2Q23F: Stronger volumes, weaker margins
- We expect NIM to compress a milder 4bp in 2Q23F (1Q23: -8bp) amid lighter funding cost pressures and continued yield repricing on 2 Fed hikes in 1Q23.
- Sequential earnings performance will depend on rate hike trajectory, speed of risk-on momentum in wealth management, and asset quality outlook.
- Reiterate Add. Strong liquidity is allaying asset quality deterioration fears, in our view. Yield of c.6% is attractive — we expect c.80Scts DPS in 2Q23F.
2Q23F: Volatility easing
We expect Singapore banks’ 2Q23F earnings to be sequentially softer qoq, as NIMs start slipping amid modest loan growth and elevated funding costs. While 1Q23 earnings were supported by a jump in wealth management income (and new money inflows due to fallouts in the banking sector globally) and strong trading and investment income (given the heightened market volatility), these trends would likely taper off in 2Q23F as operating conditions stabilise, but still help offset the impending margin compression, in our view.
Funding cost pressures likely eased, but NIMs may still taper
We expect United Overseas Bank (UOB) to report a net profit of S$1.46bn in 2Q23F (-8% qoq, +30% yoy). We expect milder NIM compression of -4bp qoq in 2Q23F (1Q23: -8bp qoq), on easing funding cost pressures as new loans reprice on higher interest rates (given the two Fed hikes in 1Q23). The continued compression comes as customers renew their matured FD placements amid a low growth environment, in our view. About c.50% of these matured FDs was rolled over into new FDs (vs. c.60-70% in 1Q23), c.20% went into CASA, while c.20% was placed in wealth management products, particularly bond funds, according to UOB. We expect funding cost pressures to ease further going forward as UOB had cut its FD rates from a peak of 4% in Nov 22 to 2.9% currently. The bank has also ceased to offer longer-dated 12- and 15-month placements as it did in 4Q22, and now offers only FDs with tenors of up to 10 months. UOB’s guidance is for margins to hold up at current levels (2.1-2.2%) in FY23F; this assumes no additional Fed rate hikes this year. Should the FOMC meeting on 27 Jul result in a rate hike, we highlight the possibility of management raising its NIM guidance slightly.
Trade loans lead growth rebound; T&I to bolster softer NII
Loan growth was likely more upbeat in 2Q23F (we expect +1.2% qoq vs. 1Q23’s -1.1% qoq), backed by corporate loan drawdowns and trade loans as loan repayments ease. We think that wealth management fees and net new money inflows likely eased in 2Q23F, given the absence of a banking sector confidence crises in 1Q23 (vs. in 2Q23F). As the market environment remains conducive, we think trading and investment (T&I) income may stay relatively strong as the bank utilises its chest of excess funds. We believe credit costs stayed benign in 2Q23F (within management’s guidance of 20-25bp for FY23F), while excess liquidity remains a deterrence against significant asset quality deterioration, for now. That said, top-ups of management overlays are likely as UOB builds up a preemptive buffer. Our GGM-based TP is unchanged. Downside risks: asset quality deterioration.
Re-rating catalyst and downside risk
Stronger and sustainable treasury income and wealth management fees are key potential re-rating catalysts. A significant deterioration in asset quality as a result of the higher interest rate environment is a downside risk. Integration risks (operational delay, technological incompatibility) in merging Citi’s retail franchise with UOB’s is another downside risk.