• UNITED OVERSEAS BANK (UOB, SGX:U11) has lowered interest rates for fixed deposits (52% of total deposits) from 1.8% to 1.5% in 3Q19. While NIM could be resilient in Singapore, overall NIM could be dragged marginally lower due to lower policy interest rates in the region.
• UOB launched its mobile-only digital bank TMRW in Thailand in March. It targets 3m-5m digital customers in five markets over the next five years. The objective is to increase engagement with customers through more transactions, thereby creating a sticky relationship.

What’s New

Mild NIM compression.

• The 3-month SIBOR and SOR were stable at 1.88% (3Q19: -12bp) and 1.68% (3Q19: -15bp) respectively as at end-Sep 19 despite two rate cuts from the Fed. UOB has cut mortgage rates by 20bp to about 2.0% and fixed deposit rates from 1.8% to 1.5% in 3Q19. While NIM could be resilient in Singapore, overall NIM could be dragged marginally lower due to lower policy interest rates around the region.
• Management expects mid-to high-single-digit loan growth for 2019 due to a strong pipeline from the manufacturing and real estate (commercial properties) sectors.

Less exposure to Hong Kong than peers.

• UOB has only one branch focusing on wholesale banking in Hong Kong, which accounted for S$12b or only 4.4% of total loans. The exposure to Hong Kong is primarily in the real estate, hospitality and consumer discretionary sectors. Real estate loans for commercial buildings accounted for S$8b or three quarters of its exposure to Hong Kong. Expected credit loss (ECL) is not expected to be significant due to low LTV ratio of 53%.

Benefitting from cross-border flows.

• Cross-border revenue grew 19% y-o-y in 5M19 and accounted for 27% of Group Wholesale Banking (GWB) income, tapping on intra-regional flows within Southeast Asia and from China to Southeast Asia. UOB’s FDI Advisory Unit, which was established in 2011, contributed greatly to the success. The team helps customers liaise with regulatory bodies and government agencies. They also help customers set up their local supply chain by linking them with suppliers and distributors.

Engaging customers with TMRW.

• In Mar 19, UOB launched mobile-only digital bank TMRW, targeting millennials in Thailand. The focus is engaging customers through regular transactions. Thus far, 40% of TMRW’s customers transacted 1-2 times per month. Management will closely monitoring net promoter score and engagement index for TMRW.
• TMRW currently provides deposit accounts and credit cards. UOB plans to introduce unsecured personal loans (small-ticket) and wealth management products as well. It is exploring tie-up with telcos to provide instalment plans for mobile subscribers to purchase smartphones. UOB targets 3m-5m customers for TMRW in five markets over the next five years.

Slight increase in credit costs.

• The slowdown in the macro economy could result in some accounts migrating from stage 1 (12-month expected credit loss) to stage 2 (lifetime expected credit loss), which will lead to higher general provisions. SMEs would be more vulnerable but there is no concentration in any specific sectors. Thus, there could be slight increase in UOB’s credit costs in 2H19.

Committed to maintaining dividend payout ratio

• UOB is committed to maintaining dividend payout ratio at 50% if CET-1 CAR stays above 13% and it achieves RORWA of 1.60-1.65%.

Source: UOB Kay Hian Research - 10 Oct 2019