• UOB's 2Q20 net profit of SGD703m was in line with expectations, with 1H20 net profit accounting for 51% of both our and consensus’ pre-results 2020F.
• We lower our sustainable ROE assumption to 8.5% from 8.6% – closer to 1H20’s 8% and given Singapore’s 2020 GDP contraction.
• Keep NEUTRAL with new GGM-derived SGD18.80 Target Price from SGD19.40, 3% downside offset by 4% yield, based on 0.8x 2020F P/NBV.

UOB’s 2Q20 Net Profit 40% Y-o-y Fall Was Mainly Due to a Surge in Allowances

• UOB (SGX:U11)'s 2Q20 pre-provisioning operating profit was down 16% y-o-y, due to weak NII from NIM compression. 2Q20 provisions was 8x that of 2Q19, leading to the y-o-y net profit decline.
• We cut our FY20-21 earnings forecasts by 8-10%, mainly due to lower NII arising from NIM compression.

NIM Was Squeezed

• UOB's 2Q20 NIM of 1.48% was 23bps narrower q-o-q due to lower interest rates. Loans grew 1% q-o-q. These led to a 9% q-o-q decline for NII. Management guided for 2-3bps NIM widening (from 2Q20 level) per quarter for 3Q20 and 4Q20 – due to lower cost of funds. We forecast FY20 NIM of 1.55% vs FY19’s 1.78%. We forecast a mild FY20 loan expansion of 4%.
• 2Q20 fee income contracted 14% q-o-q – due to wealth management (26% share) falling 34% sequentially, and credit card (15% share) dropping 28%.

UOB Guided for FY20-21 Cumulative Provisions of 120-130bps of Loans

• 2Q20 total credit cost was 67bps, up 31bps q-o-q – of which 54bps was for non-impaired loans to cushion anticipated future asset quality weakness. As the loan moratorium expires in Dec 2020, we believe the NPL ratio could rise more significantly.
• Management guided for a peak NPL ratio of 3-3.2%, and we forecast Dec 2021 NPL ratio at 2.7% (after peaking in 2Q-3Q21). Management guided for 3Q20 and 4Q20 provisions to be close to the 2Q20 level.

Capital Ratios Remain Robust

• 2Q20’s CET1 capital adequacy ratio (CAR) was 14%, marginally lower than 1Q20’s 14.1%. Management guided for CET1 CAR to fall marginally over the next few quarters, but expects it to remain above 12.5%.

FY20F Dividend Yield of 4%

• We forecast UOB's FY20 dividend of SGD0.78/share – in line with the Monetary Authority of Singapore’s (MAS) directive to cap FY20 dividend at 60% of FY19’s SGD1.30. MAS has not indicated any guidelines for FY21 dividends, and we assume an increase to SGD0.90/share.
• The target 2020F P/NBV of 0.8x is 3SD below the 5-year average of 1.15x. 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 Aug 2020