• Stay NEUTRAL with a new GGM-derived SGD20.00 Target Price from SGD25.20, 9% upside with 6% yield, based on 0.85x 2020F P/NBV.
• We lowered our sustainable ROE assumption to 10.3% from 11.2%, as we cut FY20F earnings on lower NIM and higher provision assumptions. Our NIM forecast was lowered due to the 15 Mar cut in the federal fund rate (FFR).
• Travel restrictions globally due to COVID-19 would slow economies and raise provisioning requirements. However, given UOB (SGX:U11)’s more conservative lending, it is our preferred pick within the banking sector.

FFR Cut on 15 Mar Will Lower the SIBOR Going Forward

• The US Federal Reserve cut the FFR twice in March (150bps in total) to the current upper bound of 0.25%. The 3-month SIBOR has fallen to the current 0.995% vs February’s 1.69% average. There may be more downside for the 3-month SIBOR.
• We cut our FY20F NIM to 1.68% from 1.73% to factor in the two FFR cuts – note that UOB recorded NIM of 1.71% in FY13 and FY14 when the FFR was close to zero.

We Forecast a FY20 Loan Contraction

• Given the global travel restrictions and sharp fall in crude oil price, investments are likely to be scaled back sharply. Malaysia accounts for 11% of UOB’s FY19 global loans, and we may see soft loans from there. We assume an overall loan contraction of 2% in FY20 for the bank.

Provisions to Move Up

• UOB de-risked by reducing its North Asia loans in 4Q19, and this should lead to less deterioration in asset quality. Its O&G loans which have weaker asset quality have already been largely provided for. However, its ASEAN loans could see asset quality deterioration as economic growth stalls. As a result, we raise our FY20F NPL ratio to 1.9% (from 1.8%) and increase our provisions for this period by 19% to SGD990m, or 39bps credit cost.

We Cut FY20F Net Profit by 9% to SGD3.53bn

• We cut earnings forecasts further to factor in the recent developments. Even based on our revised numbers, there is further downside to earnings if the COVID-19 pandemic worsens globally.

UOB’s FY20F Yield of 6% May be High, But the Risk of Falling Dividends Cannot be Ruled Out

• Based on our SGD1.10/share dividend for FY20F (50% payout ratio), UOB’s yield is 6%. However, there is a risk that a prolonged economic disruption could lead to dividends coming in lower than our expectations.
• Our Target Price is based on 2020F P/NBV of 0.85x, which is lower than the 5-year average of 1.17x. Our target P/NBV is close to the low of 0.92x recorded during the Global Financial Crisis.
• We believe UOB could see short-term price downsides (due to the headwinds mentioned above) before rebounding.

Source: RHB Invest Research - 20 Mar 2020