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UOB sees worst-case credit cost to hit 90-100 bps: Citi report

UOB has projected for credit costs to reach 90 to 100 basis points (bps) as its worst-case scenario, as the lender braces for further downside amid the virus fallout. 

The bank's latest credit cost guidance is up from its original estimate of 25 to 30 bps in February, said Citi analyst Robert Kong in a note late on Wednesday night.

"The actual outcome will depend on a number of factors, including for example policy responses by governments, and banks’ ability to proactively identify borrowers that need liquidity support," said Mr Kong, citing comments from the bank following a recent call.

He added that the business conditions for UOB have "changed dramatically" from post-fourth quarter results guidance last month.

Mr Kong guided for UOB's 2020 credit costs to rise to 41 bps from 16 bps in 2019, noting that every 10 bps change in credit costs has a 5 per cent impact on earnings. 

"Our sense is to brace for more earnings downside, as Singapore-dollar short-term rates have fallen sharply and our credit cost assumptions may prove too low," said Mr Kong, adding that growth in loans and fee also looks set to slow. 

UOB's latest update on its exposure to sectors made vulnerable due to Covid-19 showed that the retail, hospitality and tourism make up 6 per cent of UOB's loans, while consumer discretionary make up 3 per cent of loans. These are largely corporate borrowers. 

UOB guided that every 25 bps Singapore-dollar rates fall would impact net interest margin (NIM) by around 3 bps. Of the bank's entire loan book, 80 per cent is based on floating rates, with the remaining 20 per cent based on fixed rates. Its mortgage book alone is about 40 per cent priced off fixed rates, while corporate loans are mostly priced off floating rates.

For deposits, around 45 per cent are less price sensitive. "Banks will try to mitigate loan yield pressure by reducing time deposit costs," said Mr Kong.

This comes as the three-month Sibor/SOR (Singapore Interbank Offered Rate/Swap Offer Rate) have fallen to 1 per cent and 0.7 per cent respectively over the past two weeks.

He forecasts UOB's 2020 NIM to fall to 1.64 per cent from 1.78 per cent in 2019, slightly below the post global financial crisis quarterly low of 1.68 per cent. Every 10 bps change in NIM implies a 7 to 8 per cent impact on earnings.   

On the fees side, Mr Kong estimates a 5 per cent growth - with loan fees and wealth management fees as key drivers for the bank - adding that broad weakness is mitigated by the bank's recently renewed S$1.15 billion bancassurance deal with Prudential for 15 years.

But this appears to have downside risk, Mr Kong said. He noted as well that on the retail wealth management side, UOB's clients are not "highly leveraged" and the focus is to offer "simple wealth products". 

Citi's earnings-per-share forecast at S$1.96 is 14 per cent below Bloomberg's consensus estimate at S$2.27.  

UOB shares closed trading at S$19.20 on Wednesday, down S$0.19 or 1 per cent.