• 3Q19 revenue and PATMI were in line with our estimates.
• NIM fell 4bps YoY and QoQ to 1.77% due to declining interest rates and competitive pricing environment. NIM expected to contract 5-10bps in FY20.
• Loans growth remained strong at 8% YoY and LDR% healthy at 89% (3Q18: 86%).
• Fee income surged 14% YoY due to strong wealth management, credit cards and loan-related fees growth.
• Allowances rose 53%, to provide for impaired assets. Overall asset quality stable with NPL ratio healthy at 1.5% (3Q18: 1.6%).
• Maintain ACCUMULATE with a lower target price of S$27.80 (previously S$28.60). Lower TP as we reduce FY20e earning by 2.3%. Our FY20e NIM lowered by 4bps to 1.74% and FY20e credits costs increased by 4bps.

Positives

+ Loans growth remained strong at 8% YoY. Despite a contraction in housing loans for the second consecutive quarter at -1% YoY, UOB is maintaining market share in new bookings with the majority originating from the secondary refinancing market. Geographically, loans growth was from Singapore (+6% YoY), Thailand (+16% YoY) and Greater China (+15 YoY). Looking forward, loans growth is expected to slow from current levels to mid-single-digit for FY20 due to global headwinds dampening business sentiment. We forecast FY20 loans growth of 5.3% YoY.

+ Fees income surged 14% YoY due to strong wealth management, credit cards and loan-related fees growth. AUM rose 10% YoY, reaching S$122bn on the back of rising affluence across SEA, with 60% originating from overseas customers in Southeast Asia. Wealth management was driven by net new money inflows into unit trusts and bancassurance, and from FX contracts. The slow and steady rise in UOB’s AUM proved to be a defensive trait in today’s volatile environment.

Negatives

– NIM fell 4bps YoY and QoQ to 1.77% due to declining interest rates and competitive repricing environment. UOB guided FY20 NIM to contract 5-10bps due to internal projections of 30-50bps decline in benchmark rates for the whole of FY20. However, the impact of Fed rate cuts could be cushioned with adjustments to funding costs to match the pricing charged on loans. Hence, we lower our forecast for FY20e NIM by 4bps to 1.74%, 6bps lower than our unchanged FY19 NIM forecast of 1.80%.

– Allowances rose 53%, driven by impaired loans. Asset quality remains benign at the moment and full year credit costs is expected to remain within guidance of 20-25bps. However, management expects a slight increase in ECL in FY20 due to macro weakness which translates into an uptick in general provisions as UOB update their ECL model. FY20 credit costs is not expected to exceed 25bps. NPL ratio for this quarter remains healthy at 1.5% (3Q18: 1.6%).

Management expects business sentiments to be weighed down by global headwinds but remain optimistic in the medium to long term in Southeast Asia as businesses diversify in SEA.

Investment Actions

Maintain ACCUMULATE with a lower target price of S$27.80 (previously S$28.60).  Lower TP as we reduce our FY20e net profit by 2.3%. We shaved off 4bps of our NIM to 1.74% and raised credits costs assumption by 4bps. Our TP is based on target price-to-book of 1.3x, derived from the Gordon Growth model (ROE assumption: 11%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%). We forecast FY20 DPS of $1.27, giving a 4.8% dividend yield support.