• The amount of moratorium loans is expected to decline after the six-month moratorium on repayment for ringgit-denominated loans expired in Sep 20 (Malaysia accounted for 50% of moratorium loans).
• Asset quality is benign and more resilient than previously expected.
• UOB's management’s previous estimation that 10-15% of moratorium loans would become NPLs is likely to be revised lower.

Manageable Impact From Loans Under Moratorium

• United Overseas Bank (UOB, SGX:U11) has supported more than 1m individual and business customers across the region with loan moratoria and other relief measures that amount to about 16% of total loans.
  • For businesses, they include moratorium for existing secured loans and fresh liquidity in working capital and temporary bridging loans.
  • For individuals, UOB has provided moratorium for residential mortgage borrowers and lowered interest rates on unsecured credit. About 90% of these loans are secured, mainly by properties.

Expect Asset Prices to Remain Stable

• UOB's management compared the impact from the Global Financial Crisis (GFC) against that from the COVID-19 pandemic.
  • During the GFC, banks suffered stiff credit costs of 150bp in one year due to the severe credit crunch and correction in asset prices across the board for many asset classes.
  • For the COVID-19 pandemic, management expects credit costs of 100-130bp over two years (S$2b-3b) due to proactive fiscal and monetary policies across the region and around the world. Management does not expect a drastic correction in asset prices due to abundance of liquidity.

Moratorium Loans Expected to Decline

• The amount of moratorium loans is expected to decline after the six-month moratorium on repayment for ringgit-denominated loans expired in Sep 20 (Malaysia accounted for almost half of total moratorium loans). Some Malaysian customers were financially stable but were automatically included for loan moratorium.
• The volume of customers seeking extension is not expected to be significant given its focus on affluent customers.

Asset Quality Resilient

• UOB's management has provided weekly updates to the Monetary Authority of Singapore on a loan-by-loan basis. Thus far, asset quality is benign and more resilient than previously expected.
• Management’s previous estimation that 10-15% of moratorium loans would become NPLs is too conservative and too high. Management is likely to revise the estimation lower. However, management has maintained guidance on credit costs at 50-65bp for both 2020 and 2021.

Anticipate Pick-up in Fee Income

• Fees are expected to rebound moderately in 2H20 as economies gradually reopen post lockdown. UOB's management has observed a pick-up in contributions from wealth management and credit cards since June, although travel related activities are expected to remain weak.
• Customer activities for wealth management have increased with improvement in market sentiment and risk-on appetite to invest in recovery plays. There is healthy growth in bancassurance sales, especially for health insurance policies, driven by heightened risk aversion caused by COVID-19 pandemic.
• Contribution from credit cards recovered as consumer spending normalises post lockdown. Singaporeans appear to have reallocated their budget for overseas holidays to online and offline shopping.

NIM Expected to Have Bottomed

• Management expects some upside in NIM after hitting a trough in 2Q20. UOB has trimmed surplus high-cost fixed deposits.

Source: UOB Kay Hian Research - 19 Oct 2020