Simons Trading Research

UOB 3Q20 - A Reversal in NIM Trends

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Publish date: Wed, 04 Nov 2020, 11:32 AM
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Simons Stock Trading Research Compilation
  • UOB (SGX:U11)’s net profit of S$668m was in line with our and consensus forecasts. Credit costs of 68bp were in line with our expectations; most were due to GP.
  • NIM surprised with a 5bp q-o-q expansion in 3Q20 vs. the street’s expected 2-3bp. This was due to lower funding costs as expensive deposits rolled off.
  • Loans under moratorium reduced to 10% of loans. We forecast positive share price momentum buoyed by NIM and better moratorium trends.

UOB 3Q20: Better Wealth Fees But Offset by Weaker Treasury Income

  • UOB’s 3Q20 core net profit of S$668m (-5% q-o-q/-40% y-o-y) was in line with our/consensus expectations.
  • On balance, total income was flattish as the rise in NII and fee income offset weaker q-o-q treasury income. Fees (+16% q-o-q/-7% y-o-y) were boosted by some recovery in credit card spending (+25% q-o-q/-25% y-o-y) and better wealth management fees (+41% q-o-q/+3% y-o-y). Treasury income declined 9% q-o-q and 1% y-o-y due to a greater recovery from market volatility in the previous quarter.
  • CTI improved slightly to 44.6% (2Q20: 46%) due to lower staff costs (-5% q-o-q/-16% y-o-y). Other opex held steady q-o-q.

Stronger-than-expected NIMs. Credit Costs in Line

  • UOB's NIMs rose 5bp in 3Q20 to 1.53% (2Q20: 1.48%), above the street’s expected 2-3bp expansion. This comes on the back of lower funding costs as more expensive deposits built-up earlier this year rolled off. The bank’s CASA consequently rose to a higher 51% in 3Q20 (FY19 average: 45.4%).
  • Although average 3MSIBOR/SOR fell 29/23bp in 3Q20 as 3MLIBOR dipped 34bp, the 3Q20 decline in benchmark rates was far less severe than the 83bp/86bp/93bp contractions seen in 2Q20.
  • Credit costs came up to 68bp in 3Q20, flattish q-o-q and in line with expectations. These consist of 19bp specific provisions (SP) and 49bp general provisions (GP) (pre-emptive buffers). As a result, NPA coverage (including RLAR) rose to 111% in 3Q20 from 96% in 2Q20.
  • LDR rose to 88% (2Q20: 85.8%) as loans grew 1.3% q-o-q in 3Q20 (2Q20: 0.7% q-o-q).
  • NPL ratio improved to 1.5% (2Q20: 1.6%) as new NPA formation stayed low due to regional moratoriums still being in force.
  • CET-1 ratio held steady at 14.0% (2Q20: 14%).
  • 3Q20 ROE was lower at 6.9% (2Q20: 7.1%, FY19: 11.6%).

Moratorium Update

  • Group loans under moratorium shrank from 16% in July 2020 to 10% in October 2020.
  • We believe the asset quality impact is manageable. The bulk of exposures under moratorium is secured with collateral or government guarantees.

Source: CGS-CIMB Research - 4 Nov 2020

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