• We think UOB (SGX:U11) could be a relative defensive play on the back of supply-chain disruption across China. That said, 25-30bp as base case provisions in FY20.
• Weakest NIM performance amongst peers at -4bp y-o-y in FY19. UOB guides 5bp narrowing in FY20, but we expect slightly less on sustained S$ rates.
• Reiterate ADD with lower GGM-based target price of SGD28.39. Asset quality has been well-managed through the cycle; we expect this to continue amid outbreak.

De-risked SG and HK Portfolio in 4Q19; Expect 3% Growth in FY20F

• UOB (SGX:U11) registered a 1bp q-o-q NIM compression in 4Q19 to 1.76%; FY19 NIM dipped 4bp y-o-y to 1.78% as loan yield contraction (-19bp from peak in 2Q19) outpaced deposit cost savings (-15bp).
• Deliberate de-risking (particularly North Asia and SG) resulted in loan contraction of 2% in 4Q19. Although full-year FY19 loan growth was reduced to 3.7%, this proved helpful in defending margins.
• UOB guides for further NIM compression 5bp in FY20 as regional central banks cut policy rates. Loan growth likely to be moderate in FY20F (below 5%) – most of this should come from SEA as the bank stays selective on credits. We cut FY20-21F loan growth to 3-5% following regional GDP growth revisions.

We Expect Wealth Income to Sustain in FY20, Cushioning Negativity

• UOB's 4Q19 earnings were mainly supported by sustained wealth income. Trading income was affected by lower volumes (-18% q-o-q/+48% y-o-y) while loan-related fees (-40% q-o-q/-25% y-o-y) were capped by deliberate loan book de-risking. We expect wealth income to be the key earnings driver going forward, offsetting some of the NIM negativity in FY20F.
• UOB’s recognition of S$77m in fees per year from Prudential (renewal of bancassurance partnership for 15 years) will support this figure. We are optimistic in trading and investment gains holding steady at the FY19 run-rate, cushioning the weaker growth outlook.

First-order Impact of Covid-19 at 10% (S$27bn) of Loan Book

• Alongside the reduced growth in tourist-dependent economies (e.g. TH, SG), UOB cautions that credit costs could trend up by 25-30bps in FY20 (FY19: 16bp or S$475m) due to the virus outbreak. Consumption segments directly impacted (i.e. hospitality, aviation, F&B, retail trade, etc.) amount to 10% (or S$27bn) of its loan base; we believe the bulk of these comprise larger corporates.
• Specifically, most of UOB’s S$33bn HK exposure comprise wholesale clients where the bank had input additional macro overlays on assumptions of a slowdown. Vulnerable industries here amounted to a small S$5bn in 4Q19. We think virus-related impairments should peak over 2Q-3Q20F and normalise thereafter; we pen in 23bp credit costs in FY20F.

Reiterate ADD With Lower Target Price; 50% Dividend Policy Maintained

• UOB maintains its 50% dividend payout ratio policy, with a caveat of a min. 13.5% CET-1 ratio; we expect a sustained S$1.30/share in FY20F.
• UOB has traditionally maintained a good grip on asset quality management through the cycle (averaged 30bp in FY15/16 O&G crisis vs. peers’ 32-55bp), and we expect this to continue in light of Covid-19.

Source: CGS-CIMB Research - 23 Feb 2020