UOB Q2 preview: Analysts predict 33% drop in net profit

United Overseas Bank (UOB) (SGX: U11) - Singapore's third most valuable bank by market cap - will be reporting its second quarter (Q2) results for financial year 2020 (FY2020) before the market opens on Thursday 06 August 2020.

Below, we highlight three areas that investors should be aware of ahead of the earnings report.

1. UOB stock fell 5.1% after MAS limits dividends

UOB’s share price has fallen as much as 5.1% since last Thursday 30 July 2020, after the Monetary Authority of Singapore (MAS) announced new restrictions requiring local banks to cap their dividend pay-outs for the 2020 financial year at 60% of FY2019’s final amount.

MAS also advised local banks to offer shareholders the option of receiving the dividends to be paid for FY2020 in scrip in lieu of cash.

The 60% cap on the local banks’ FY2020 dividends is intended to help banks balance the objective of capital conservation with the interests of shareholders, the central bank further noted.

As at 13:45 SGT on Tuesday 04 August 2020, UOB shares have rebounded slightly, and are trading at S$19.33 each. This still represents a decline of almost 4% from last week.

IG’s market analysis show that ‘buys’ form 79% of all trades on the UOB counter so far this week. In terms of sentiment, 95% of IG client accounts are currently holding ‘long’ (buy) positions on the UOB stock – indicating an expectation for a price increase in the near term.

For the month of July, the UOB stock dropped by 5.4%, and was down as much as 6.5% at one point.

2. UOB’s FY2020 dividend potentially capped at S$0.78

IG market strategist Pan Jingyi said in a previous client note that although MAS’ advisory had ‘perhaps been a milder recommendation’ compared to other central banks’ orders, this would ‘nevertheless diminish the attractiveness of (Singapore banks’) shares in the short-term if adopted’.

A 60% cap on FY2019 dividends per share (DPS) would mean that UOB’s FY2020 DPS will be limited to S$0.78 (based on 2019's final pay-out of S$1.30). Based on the latest traded share price of S$19.33, UOB’s dividend yield would drop from c.6.5% to c.4%.

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Pan added that investors should watch the bank’s earnings performance against consensus and guidance ‘for any disappointments that could see (share) prices be susceptible to declines once again’.

Across the board, the UOB stock has received an average share price target of S$20.66 per share from six analysts (representing a 6.9% upside from the last traded price), alongside a consensus rating of ‘hold’ from 18 brokers surveyed by Refinitiv.

3. UOB Q2 earnings per share estimated to fall by 31%

In terms of earnings estimates, analysts polled by Refinitiv are expecting for UOB’s earnings per share to come in 31% lower year-on-year at S$0.472 per share, with net income also dropping 33.1% to S$781 million in the second quarter of 2020.

Analysts also estimated for DBS to post a Q2 FY2020 DPS of S$0.55, on par with Q2 2019, although these figures had been provided before MAS’ dividend advisory.

According to Citi analyst Robert Kong, Q2 could potentially produce UOB’s worst quarterly results for FY2020. He predicts that the bank’s Q2 net profit will drop by 39% year-on-year.

Meanwhile, CIMB’s Andrea Choong and Lim Siew Khee foresee that Singapore banks will record stronger trading and investment gains in the second quarter on the back of better market performance, offsetting some of the headwinds from narrowing net interest margins.

However, they noted that UOB ‘could be least affected’ by the dividend rule, ‘given lower expectations from investors’.

Finally, Maybank analyst Thilan Wickramasinghe highlighted higher provisioning costs, ‘significant’ drops in interest rates driving negative pressure on net interest margins, as well as non-performing loans during the Covid-19 lockdown period as key areas to note in the banks’ upcoming Q2 earnings.

How to trade UOB with IG

Are you feeling bullish or bearish on UOB shares? Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG's industry-leading trading platform in a few easy steps:

1. Create a live or demo IG Trading Account, or log in to your existing account
2. Enter <United Overseas Bank Ltd> in the search bar and select the instrument
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade