UOB reported net profit of S$906m for 1Q22 (-10% yoy and -11% qoq). It suffered one-off losses from structural hedges for its additional tier-1 capital securities due to accounting asymmetry. Management expects trading & investment income to normalise back to S$150-250m in subsequent quarters. Management guided mid to high single digit loan growth, single digit growth in fees and normalisation of credit costs higher to 20-25bp for 2022.RESULTS
· United Overseas Bank (UOB) reported net profit of S$906m for 1Q22 (down 10% yoy and 11% qoq), below consensus estimate of S$1,025m.
· Benefitting from interest rate hikes. Loan growth was strong at 9% yoy and 3% qoq in 1Q22 driven by Singapore and Greater China. NIM expanded 2bp qoq to 1.58% benefitting from the hike in Fed Funds Rate of 25bp in March and the associated increase in loan yield. Net interest income increased 10% yoy. Management estimated that every 25bp hike in the Fed Funds Rate will lead to NIM expansion of 4bp and an increase in net interest income of S$150-200m.
· Market-sensitive revenue streams affected by heightened risk aversion. Fees declined 8% yoy and 1% qoq. Loans & trade-related fees grew 8% yoy and 10% qoq to a record S$276m in 1Q22 due to growth in lending and advisory businesses. Wealth management fees decreased 27% yoy and 9% qoq due to weak market sentiment. AUM increased by 3% yoy to S$140b.
· Affected by one-off negative impact from structural hedges. Other non-interest income dropped 70% yoy to S$101m in 1Q22. Customer-related treasury income was stable. However, UOB suffered one-off negative impact from structural hedges for its additional tier-1 capital securities as interest rates rise. It also recorded unrealised mark-to-market losses from its investments. In total, non-customer-related trading and investment incurred losses of S$117m.
· Exercised discipline on discretionary spending. Operating expenses decreased 3% yoy in 1Q22 due to decline in staff costs of 8% yoy. IT-related expenses increased 13% yoy due to continued investment in technology to enhance capabilities and customer experience. Cost-to-income ratio increased 1ppt yoy to 44.8%.
· Asset quality relatively stable. New NPL formation was S$462m and NPL balance increased 4% qoq in 1Q22, although NPL ratio was unchanged at 1.6%. Total provisions dropped 11% yoy to S$178m. Its NPLs are well collateralised with specific provisions/NPLs stable at 31%. UOB made a small write-back in general provisions of S$2m.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
· Benefitting from recovery in Southeast Asia. Management is focused on helping its customers seize business opportunities as the economy reopens. UOB is well positioned to serve customers and facilitate trade and investments between ASEAN countries and China. ASEAN countries benefit from the ongoing disruption to the global supply chain. UOB is making good progress in its digital initiatives. It has acquired 140,000 customers across the region digitally through UOB TMRW in 1Q22, of which 80% are new to UOB.
· Guidance for 2022. Management guided mid to high single digit loan growth for 2022, driven by cross-border transactions and pick up in ASEAN countries. Fee income is expected to grow at single-digit rate supported by cross-border transactions and sector solutions for wholesale banking. UOB will continue to exercise discipline to control expenses so as to keep cost-to-income ratio stable at about 45%. NPL ratio is expected to inch higher but stay below 2%. Management guided credit costs at 20-25bp for 2022 (2021: 20bp). ROE is expected to be above 10%.
· Cautiously optimistic. Loan growth is currently dominated by large corporate customers acquiring assets in developed markets. The recovery within ASEAN has just started and reopening will lead to increased spending. Working capital accounted for 60% of loan demand from ASEAN countries and management anticipates increased drawdown in 2H22. On the consumer banking front, management sees higher demand for residential mortgages due to pick-up in transaction volume in the secondary market. The reopening in ASEAN countries will also lead to increase in spending for credit cards and growth in unsecured personal loans.
· Good progress in integration of Citigroup’s Consumer Banking Businesses. Citigroup’s consumer banking businesses in Indonesia, Malaysia, Thailand and Vietnam have the right strategic fit for UOB. The acquisition doubles UOB’s retail customer base across the four markets, accelerating growth and deepening UOB’s regional franchise within ASEAN. Management expects regulatory approval for Thailand by end-22 and acquisition of Indonesia, Malaysia and Vietnam to be completed in 2023. The acquisition is expected to reduce UOB’s CET-1 CAR by 0.7ppt to 12.8%.
· Cautiously monitoring exposures to vulnerable companies. Management is concerned about the secondary impact from the ongoing Russia-Ukraine War. The Chinese economy could be affected by lockdowns with the recent outbreak of COVID-19. Management is encouraged by the shift in fiscal policy to step-up investment in infrastructure projects. Nevertheless, UOB has conservatively slowed down loan growth in mainland China. Currently, asset quality for mainland China is benign with NPL ratio at 0.3%. Management is also monitoring downstream players in the oil & gas supply chain and companies affected by weakness of their local currencies against the US Dollar.
• Decarbonisation. UOB plans to announce its net zero plan by end-2022.
