United Overseas Bank Limited – Asset quality clarity to mitigate earnings pressure November 9, 2020 524

PSR Recommendation: ACCUMULATE Status: Maintained
Last Close Price: S$26.18 Target Price: S$21.1
  • 3Q20 earnings of S$668mn brought 9M profit to S$2.23bn, 74% of our FY20e estimate – in line. Results were in line with consensus as well.
  • Net interest income fell 13% YoY to S$1.47bn as NIM was compressed by 24bps.
  • Fee and commission income improved 16% QoQ as business recovered from CB, offsetting a 24% QoQ drop in trading income.
  • Credit cost of 68bps brought GP reserves past S$3bn to provide a post-moratorium relief buffer.
  • Maintain ACCUMULATE with higher GGM TP of S$21.10 (previously S$20.40). We hold FY20e estimates but raise FY21e by 15% to factor in expected lower allowances.



+ 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.



– 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.



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).

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About the author

Profile photo of Tay Wee Kuang

Tay Wee Kuang
Research Analyst
Phillip Securities Research

Wee Kuang currently covers the Banking and Finance as well as the Healthcare sector. Wee Kuang has had 2 years of experience as a Trading Representative (TR) before his current stint as an Analyst. As a TR, Wee Kuang developed a keen interest in investor education and hopes to be able to provide better insights for investors in his current role.

Wee Kuang graduated with a Bachelor of Business Management (Cum Laude) with major in Finance and Operations Management in 2017.

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