Managing Franchise, Asset Quality & Returns

• UOB (SGX:U11)’s 1Q20 PAT came in-line with Street expectations and marginally behind MKE. PPOP was flat despite a tougher operating environment supported by UOB’s diversified geographical presence. While we expect operating pressures to intensify going forward, its regional integration and strong USD liquidity should provide market share opportunities.
• We have raised credit charges and expect them to remain elevated till 2022E. Despite this, we estimate overall CET1 levels should sustain above minimum management comfort levels to preserve 50% dividend payout.
• Maintain BUY with lower Target Price of SGD22.42.

Executing in a Weak Environment

• Loans increased 3% y-o-y supported by SE & North Asian operations. The mix of China opening up from Covid-19 lockdowns and aggressive government measures to keep liquidity flowing may provide upside support for loan growth going forward.
• Similarly, increasing low-cost deposits and USD liquidity (62% 2019 LD ratio) should support market share opportunities regionally as well as better pricing power.
• We have lowered 2020-2021E opex by 6-8% to account for government wage support schemes, lower bonuses as well as cuts to travel, marketing as well as suspended tech projects. This should keep CIR flat y-o-y, we estimate.

Credit Charge Risks Remain on the Upside

• Management is guiding credit charges to reach 50-60bps yearly in 2020- 2021E.
• We have raised our own estimates to the upper end of guidance and expected elevated levels in 2022E given earlier cycles took 3-years to normalise. 15% of loans are SMEs with a majority in SG and MY where strong government support schemes exists, while Covid-19 frontline sectors account for 12% - exposure here is predominantly large corporates, according to Management.
• UOB’s conservative classification track record should drive gross NPLs reaching 2.5% in 2022E vs. 1.6% now.

Maintain BUY. New Target Price SGD22.42

• Our adjustments to credit charges, asset quality and opex sees us lowering 2020-2021E PAT by 5% each. Despite higher RWA from souring asset quality and lower retained earnings, we expect CET1 to remain above 13.5% - management’s minimum for a 50% dividend payout.
• We have lowered our multi-stage DDM (COE 9.7%, 3% terminal) Target Price to SGD22.42 (from SGD22.55).
• Maintain BUY.

Source: Maybank Kim Eng Research - 6 May 2020