Prioritising funding cost reduction
- Although some NIM could be sacrificed to pursue opportunistic loan growth, lowering its funding costs remains a key priority for UOB in FY24F.
- Basel IV will give its CET1 a transitional 150bp boost but this will be used for organic growth, says UOB. It maintains its 50% div. payout ratio for FY24F.
- Reiterate Add as we expect its asset quality to stay resilient, moderating the provisioning risks, and we see its c.7% FY24F dividend yield as attractive.
Basel IV implementation to push CET1 to a pro-forma 14.9%
UOB remains optimistic of an improving economic growth outlook for ASEAN in 2024F although we believe this may take time to materialise. As overall loan demand has stayed rather muted amid the elevated interest rate environment, UOB said it will remain selective, focusing on high-quality credits and lower-risk mortgages, and this could keep its asset yields compressed. The implementation of Basel IV will take effect in Jul 2024; UOB said this will provide a transitional 150bp uplift to UOB’s CET1 ratio, lifting it to c.14.9% on a pro-forma basis. Given the transitional nature of the capital uplift and its base CET1 of c.13.4% (in 4Q23), UOB is inclined to keep its capital base for organic growth, and to maintain its current 50% dividend payout ratio, it said. According to management, it may revisit its utilisation of excess capital when its CET1 reaches the c.15-16% range.
Containing funding costs via strategic deposit repricing
Having achieved a stronger funding position in 4Q23 (liquidity coverage ratio of 157% in 4Q23) given its concerns on liquidity earlier in FY23, it said its key priority will be to contain funding costs. It said amongst its levers to contain this would be via the strategic repricing of its fixed deposits (FDs) and using domestic funding in its regional markets where possible (vs. using forex swaps which could result in lower NIMs). Tactically shifting customers from FDs (as they mature) into wealth management products will also aid in sustaining asset yields, it said. Nonetheless, management highlights that there will be cases where margins may be sacrificed for opportunistic loan growth – underlining rationale for its guidance for FY24F total income (vs. NIM). In all, UOB guides for c.2% NIM in FY24F (FY23: 2.09%). On its quarterly trajectory, UOB expects NIMs to first dip slightly in 1Q-2Q24F given the deposit cost pressures, before rising in 3Q-4Q24F as the fall in funding costs outpace the decline of asset yields when the US Fed fund rate cuts set in.
Reiterate Add with GGM-based TP unchanged at S$33.30
UOB’s asset quality has stayed resilient over FY23, and it expects credit costs to trend at the lower end of c.25-30bp in FY24F. On investor concerns over its portfolio in mainland China (c.S$12bn loan exposure in 4Q23), UOB highlighted that domestic-based customers accounted for only c.S$3bn of these loans (with loan-to-value ratio of below 50% in 4Q23). We reiterate our Add call on UOB. With its integration of newly-acquired Citi franchise in Malaysia, Indonesia, Thailand and Vietnam underway, we look forward to earnings synergies between the two franchises. Downside risks include a drastic US Fed rate cut, which could negatively impact NIMs.
