• We had a conference call with UOB Malaysia’s CFO Chang Yeong Gung and senior economist Julia Goh to discuss business updates amid the MCO.
• Strong collateral levels (c.80% of total loans) and strong sponsors should mitigate significant asset quality deterioration, but NIM headwinds persist.
• Reiterate HOLD on UOB (SGX:U11), with a GGM-based Target Price of S$19.04.

UOBM Projects Gradual GDP Recovery as Economy Reopens

• UOB Malaysia (UOBM) is core to UOB Ltd (SGX:U11)’s operations — accounting for 11% of the group’s gross loans and 12% of the group’s pre-tax profit in FY19.
• We hosted UOBM’s CFO, Chang Yeong Gung, and senior economist Julia Goh for a conference call with institutional investors. Key topics of discussion comprised credit quality impact from business closures due to Malaysia’s movement control order (MCO) and NIM impact from lower benchmark rates.
• The bank expects Malaysia’s GDP growth to reverse into positive territory in 4Q20, staging a gradual recovery into FY21F, from the 3-3.5% contraction forecasted for FY20F. The construction sector is likely to remain weak in the medium term. The pick-up in trade activity over the past month has been encouraging, although significant growth may be limited as long as borders stay shut.
• UOBM’s NIMs could compress by 10-15bp in FY20F as asset repricing outpaces funding cost reductions – in line with the industry.

Management Expects Credit Costs to Rise to 50-60bp in FY20F

• Taking into account potential asset quality headwinds once Bank Negara Malaysia’s (BNM) 6-month loan moratorium lifts by end-Sep 20, UOBM expects credit costs to rise to 50-60bp in FY20F (FY19: 30bp); these expectations include management overlays. This will likely stem from its corporate portfolio, although exposures to vulnerable sectors (eg. hospitality, transport, travel-related) accounted for a relatively manageable 3% of UOBM’s gross loans in 1Q20. Notably, UOBM’s credit cost expectations are broadly in line with the group’s estimates of 50-60bp p.a. over FY20-21F.
• Casting the net wider to include consumer discretionary, transportation and oil and gas sectors, its exposure would amount to a larger 10% of its loan base, of which 70% are secured by collateral.
• Separately, 80% of UOBM’s total loans is secured. The bank also boasts strong sponsors to back weaker credit exposures, mitigating asset quality deterioration.

Better Delinquency Rates Over Apr-May 20 From Excess Liquidity

• To reiterate, BNM’s loan moratorium is automatically applied on retail loans across all financial institutions (FIs), whereas deferments/restructuring and rescheduling (R&R) for corporate exposure are assessed by their respective FIs on a case-to-case basis. Just over 60% of the bank’s total loans has chosen to remain opted-in for the moratorium — we understand that this proportion is comparatively lower than the industry average. The bank proactively engages with its corporate clients (including conducting site visits) to identify cashflow issues, if any, and R&Rs.
• UOBM sees improving delinquency rates over Apr-May 20 as repayments improved, possibly due to excess liquidity amid the MCO and loan moratorium. The bank has noted higher deposit levels over the past quarter, particularly in current and savings account deposits (CASA, 29.7% of total deposits in FY19).
• Currently, the bank is focusing on proactively working with customers in assessing their liquidity conditions to restructure/ reschedule outstanding exposures if necessary.

Source: CGS-CIMB Research - 4 Jul 2020