Largely in line; management pulled back on full year guidance
Results largely in line. 2Q22’s net profit of S$1.1bn improved 11% y-o-y/23% q-o-q, in line with consensus. Net interest income of S$1.9bn rose 18% y-o-y/11% q-o-q, driven by NIM that increased 9bps q-o-q to 1.67% ahead of management’s guidance of 1.60-1.62% for 2Q22. Operating costs increased by 12% y-o-y and q-o-q due to staff costs on better performances. Cost-to-income ratio improved to 43.8% (1Q22: 44.8%) as income picked up. Capital ratio stood strong with a healthy CET1 ratio of 13.1%.
Largely flat fees amid macroeconomic uncertainties. Net fee and commission income remained flat y-o-y/increased 25% q-o-q, due to record loan, trade-related, and credit card fees offset by lower wealth fees due to weaker market sentiment. Trading and investment income grew 9% y-o-y/normalised from 1Q22 levels that were affected by hedges and unrealised mark-to-market on investments.
New NPA formation spiked in the quarter; higher NPL ratio of 1.7%. NPL increased to 1.7% from higher new NPA formation at S$661m (1Q22: S$462m, average of S$461m for last three quarters), due to a China developer’s corporate account, for which UOB had commenced legal proceedings on. According to UOB, the remaining exposures are diversified and have strong LTVs based on UOB’s internal credit rating system. As a result of special allowances on this China developer, total loan allowances for 2Q22 was higher at S$173m, 22bps (1Q22: S$146m, 19bps), including general allowances (stage 1+2) of S$7m, 1bps (1Q22: -S$2m, 0bps) and special allowances (stage 3) of S$166m, 21bps (1Q22: S$148m, 19bps).
Takeaways from analyst briefing
Overview on the backdrop. With uncertainty in the market, consumer confidence receding, business sentiment weaning, and inflationary pressures rising, management sees a weaker macro environment ahead. However, the base case scenario is that they do not expect a recession in their key markets, although growth may slow down.
Enhanced optimism on NIM. Management believes an exit NIM of 1.9% is possible, given that the 9bps growth q-o-q in 2Q22’s NIM did not reflect the May and July Fed rate hikes of 75bps each. Management gave guidelines for NIM to see a 10bps q-o-q expansion per quarter for 3Q22 and 4Q22, with another 1-2bps for 4Q22. Majority of loans (~40%) have a tenure of less than an year, resulting in a positive repricing. 80% of the loan book is also on a variable rate, which will require adjusting according to the base rate.
Pull-back on guidances. Management reiterates that the new guidances are a reflection of the overall market slowing and sentiment turning cautious. They include: 1) Lower loan growth at mid-single digit (previous: mid-to-high) – year-to-date loan growth stands at 3.5%; 2) lower fee growth at low-single digit (previous: high); and 3) higher credit costs of 25bps (previous: 20-25bps). For 2H22’s loan growth, the mortgages drawdown pipeline is strong. For other loans, UOB will prioritise pricing over volumes.
Asset quality. UOB believes there is no systemic weakness, and will keep adding general provisions for the rest of the year, maintaining that they will not look to reverse general provisions as previously hoped for. A single corporate account – another $40m of new NPA formation – was due to a Malaysia exposure. Weaker names for Malaysia in 4Q21 and 1Q22 have already been recognised. Going forward, the situation of supply chain and labour constraints may affect the construction sector (especially smaller contractors).
More details on China property exposure. Total exposure to the China property is S$12bn (3.7% of total loan book). This number includes network clients (e.g. Singapore GLCs etc), of which there is S$3bn+ (~1% of total loan book) exposure to Chinese SOE developers and Chinese private developers (split 50%-50%), with some projects possibly residing outside China. There are no issues with Chinese SOE developers’ loan book. For Chinese private developers, most projects are near completion and money for sale has been collected for, if not fully completed with comfortable LTVs. There is no undue concentration to any developer.