• UOB (SGX:U11)'s 1Q20 net profit of SGD855m was in line with expectations, accounting for 24% and 23% of our pre-results and consensus’ 2020 forecasts. We lower our sustainable ROE assumption to 8.6% from 10.3% – in line with 1Q20’s 8.8% and Singapore’s 2020 GDP contraction.
• Keep NEUTRAL with new GGM-derived SGD19.40 Target Price from SGD20.00, 3% downside offset by 5% yield, based on 0.83x 2020F P/NBV.

UOB 1Q20’s Net Profit 19% Y-o-y Fall Was Mainly Due to Provisions

• Pre-provisioning operating profit was sequentially flat, as expansion in net fee income offset NII contractions. However, provisions during this period doubled q-o-q, which led to the y-o-y net profit decline.
• We cut our UOB's FY20F earnings by 13%, mainly due to the increase in provisions.

NIM Downside Going Forward

• UOB's 1Q20 NIM of 1.71% was 5bps narrower q-o-q due to lower interest rates. Gross loans grew 4% q-o-q. These led to a 3% q-o-q decline for NII. Management guided for continued NIM pressure, as interest rates have fallen and UOB’s strategy is to lend more to lower-yield, high-quality borrowers.
• The bank is working to lower its funding costs, and we forecast FY20 NIM of 1.66% vs FY19’s 1.78%. Management guides for positive loan growth, as UOB continues to lend to high-quality borrowers – we forecast an FY20 loan growth of 2%.

Fee Income Expanded 8% Q-o-q

• UOB's fee income expanded 8% q-o-q, driven by loan-related and wealth management fees, while credit card fees fell. Strength was seen in January/February, but a slowdown was evident in March. Management guided for weak fee income in 2Q20.

UOB Guided for FY20-21 Provisions of 50-60bps Pa of Loans

• UOB's 1Q20 credit cost was 36bps, up 12bps q-o-q. An additional SGD546m of allowance was made in 1Q20, with SGD286m in impairment charges to P&L during this period, with the balance for pre-emptive regulatory loss allowance reserves.
• We forecast an FY20 NPL ratio of 2% vs 1Q20’s 1.6%, and raise our full-year provisions 40% to SGD1.39bn, or 53bps credit costs.

Capital Ratios Remain Robust

• 1Q20’s CET1 capital adequacy ratio (CAR) was 14.1%, ie marginally lower than 4Q19’s 14.3%. We expect UOB's CET1 CAR to fall marginally over the next few quarters. Management is comfortable with a lower CET1 CAR band of 12.5-13%.

FY20F Dividend Yield of 4.5%

• We forecast an FY20 dividend of SGD0.90/share – based on a 50% payout ratio – vs FY19’s SGD1.30. UOB’s historical payout ratio is between 35% and 50%.
• The target 2020F P/NBV of 0.83x is 3SD below the 5-year average of 1.16x. Given the earnings headwinds, we do not believe UOB will trade close to its historical P/NBV in the near term.

Source: RHB Invest Research - 6 May 2020