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UOB share price hits two-week low after CEO gives soft 2020 outlook

The lending group's share price fell as much as 0.62% after its CEO warned of 'challenging times ahead' for the business.

Source: Bloomberg

CEO guidance: ‘downward pressure in customer margin’

United Overseas Bank (UOB) Limited, Singapore’s third largest bank by market capitalisation, has cautioned shareholders that ‘many signs point to more challenging times ahead including the unfolding impact of the COVID-19 epidemic’.

Deputy Chairman and CEO Wee Ee Cheong had stated during the group’s Q4 FY2019 earnings call that he expects there to be ‘downward pressure in customer margin’ alongside ‘slight uptick in credit costs’, given that Mainland China accounted for S$30 billion or 7% of the group’s total assets as of 31 December 2019.

‘To help cushion its impact on our customers, we have implemented a range of relief assistance measures for affected companies, especially small- and medium-sized enterprises, and mortgage relief for homeowners,’ said Wee.

‘We will continue to invest in our capabilities, including digital, and seize the opportunities arising from the shifting economic environment. It will enable us to emerge stronger from these trying times and to scale up our franchise across the region.’

The full extent of COVID-19’s impact on company profits will only be reflected in the next financial report.

‘Record’ annual net profit in 2019

For now, the lender has managed to achieve 8% higher post-tax net profit for the full 2019 fiscal year of S$4.34 billion as compared to FY2018. This is in line with the average estimates of analysts surveyed by Refinitiv.

Total income for the full year also rose 10% to cross the S$10 billion mark, led by healthy growth in client franchise as well as an improvement in trading and investment income. Return on equity increased to 11.6%.

Zoning in on Q4 itself, net earnings was 10% higher than the fourth quarter of 2018, on the back of growth in net interest income and trading and investment income. Net earnings was 10% lower than the third quarter of 2019, given the ‘seasonally slower’ fourth quarter.

The group also stated that it maintained its strong capitalisation, a well-diversified funding base and solid balance sheet position. The loan-to-deposit ratio was stable at 85.4% and the Common Equity Tier 1 ratio was robust at 14.3%.

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Total shareholder dividend payout of S$1.30 for 2019

In view of this, the Board of Directors has recommended a final dividend of S$0.55 per share and a special dividend of S$0.20 per ordinary share, ‘in appreciation of the continued support from shareholders’.

Together with the interim dividend of S$0.55 per share, the total dividend for the financial year ended 31 December 2019 amounts to S$1.30 cents per ordinary share. This represents a payout ratio of approximately 50%.

Comparing the various business segments

Group Retail income grew 9% to S$4.3 billion, driven by higher net interest income from volume growth and improvement in deposit margin, coupled with strong contribution from the wealth management business.

Income from high affluent customers increased 14% year-on-year, while assets under management of this segment expanded by 14% to S$127 billion, of which 61% was from overseas customers served by the company’s network of wealth management centres in Southeast Asia.

Group Wholesale Banking income grew 6% to S$4.1 billion, benefitting from cash management, treasury and loan-related activities. Cross-border income increased 10% from last year and accounted for 28% of Group Wholesale Banking’s income.

Global Markets income increased 28% to S$595 million, largely from higher trading and investment income.

Analyst reactions to UOB’s Q4 FY2019 results

Leng Seng Choon, analyst at RHB Invest, said UOB’s net profit for 2019 was in line with their expectations, ‘accounting for 100% of ours and consensus’ forecasts’.

Following the company’s guidance for FY2020, Leng lowered his sustainable ROE assumption to 11.2% from 11.6%, which it says is in line with Q4 FY2019’s 10.6% and the softer economic environment brought on by COVID-19.

‘We believe COVID-19 could exert downside ROE pressure over the next few quarters,’ he wrote in a note.

While UOB management remains bullish on wealth management fees expansion, Leng has cut his FY20 net profit prediction for the group by 8% to S$3.89 billion and a lower net income margin of 1.73%, citing an ‘uncertain economic environment’.

Finally, he maintains a ‘neutral’ rating on UOB’s shares, alongside a share price target that is lower by 3%.

UOB shares fell as much as 0.62% on the day of its Q4 earnings. Shares closed at S$25.68 per share – a two-week low – on Friday 21 February.

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