quality deterioration from the COVID-19 pandemic.

 

Investment Actions

We maintain our ACCUMULATE recommendation with a reduced target price of S$20.40 (previously S$20.70).

We revise earnings estimate for FY20e downwards by 5% to reflect a slower recovery from business disruptions from COVID-19.

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