Managing deposit costs ahead
- 4Q23 net profit of S$1.4bn (+22% y-o-y, +2% q-o-q) below expectations
- NIM declined 7bps q-o-q on lower loan yields due to competition
- Management revised down FY24F loan growth to low-single digits (previous: mid-single digits)
- Maintain HOLD; TP S$30.30
- 4Q23 NIM declined 7bps q-o-q
4Q23 net profit below consensus estimates. 4Q23 revenue came in at S$3,410m (+2% y-o-y, -1% q-o-q) and net profit of S$ 1,403m (+22% y-o-y, +2% q-o-q). Core net profit after tax, excluding Citi integration costs (net of tax) of S$94m, would be S$1,500m (-21% y-o-y/1% q-o-q). Net interest income declined 6% y-o-y, 1% q-o-q to S$2,404m as NIM decline accelerated to 7bps q-o-q (3Q23: a 3bps q-o-q decline) mainly driven by loan margin compression due to competition for high quality credits. Operating costs increased 4% y-o-y and 4 % q-o-q, resulting in a cost-to-income ratio excluding/including one-off Citi integration costs of 43.2%/46.8% (2Q23: 41%/44.4%), respectively. CET1 ratio improved to 13.4% (3Q23: 13.0%).
NII declined from the previous quarter. Net fee income of S$569m (+17% y-o-y, -4% q-o-q) was driven by modest wealth fees recovery alongside record-high card fees q-o-q. Other non-interest income of S$438m (+54% y-o-y, flat q-o-q) saw sustained momentum for customer-related treasury income, and good performance for trading and liquidity management activities. Trading and investment income of S$362m (+78% y-o-y, -3% q-o-q) declined from the previous quarter. Customer-related treasury income of S$184m (+4% y-o-y,-7% q-o-q) sustained its momentum while other trading and investment income of S$178m (+585% y-o-y, -1 % q-o-q) continued to deliver good performance.
Higher credit cost of 25bps; NPL stable at 1.5%. 4Q23 credit cost was higher q-o-q at 25bps, driven by higher specific allowance offset by writeback in general allowance. General allowance performing loans coverage maintained at 0.9% q-o-q. Total loan allowances of S$202m, 25bps (3Q23: S$151m, 19bps) including general allowances (stage 1+2): -S$9m, -1bps (3Q23: -S$78m, -10bps) and specific allowances (stage 3): S$212m, 26bps (3Q23: S$229m, 29bps). General allowance performing loans coverage remained flat at 0.9%. New NPA formation was higher, at S$389m (3Q23: S$267m, average of S$331m for the last four quarters), wrote off S$218m (average S$138m in last 4 quarters). NPL remained stable q-o-q at 1.5%.
2024 guidance: Lower loan growth projections. UOB revised down its loan growth projections to low single-digit (from mid-single digits previously). Management maintains its double-digit fee growth target for 2024 and projects a positive trajectory for its total income. Core cost-to-income ratio is expected around 41-42% on cost discipline, with one-time costs from Citigroup acquisition to substantially roll off. Credit costs for 2024 are anticipated to be within the lower end of 25-30 bps.
Takeaways from analyst briefings
Details of 7bps q-o-q NIM contraction and NIM outlook. UOB continues to swap excess USD deposits into SGD. Including the swap income, headline NIM would have been 10bps higher during FY23. The 7bps q-o-q NIM compression is largely due to competition of loans. UOB is guiding for NIM to be c.2% levels (December exit NIM: 2.02%). NIM might go slightly below during 1Q24 and 2Q24, depending on how aggressive UOB is for loan growth, but 2H24 should turnaround. UOB remains confident in growing NII in FY24F as it seeks to manage cost of funds going forward. UOB is the first to cut back on fixed deposit costs and is looking to cut savings account rates at some point. Management is very comfortable with existing CASA ratios, especially wholesale CASA ratio at >50% due to the cash management platforms and systems built over the years. This contrasts the early 2000s where wholesale CASA ratio was ~30%.
Capital and dividends. On 1 July 2024, UOB will see a 150bps uplift in the CET1 ratio due to Basel 4 implementation, but believes that capital impact is neutral/slight positive at the end of transition. SME loans will benefit from transition. UOB believes that their retail portfolio is disadvantaged compared to peers. UOB has been more prudent in terms of risk weightage for mortgages, and continues to target a healthy CET1 operating orange of 13-14% and believes that as a commercial bank, they should not be paying more than 50% of earnings as dividends to sustain ROE at 14% with projected credit growth of 8-10%.
Asset quality details. Management believes that there will still be short-term pain in China. Overall China non-bank exposure is ~S$12bn, <4% of total loans, of which China local customers’ CRE exposure is <$3bn (exposure has been reduced). The remaining customers are network customers e.g. from Singapore. UOB has not been aggressive in lending to property developers in China and the portfolio remains sound. During 3Q23, they fully provided for the Thai corporate (fraud case) which was recognised as NPL during 2Q23. Management remains comfortable with Thailand book (other Thailand banks are watchful on corporate loan book).
Citi acquisition and integration costs. Management continues to guide for FY24F integration costs to be half of FY23’s S$350m. They also mentioned that projected attrition rates did not materialise as countries are very proactive to retain customers and UOB is ahead of S$1bn revenue uplift that was projected. Due to an enlarged customer base of ~8m, UOB is in a good position to negotiate with card partners. UOB continues to target 1% ROE uplift by 2026. There were hiccups in Citi Malaysia integration and UOB took a couple of months to correct the issues in onboarding to digital channels – Malaysia is growing in healthy way post-issues resolution.
