Better NPL Outlook, But Upside to Yields Uncertain

• UOB (SGX:U11)’s 3Q20 PAT was behind MKE & in-line with Street. Lowered credit charge guidance and limited NPL formation despite moratoriums unwinding are positive developments. Nevertheless, the operating environment remains uncertain and low NIMs are likely to continue.
• We believe improved PAT from lower provisions may not flow through to higher dividends in 2021E given regulatory moratoriums. This may cap yields in the near term.
• We have raised Target Price to SGD21.24, but maintain HOLD.

Better Outlook for Asset Quality

• At 68bps, 3Q20 credit charges were similar to 2Q20 – but 72% was cautionary GP. Management claims the GP build up is to cover potential risks in 2021E as well. That said, 2020-2021E credit charge guidance has been lowered to 100bps (from a high of 130bps earlier).
• New NPL creation fell 43% q-o-q and upgrades/recoveries increased 71%. Management claims the expiry of Malaysian moratoriums have not exposed much weakness.
• UOB has been doing bottom up analysis of its portfolios under relief and expects NPL formation to be slower than initially expected. As a result, we have lowered UOB's 2020E-2022E credit charges by 12-35% and NPA balances by 15-29%.
• But, given uneven economic recovery, downside risks remain.

Operational Uncertainty Remains

• UOB's NIMs continue to be pressured in 3Q (-24bps y-o-y). Management claims it may have bottomed, but we believe recovery may be some way off given expectations of lower policy rates regionally.
• We expect loans to see some improvement in 2021E (+7% y-o-y) led by SE Asian markets.
• Overall, regional recovery in 3Q20 has been lacklustre with PPOP rising 4% q-o-q in Singapore & ASEAN, while North Asia saw a 14% q-o-q decline. Continued risks of regional COVID-19 lockdowns and travel bans may prolong recovery visibility.
• We have lowered UOB's 2020E PAT by 4% but raise 2021-22E by 2-8%.

Dividend Caps in 2021E? Maintain HOLD

• The elephant in the room is whether regulatory dividend caps (60% of 2019 DPS) will be extended into 2021E. We believe given the infancy of macro recovery and the need to preserve confidence in systemic capital and liquidity, there is a high probability it is extended. As a result, UOB's 2021E operational improvements may not necessarily translate to dividend yield.
• We have rolled forward our multi-stage DDM (COE 9.7%, 3% terminal) to 2021E and raised UOB's target price to S$21.24. With 9% upside, maintain HOLD.

Source: Maybank Kim Eng Research - 4 Nov 2020