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UOB starts restructure work for debts paused on payments; Q2 profit down 40%

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UOB on Thursday posted a 40 per cent drop in second-quarter net profit, hurt by weaker income and a surge in provisions.

UOB has set up restructuring teams to assess borrowers who have taken a debt holiday amid the gradual unwinding of government relief measures towards the end of the year. 

But given the enormous government support around the world, asset prices are unlikely to collapse, with the bank guiding that it does not expect a fallout that was seen during the Asian Financial Crisis.

The bank posted a 40 per cent drop in second-quarter net profit to S$703 million for the three months ended June 30, hurt by weaker income and a surge in provisions set aside to brace for the easing of loan moratoria, UOB chief Wee Ee Cheong told analysts and media at a briefing on Thursday morning. 

Net profit for Q2 stood at S$703 million, compared with S$1.17 billion the same period a year ago. This was weaker than the consensus forecast of S$815 million in net income estimated by four analysts in a Bloomberg poll.

Provisions against bad loans in the second quarter surged to S$396 million, compared with just S$51 million a year ago, with credit costs rising to 67 basis points. Total general provisions as at June 30 stood at S$2.39 billion, 20 per cent from S$1.99 billion a quarter ago. The bank has guided for total provisions to remain between S$2 to S$3 billion for "the next few quarters". 

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At the briefing, UOB's group chief financial officer Lee Wai Fai said: "Various relief programmes and laws put in place now might result in low non-performing loans and low delinquency during this period. While we remain committed to support customers through difficult times, we are also expecting credit costs to rise when most moratoria end as not all customers can emerge out of this crisis the same."

Roughly 16 per cent of UOB's loan book is currently under moratorium programmes. About 10 per cent of loans in Singapore are under moratorium; and 63 per cent and over-30 per cent in Malaysia and Thailand respectively due to automatic moratorium schemes. 

UOB has projected for about 10-15 per cent of loans under moratoria to sour into bad debt at worst-case. For the remaining loans, majority will probably require some commercial-base restructuring, said UOB group chief risk officer Chan Kok Seong. 

"There will be some restructuring required because we cannot expect all businesses to catch up with the clawback for deferment from day one. So those businesses that have a viable business model, we will look at them individually...look at their cash flow, their business model. If we believe they are viable, we will look at how to do a comprehensive commercial-based restructuring," said Mr Chan. 

"If not, then we may have to exit that relationship a bit earlier." 

Mr Wee added that credit losses are expected to be spread out over two financial years, noting that credit accommodation across the region, and globally, has made a lot of difference for many businesses with liquidity issues.

"Asset prices are unlikely to collapse because of government support around the world. We don’t expect the situation to play out like the Asian Financial Crisis," he said.

UOB's non-performing loan (NPL) ratio in the second quarter stood at 1.6 per cent, up from a year ago's 1.5 per cent, and unchanged from a quarter ago. The bank has factored in a peak NPL ratio of 3-3.2 per cent. 

While UOB is one the largest users of Enterprise Singapore's risk-sharing loan facility to support the bank's small and medium-sized enterprise (SME) customers, Mr Wee noted that only 50 per cent of the loans accepted by SME customers has been drawn down. This signals that their liquidity concerns are manageable, said Mr Wee.

The bank's SME book is mostly made up of mid to larger SMEs with turnovers of between S$10 million to S$100 million. 

UOB's regulatory loss allowance reserve (RLAR) set aside as at the second quarter also rose slightly to total S$379 million. 

As at the end of the first quarter, UOB had pre-emptively upped RLAR above the minimum requirement to boost allowance coverage.

RLAR is a separate reserve in equity - in other words, coming out from retained earnings - that can be used to reflect more coverage against non-performing assets. But it does not substitute for provisions deducted against income earned in each quarter.

The board declared an interim dividend of 39 cents per share, down from the year-ago quarter of 55 cents per share. The scrip dividend scheme will be applied. The move is in line with MAS’s guidance for local banks to moderate their dividends for 2020.

Total income fell 12 per cent to S$2.26 billion, with both net interest income and fee income down. Net interest margin (NIM) for the quarter stood at 1.48 per cent, a sharp fall from the 1.81 per cent earned on loans a year ago, and the 1.71 per cent earned on loans a quarter ago. 

The one-month Sibor as at Wednesday stood at an all-time record low of 0.25 per cent; the three-month Sibor of 0.438 per cent was at a level not seen since 2014.

Expenses for the second quarter fell 8 per cent from the year-ago period to S$1.04 billion.

The bank's return on equity for the second quarter stood at 7.1 per cent, sliding from 8.8 per cent in the first quarter, and down again from 12.5 per cent in the year-ago quarter. CET1 ratio stood at 14 per cent.

As at 11.37am, shares of UOB were trading higher, gaining 28 cents to S$19.70.

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