What’s the outlook for UOB after a better-than-expected Q1?

First quarter 2020 earnings of Singapore's third largest money lender beat analyst estimates by nearly 8%.

Singapore bank United Overseas Bank (UOB) Group has reported net earnings of S$855 million for the first quarter of 2020, beating Refinitiv analyst estimates of S$793.3 million.

This is 15% and 19% lower than the fourth quarter of 2019 and the first quarter of 2019 respectively, as a result of declining margins and higher credit costs.

The lender also increased impairment charge for this quarter to S$286 million, up from S$146 million in the previous quarter and S$93 million a year ago, to account for the bleak economic outlook.

Total income held steady at S$2.41 billion from a year ago, despite a lower interest rate environment and slowing business momentum towards the end of the quarter due to the effects of the global coronavirus pandemic.

Following the earnings report, UOB’s share price moved up slightly within the first 30 minutes of trading on Wednesday 06 May 2020 to S$20.10 per share, based on IG data.

The average 12-month share price target for UOB as of 05 May 2020 based on five analysts’ estimates is S$21.37 per share. Of these, four have rated the UOB stock a ‘hold’ and one rated it ‘accumulate’.

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Performance by business segment

By business segment, Group Retail’s operating profit was higher largely driven by strong contribution from wealth management, which mitigated the impact from declining interest rate.

Income from high affluent customers increased 14% year-on-year, while assets under management expanded by 8% to S$124 billion.

Group Wholesale Banking’s operating profit declined from lower loan-related and investment banking fees, but partly moderated by franchise loan growth. Cross-border income fell by 5% in line with slower business activity across the region, accounting for 27% of Group Wholesale Banking’s income.

Global Markets’ better performance was supported by higher net interest income, offset by decline in trading and investment income.

Exposures to oil and gas, and Mainland China

In terms of exposure to the volatile oil and gas sector, outstanding oil and gas loans stood at S$10.2 billion as of 31 March 2020, representing 3.6% of total loans, as compared with 4.7% at 30 June 2018.

Of this, 75% of the exposure is to downstream players and traders, of which 70% are national oil companies and global firms, while the remaining exposure are mainly short-term structured exposure.

Meanwhile, the group also maintained a similar exposure to Mainland China at 7% (S$32 billion), of which banks accounted for an estimated 60% (S$18 billion) of the total.

The group said its balance sheet position remained strong, thanks to an additional S$546 million of allowance that was made to strengthen coverage this quarter. Together with Common Equity Tier 1 (CET1) ratio at 14.1% and ample liquidity support, it stated that it is ‘well positioned to navigate the greater uncertainties ahead’.

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UOB CEO: ‘we are in a period of unmatched challenges’

Regarding the Q1 results, Wee Ee Cheong, Deputy Chairman and Chief Executive Officer, UOB, said:

‘We are in a period of unmatched challenges and disruption brought on by the rapid contagion of COVID-19 across the world. But the first quarter of 2020 has also revealed the capacity and resolve of governments, industries and individuals to contain and to cushion the impact of the pandemic.’

He added: ‘‘In times such as these, we ensure our balance sheet remains strong and our capital and liquidity positions robust, so we can continue to support our customers through the roughest of cycles and crises, just as we have done so over the past eight decades.

He cited the example of how the group has been working closely with government agencies and central banks to provide liquidity support to individuals and businesses. Throughout this period, the bank has also seen an increase in uptake of digital banking services such as UOB Mighty and UOB Business Internet Banking Plus.

On the employee front, currently more than three quarters of UOB’s Singapore staff and an estimated 19000 employees across the region are working from home. The bank has also rolled out additional allowances and family care leave, flexible work arrangements and educational webinars.

‘Coupled with our strengthened allowance coverage and through our collective efforts with all our stakeholders, we are confident that we will ride through these extraordinarily difficult times and emerge stronger,’ said Wee.

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