PhillipCapital is revising UOB’s FY2020F earnings down 5% to reflect business disruptions from Covid-19, as the bank posted 2Q2020 earnings 18% below previous estimates last week. PhillipCapital analyst Tay Wee Kuang is maintaining “accumulate” on the bank with a reduced target price of $20.40 from $20.70.
“2Q2020 earnings of $703 million was 18% below our previous estimates of $857 million due weaker-than-expected fees income amidst Circuit Breaker period in the quarter,” says Tay in an August 11 note.
Net interest margin (NIM) fell 33 bps y-o-y to a historical low of 1.48% in 2Q2020 from 1.81% in 2Q2019 on low interest rates and huge inflow of deposits. Net interest income fell 12% in 2Q2020 on full impact interest rate cuts on NIM.
Net fee and commission income saw all segments fall by double digits with the exception of fund management, which fell 3% from $59 million to $57 million in 2Q2020.
Weakness was most pronounced in credit card fees and wealth management fees, which fell by 37% and 17% y-o-y to $76 million and $133 million respectively as business activity was heavily impacted during the circuit breaker period.
Other non-interest income also fell by 11% in 2Q2020, affected by lower net trading income, which fell 5% y-o-y from $245 million to $232 million.
That said, $90 million of allowances recognised on impaired loans in 2Q2020 represents only 13 bps of credit costs, a bright spot this quarter. 13 bps of specific provisions recognised in the quarter is lower than the quarterly average of 20 bps recognised over the past four quarters.
The remaining $378 million of general provisions represents 54 bps of credit cost, and is within the previous credit cost guidance of 50 – 60 bps in both FY2020 and FY2021.
On dividends, UOB declared a semi-annual dividend of 39 cents per share, in compliance with a 60% cap on FY2019 dividends ($1.30) announced by the Monetary Authority of Singapore.
“We expect the bank to resume 50% payout ratio in FY2021, which will see dividend resume to at least $1.10 per share,” says Tay.
“Previous guidance of 50 - 60 bps in credit cost per year (approximately $1.5 billion per year) represents $350 – $420 million of allowances per quarter for the next two years. Held together with RLAR [regulatory loss allowance reserve] of $379 million, the bank should be well-hedged against asset quality deterioration from the Covid-19 pandemic,” says Tay.
As at 10.15am, shares in UOB are trading 3 cents lower, or 0.15% down, at $19.62.
