UOB Q3 profit down 40% as provisions climb

Singapore

UOB opened the Singapore banks' Q3 results season by rolling back some of its worst fears, as has been the case with the global banks.

Despite posting a 40 per cent drop in net profit for its third quarter, the bank with a sizeable exposure to small- and medium-sized enterprises is confident that its provisions should be strong enough to withstand further build-up of bad loans, particularly with automatic moratoriums unwinding in Singapore and Malaysia.

UOB shares closed S$19.80 on Wednesday, up 1.8 per cent or 35 cents.

The bank's net profit for the three months ended Sept 30, 2020, stood at S$668 million, compared with S$1.12 billion for the year-ago period, due to pre-emptive build-up of credit allowances.

An additional S$339 million in allowance for non-impaired assets was set aside to strengthen provision coverage, the bank said, bringing total credit costs on loans to 68 basis points this quarter.

The proportion of the bank's loan book under moratorium has also come down to 10 per cent, from 16 per cent in July, largely because of the expiration of blanket loan moratoriums in Malaysia.

Malaysia is a key market for UOB, making up about 11 per cent of the bank's pre-tax profits in 2019.

Annualised earnings per share stood at S$1.55 for the quarter, down 40.8 per cent from S$2.62 a year ago.

Against the year-ago period, net interest income fell 13 per cent to S$1.47 billion as effects from margin compression offset loan growth of 2 per cent, the bank said. Gross customer loans for the quarter stood at S$280.68 billion. Net interest margin was down 24 basis points.

From the previous quarter, however, net interest income for the quarter rose 1 per cent, led by an improvement in net interest margin of five basis points to 1.53 per cent, as liquidity buffers eased in line with a stabilising funding environment, the bank said.

Non-interest income was 15 per cent lower, year on year, at S$786 million, as business activities across corporate and retail customers declined.

The bank's non-performing loans (NPL) ratio was 1.5 per cent, unchanged from the same-period a year ago.

UOB chief executive Wee Ee Cheong said in a media release on Wednesday that the economic trajectory remains uneven and unclear, despite early signs of recovery across the global economy.

"Given the evolving geopolitical and pandemic situation, we remain vigilant, especially in our key regional markets. However, our asset quality is manageable and we are adequately provisioned even with the expiry of moratorium programmes across the region," he said.

Speaking to The Business Times, UOB's chief financial officer Lee Wai Fai said the bank has "proactively" set aside more provisions than needed, and is confident that the allowance coverage will be sufficient even after taking into account non-performing loans for the next year.

The bank has guided that NPL ratio could stand at slightly above 2 per cent for 2021.

"We can now estimate with confidence how much provision we need if loans turn bad. What I've built up this year should be enough to cover up to next year... We also expect credit costs to come down," Mr Lee said.

The bank expects credit costs to hover around 30 to 40 basis points for the next year.

Not all loans under moratorium are expected to go bad, he said, noting that some customers have the ability to pay, but might be taking advantage of the relief to channel funds towards other uses.

While the Q3 results may not demonstrate the true measure of distress, the overall impact "may not be as bad as feared", Mr Lee said.

"We expect some weakness coming out next quarter and the following (quarter), but it will not be as bad. With support from the government and extension of various relief programmes, I think the banks themselves will be able to manage well," he said.

Analysts viewed UOB's Q3 results as largely in line with expectations. Krishna Guha from Jeffries noted that the stabilisation of pre-provision operating profit is "encouraging", even as he noted that the build up of provisions more than offset the gains.

Equity analysts from Morgan Stanley believe the drop in Malaysian loans under moratorium should help address some of the market's concerns over credit quality, while Goldman Sachs' Melissa Kuang and Siward Ludin expect the market to respond positively to the recovery in net interest margins.