Broker's take: RHB downgrades UOB as coronavirus may dampen forward earnings

WITH economic disruption from the coronavirus outbreak likely to impact the operations of Singapore banks both here and in China, RHB Securities has downgraded United Overseas Bank (UOB) to "neutral" with a target price of S$25.80.

As at 11.22am, shares in UOB were trading S$0.10 or 0.4 per cent higher at S$25.09.

RHB analyst Leng Seng Choon noted that the impact from the virus is likely to dampen forward earnings. Therefore, Mr Leng has lowered UOB's expected return on equity to 11.6 per cent from 12.7 per cent previously.

With a lower loan growth assumption and higher provisions, forecast FY2020 earnings were lowered by 3 per cent.

That being said, at 16 per cent, UOB has the lowest loan exposure to Greater China compared to DBS Bank (30 per cent) and OCBC Bank (25 per cent).

Mr Leng said that disruptions in China brought about by the virus are "negative for banks with operations there". "As such, despite downgrading UOB to 'neutral', it remains our preferred bank pick."

Looking ahead to UOB's full-year results released on Feb 21, Mr Leng noted that the three-month Singapore Interbank Offered Rate (Sibor), which averaged 1.8 per cent in Q4, is likely to contribute to softer lending yields and exert downside pressure on UOB's net interest margins (NIMs).

However, he does not believe NIM will fall much for Q4 as UOB front-loaded its funding in Q3, which lowered Q3 NIM to 1.77 per cent.

"Corporate loan repayments at the end of 2019 could have contributed to some marginal Q4 FY2019 loan sequential contraction," Mr Leng added.

RHB has forecast a FY2019 dividend of S$1.30 per share.