2Q22: Sufficient General Provisions To Cushion Against External Uncertainties
UOB reported net profit of S$1,113m for 2Q22 (+11% yoy and +23% qoq). NIM expanded by a sizeable 9bp qoq to 1.67%. Loans & trade related fees hit a new record high of S$283m (+10% yoy) as UOB supported business clients in their regional expansion. UOB declared an interim dividend of 60 S cents per share, representing a payout ratio of 50%. It guided mid single-digit loan growth, low single-digit growth in fees and normalisation of credit costs higher to 25bp for 2022.
RESULTS
• United Overseas Bank (UOB) reported net profit of S$1,113m for 2Q22 (+11% yoy and +23% qoq), in line with consensus’ estimate of S$1,095m.
• Spectacular NIM expansion. Loan growth was strong at 8% yoy and 1% qoq, driven by short-term working capital loans. Loans for Singapore and Greater China grew 6.7% and 9.0% yoy respectively. Sustainable finance rose to S$20b. NIM expanded by a sizeable 9bp qoq to 1.67%. The US Fed hiked the Fed Funds Rate by 50bp in May and 75bp in June. There was strong pass-through to domestic interest rates with SORA and three-month SIBOR rising 105bp and 112bp qoq respectively to 1.66% and 1.91% during 2Q22.
• Drag from wealth management. Fees & commissions declined 3% yoy and 1% qoq in 2Q22. Loans & trade related fees hit a new record high of S$283m (+10% yoy) as UOB supported business clients in their regional expansion. Credit card fees grew 44% yoy due to increased customer spending after Singapore reopened its international borders in April. Wealth management fees slumped 27% yoy and 14% qoq as investors turned cautious. AUM was stable at S$138b.
• Positive momentum for hedging demand. Trading & investment income increased 9% yoy to S$214m due to customer-related income with greater demand for hedging.
• Maintaining tight control on discretionary spending. Operating expenses increased 12% yoy. UOB continues to prioritise strategic investment in people and technology while maintaining cost discipline. Cost-to-income ratio was stable at 43.8%.
• Downgraded a major corporate account in 2Q22. NPL ratio edged higher by 0.1ppt qoq at 1.7%. NPLs increased 7% yoy. NPL formation was S$661m in 2Q22, higher than S$462m in 1Q22. NPLs for Greater China increased S$524m hoh in 1H22 due to downgrade for a major real estate corporate account. Total provisions was S$137m in 2Q22 (-25% yoy) comprising mainly specific provisions. We estimated there was a write-back in provisions for securities at S$35m.
ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING
• Guidance for 2022. UOB guided mid single-digit loan growth for 2022. Management expects disbursement for working capital loans for SMEs and drawdown for residential mortgages in 2H22. Fee income is expected to grow at a low single-digit rate, supported by cross-border transactions and sector solutions for wholesale banking. UOB will continue to exercise discipline in control expenses so as to keep cost-to-income ratio stable at about 45%. Management guided credit costs at 25bp for 2022 (2021: 20bp).
• Weathering near-term headwinds. Economic activities are picking up as borders reopen and investment flows are resuming. Aggressive interest rate hikes around the world would dampen global growth. Nevertheless, management expects resilient growth from ASEAN countries as they are net exporters of commodities.
• Continued NIM expansion in 2H22. Management expects more rate hikes in 2H22. 80% of all loans are on floating interest rates. NIM expansion of 9bp qoq is expected to be sustained for the next two quarters in 3Q22 and 4Q22. Thus, management expects NIM to be about 20bp higher and hit 1.9% by end-22. Management expects growth in bottom line in 2022 as the increase in net interest income exceeds the slowdown in non-interest income. Management expects the pace of NIM expansion to moderate by early-23.
• Scaling up across the region through Citigroup’s Consumer Banking Businesses. Management expects legal completion for the acquisition of Citigroup’s Consumer Banking Businesses for Thailand and Malaysia by end-22, Vietnam by 1Q23 and Indonesia by 4Q23. There is smooth integration with 90% of the employees in Thailand, Malaysia and Vietnam agreeing to stay on and join UOB.
• Sufficient general provisions to cushion against external uncertainties. UOB has set aside general provisions equivalent to 90bp of total loans, compared to 70bp before the COVID-19 pandemic. Management sees its general provisions as sufficient but does not intend to write back its general provisions. UOB does not expect asset quality to deteriorate in 2022. There could be pockets of weakness, such as construction companies affected by supply chain disruptions and shortage of manpower.
• Exposure to Chinese developer. Management disclosed that UOB has S$3b exposure to Chinese developers (state-owned enterprises: 50%, privately owned enterprises: 50%), which represents only 1% of group loans. Management is comfortable with loan-to-value ratio for these real estate developers and they are not in danger of turning into NPLs. UOB does not have exposure to residential mortgages in Mainland China.
• Taking legal action. Separately, based on Bloomberg, UOB has taken legal action against Shimao Group at the High Court of Hong Kong for breach of terms for loan and security agreement for a residential development project in Kowloon. Shimao is alleged to have reallocated loans and shares between entities without UOB’s consent.
• The board has declared an interim dividend of 60 S cents per share (1H21: 60 S cents per share), representing a payout ratio of 50%.