Analysts lower UOB share price targets as coronavirus cases surge

Since our last full update, United Overseas Bank's (UOB) share price has fallen another 17%, as of 9am on Tuesday 10 March.

UOB’s shares opened at S$21.31 a share right out of the gate, extending the already-steep loss of the previous day. This is the Singapore Blue-Chip stock’s lowest buy-in level since March 2017.

Share price had sunk over 8% on Monday 09 March to close at S$21.52 per share.

Reduced net interest margin and lower loan growth estimates

As the coronavirus continues its spread across the globe and to impact financial markets, several local equity analysts have revised their share price targets and gradings on UOB.

CIMB analysts had on 04 March downgraded their rating on the stock to a ‘hold’ from ‘buy’, alongside a lower share price target of S$24.91 per share, versus S$28.39 previously.

The rating is based on a reduced net interest margin (NIM) forecast by 10 to 12 basis points (bps), which was posted after the US central bank’s emergency interest rate cut of 50 bps last week as a countermeasure against a coronavirus-driven economic recession.

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With further rate cuts a possibility, CIMB analysts have consequently lowered their regional loan growth estimates for UOB to ‘2-3% in FY20F on the broad cautionary stance on business expansion’.

They also raised credit costs estimates to 26-30 bps, up from 25-29 bps previously, as they believe that non-performing loans (NPLs) ‘could start to emerge prominently as COVID-19 turns pandemic, given the banks’ Greater China exposure (supple chain disruption) and SME portfolios’.

UOB’s 2020 earnings to be further hit by interest rate cuts

Following the US Federal Reserve’s interest rate reduction, DBS’ research team has also lowered its call on the UOB stock from a ‘buy’ rating to a ‘hold’, alongside a lower target price of S$25.50 – against S$27.20 previously.

In the wake of the Fed’s move, as well as Hong Kong’s rate cut in tandem, DBS researchers believe that there are more Singapore Interbank Offered Rate (SIBOR)/ Singapore Dollar Swap Offer Rate (SOR) downsides in store.

‘While impending decline in cost of funds will cushion decline in loan yields, we believe overall NIM will still see further pressure’, they wrote in a new research note. As a result, they have lowered their earnings forecast for UOB by 2% on a 2bps drop in NIM to 1.71%. In 2019, UOB achieved a 1.78% NIM rate.

They added that while UOB is likely to keep leveraging on its strong capital position to capture cross-border loan growth opportunities amid a slower growth environment, there are ‘limited catalysts on the stock for now’ given the expected NIM pressures and ongoing COVID-19 uncertainties.

Despite a lower earnings estimate, DBS analysts maintain that UOB is likely to sustain its S$1.30 per share full-year dividend for FY2020, if a second-half recovery takes place as expected at present. Furthermore, the group is on track to launching its digital-only bank called TMRW in Indonesia later this year, which should help cushion any adverse impacts to business so far this year.

UOB’s share price closed at S$21.94 per share on Tuesday 10 March.

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