NIM has stabilised
- 2Q23 revenue of S$3.5bn ~5% ahead of consensus, while net profit of S$1.4bn (including one-off costs) in line with consensus
- Higher credit costs of 30bps; guidance raised to 25bps for rest of year, suggesting ~26bps for FY23F (prev: 20-25bps)
- Interim dividend of 85 Scts in 1H23 vs. 60 Scts in 1H22; high dividend yield of c.5.9% to limit downside in near term
- Maintain HOLD and TP of S$30.30
2Q23 revenue ~5% ahead of consensus while net profit in line with consensus. 2Q23 revenue grew 31% y-o-y/1% q-o-q to S$3,542m and net profit improved 27% y-o-y/declined 6% q-o-q to S$1,415m. Core net profit after tax, excluding Citi integration costs (net of tax) of S$92m, would be S$1,507m (+35% y-o-y/-4% q-o-q). Net interest income rose 31% y-o-y/1% q-o-q to S$2,437m, as it was a longer calendar quarter despite NIM continuing its second consecutive quarterly decline to 2.12% (-2bps q-o-q in 2Q22; -8bps q-o-q in 1Q23) due to excess liquidity deployed to high-quality assets, while loan growth grew 1% q-o-q. Operating costs increased 22% y-o-y/1% q-o-q, resulting in a cost-to-income ratio excluding/including one-off Citi integration costs of 40.9%/44.1% (1Q23: 40.9%/43.3%), respectively. Capital ratios stood strong with a CET1 ratio of 13.6%.
Non-interest income improved on another quarter of record-high trading and investment income, partially offset by lower net fee income. Net fee income declined 8% y-o-y/5% q-o-q to S$524m in 2Q23 on the back of lower wealth management fees (-3% y-o-y/-9% q-o-q), as market sentiment continues to be cautious, and lower loan/trade-related fees (-20% y-o-y/-4% q-o-q) on softer lending activities. This was partially offset by higher credit card fees (+22% y-o-y/-11% q-o-q). Trading and investment income of S$478m (+123% y-o-y/flat q-o-q) saw another record quarter, customer-related treasury income of S$182m (+5% y-o-y/-10% q-o-q) was supported by hedging demand, while other trading and investment income of S$296m (+622% y-o-y/+8% q-o-q) saw good performance in trading and liquidity management activities.
Higher credit cost of 30bps; NPL stable at 1.6%. 2Q23 credit cost was higher at 30bps on the back of higher specific allowances, largely due to a major Thailand corporate account and pre-emptive general allowance set aside. Consequently, credit cost guidance was raised to 25bps for the rest of the year, suggesting ~26bps credit costs for FY23F (prev: 20-25bps). Total loan allowances of S$238m, 30bps (1Q23: S$192m, 25bps) include general allowances (stage 1+2) of S$36m, 4bps (1Q23: S$28m, 4bps) and specific allowances (stage 3) of S$202m, 26bps (1Q23: S$164m, 21bps). There was higher new NPA formation, which came in at S$364m (1Q23: S$301m, average of S$393m for last four quarters); NPL remained stable q-o-q at 1.6%.
Takeaways from analyst briefing
Guidance from management: 1) Loan growth was maintained at a low-to-mid-single digit; 2) margins are to remain stable, at the current levels; 3) fee growth was revised downwards to a high single digit from a double digit; and 4) credit cost increased to 25bps for the rest of the year from 20-25bps for the full year.
NIM outlook. Exit NIM for June was 2.14% (2Q23 NIM: 2.12%). Management believes NIM has stabilised for the year, with some upward bias following the Fed’s rate hike announcement last night. Loan yields could see an upside if benchmark rates continue to go up.
Asset quality and managing provisions into FY24F. A large chunk of specific provisions relate to a Thai manufacturing corporate. Although management is confident that they will be able to recover some monies, its exposure has been fully provisioned for in 2Q23 for prudence. During 2Q23, non-loan GPs were S$127m relating to non-loan portion of the Thai exposure and MEV adjustments. Management also acknowledged that rising household debt in Thailand is a concern but their portfolio is catered to more high-end customers. Meanwhile, UOB remains comfortable with its China exposure, with loans to Chinese developers (~1% of group loans) managed down to S$2.8bn from S$3bn previously.
Managing costs ahead. One-off Citi costs (FY23F: S$300-400m) should mostly roll off as Indonesia targets completion this year, with only Thailand and Malaysia left for 2024, which should drop off by 1Q24. After that, focus will be on improving JAWs and working on cross-selling. Management believes that UOB should see a 41%-43% CIR as a more normalised level for CIR going forward post-integration.
View on dividends going forward. The board and management remain comfortable with a 50% payout ratio, as it strikes a balance between returning capital and growth opportunities in the medium term. Management believes that there are many areas of growth in ASEAN in the next few years.
Keeping track of Citi acquisition. UOB added 300k retail customers in 2Q23, largely attributed to organic growth – the impact of Taylor Swift concert pre-sale tickets initiative was not big since the application-to-sales window is short. Management has started to see the consolidation of the Malaysia franchise, which has seen additions in its deposit base, amongst others The opportunity to cross-sell remains huge, with Citi customers having higher digital penetration and being more digitally savvy. Citi’s stronghold is unsecured and UOB has started to introduce its products into Citi post the legal date of competition. For instance, additional UOB credit cards have seen a good take-up, there is successful integration of Citigold clients into UOB privilege banking through joint events, and the selling of UOBAM/prudential banca products to Citigold’s base has seen good success. Going forward, privilege banking will be managed by a bigger private banking team as resources are pooled and shared.
