Swift Citi integration
- Management is optimistic about NIM upside given the current US Fed Funds rate trajectory. A rebound in CASA further eases funding cost concerns.
- Citi integration progressing well; c.41-42% CTI is in view as one-off costs roll off at end-FY23. No systemic asset quality risks raised; UOB is watchful.
- Reiterate Add with GGM-based TP unchanged. Rising NIM momentum is a re-rating catalyst. We raise FY23F DPS to S$1.85; its c.6% yield is attractive.
Some NIM upside ahead as Fed Funds rate hikes filter to it books
Milder-than-expected NIM compression in 2Q23 (-2bp qoq to 2.12%), and a higher 2.14% NIM at end-Jun (2Q23 average: 2.12%) were the pleasant surprises in this set of results. Factoring in the US Fed Funds rate (FFR) hike on 27 Jul, UOB had turned more positive on its NIM outlook in 2H23F and guides that NIMs should stabilise in the short term, with some possible upside in 2H23F. 2Q23 loan yields had improved on the back of the three FFR hikes in 1H23, though overall NIM was weighed down by excess funds placed out in short-term Singapore treasury bills. The CASA rebound in 2Q23 should further ease funding costs, holding NIMs stable in 2H23F at least at current levels, in our view.
Targeting wealth management as the next key earnings driver
Notwithstanding the NIM positivity, UOB toned down its fee income guidance for FY23 (from double-digit growth to high single-digit) mainly to account for softer wealth management performance amid weak market sentiment. Net new money inflows stayed resilient at +S$11bn in 1H23 (FY22: +S$15bn), bringing UOB’s total asset under management (AUM) to S$165bn at end-Jun 23. We think the strong AUM inflows set a firm foundation to drive wealth management earnings when risk-on sentiment returns, likely when FFR hike newsflow recedes. Persistent market volatility, hampering the return of riskon sentiment, is a downside risk.
UOB guides c.25bp credit costs in 2H23F as interest rates stay high
The rise in its credit costs to c.30bp in 2Q23 (vs. its c.20-25bp guidance) was attributable its exposure to a manufacturing company in Thailand that was affected by fraud. UOB has made full provisions for this exposure. Although management reports that it had not identified any systemic risks in its portfolio, it now guides for c.25bp credit costs in 2H23F to reflect the current operating environment vis-à-vis higher interest rates. We raise FY23F credit costs to c.27bp (from c.25bp previously) to factor in the elevated risk of borrower repayment disruptions. UOB remains watchful on the commercial real estate segment.
Citi integration costs to drop off by end-FY23; CTI may improve
UOB guides that the bulk of the related costs (c.S$300m-400m) should roll off by end-FY23 as the integration in Malaysia and Indonesia completes, placing it on track towards c.41- 42% cost-to-income (CTI) ratio in 2024 (c.44% currently). Operational delays in integrating the rest of Citi’s franchise is a downside risk. We raise FY23-24F DPS to S$1.85 (from S$1.65-1.75 previously), in line with UOB’s 50% dividend payout ratio policy. We think that its current c.6% dividend yield is attractive, positioning UOB well as a yield play.