On July 31, Jerome Powell, chairman of the Federal Reserve, said a rate cut in September is “on the table” provided the inflation data continues to be encouraging.
Wee Ee Cheong, group CEO of United Overseas Bank U11 (UOB), echoes the same expectations: “Interest rates have peaked and inflation data has strengthened the case for the Fed to cut interest rates. A gradual easing of interest rates will be good for Asia. We’ve seen the pick-up of commercial activity in Asia.”
UOB was the first local bank to announce its 1HFY2024 and 2QFY2024 ended June financial results. The bank reported a core net profit of $1.489 billion for 2QFY2024, down 5% q-o-q and up 1% y-o-y. Including Citigroup’s integration costs, net profit rose 1% y-o-y but fell 4% q-o-q to $1.425 billion.
This compares with the market’s estimate of $1.42 billion for 2QFY2024. In 1HFY2024, UOB’s core net profit of $3.05 billion fell 1% y-o-y. Including Citi’s integration costs, net profit in 1HFY2024 was unchanged at $2.92 billion. In 2022, UOB announced the acquisition of Citi’s retail businesses in Malaysia, Indonesia, Thailand and Vietnam.
Wee says Citi’s integration costs are likely to halve in the coming quarters. Only the integration of Citi Vietnam remains, which should be completed early next year. In 2QFY2024, Citi’s integration costs of $64 million were led by Thailand, one of UOB’s larger markets.
Similarly, on credit costs, Thailand accounted for the lion’s share of specific allowance (ECL3) in 1HFY2024. ECL stands for expected credit loss. During the first half, specific allowances on loans fell 11% y-o-y and 26% h-o-h to $328 million. The number for Thailand was $188 million.
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“We had some friction in the Thailand portfolio,” Lee Wai Fai, group CFO of UOB, acknowledges. According to him, the problem arose with service standards which resulted in a spike in credit costs. The problem has “stabilised” as the bank stepped up service standards and collection efforts, Lee says.
“Think of it as technical. When an account slips (in payment) in the number of days, it goes from bucket one (ECL2) to bucket two (ECL3). But it’s not a non-performing loan (NPL). We are putting back more people to collect that, we think we can get to an 80% recovery level. We took a more conservative stand. Because of our conservative stand, there is a one-time pick-up credit cost,” Lee explains.
“Going forward in the third and fourth quarters, we are only left with Vietnam’s integration and that will cost $30 million,” he says.
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On commercial real estate (CRE), CFO Lee says that its portfolio in the US is still performing but the bank has written some of that down in the last 18 months. “Hong Kong is where the concern is. There are activities, but valuations are coming down, and for the processes where we are working with customers, we are comfortable with our loan-to-values (LTVs) which are 30% in Hong Kong (compared to 49% elsewhere).”
“You might see some customers restructuring, in which case we have to reclassify them as NPLs. On the other hand, if they are not classified as NPLs, ECL3 will rise,” Lee explains, adding that the bank has added to general provisions for the CRE portfolio “to make sure if we get hit, credit costs will not be affected”.
During the media briefing, a surprise was UOB’s loan growth. Loan grew by 3% y-o-y and 2% q-o-q. Wee revealed that mortgages grew by 42% q-o-q. “We’re focusing more on the secondary market. The LTV for these mortgages is 60%. The risk profile is acceptable. The margin is more or less the same. But the volume has picked up a lot. Our mortgage retention unit is doing a good job of retaining customers,” Wee says.
The original assumption in 2022, when the Citi acquisition was first announced, was that the attrition rate would be 10% due in part to overlapping customers. Instead, UOB customers’ transactions have increased, and Citi+UOB’s customer base has grown in at least two markets.
In Malaysia, UOB experienced 3% growth in its customer base after the integration with Citi while average product holdings of ex-Citi customers grew from 1.25 to 1.33. Casa (current account savings account) penetration rose from 20% to 28%.
Indonesia also experienced a 3% growth in customer base post-integration. Average product holdings of ex-Citi customers grew from 1.14 to 1.19 and Casa penetration rose from 14% to 19%.
“Our operation in Vietnam is pretty small and we don’t want to expand until TMRW has been introduced in Vietnam next year,” Wee says.
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UOB TMRW is UOB’s digital bank and it has transferred its Citi customers to TMRW. “The Citi portfolio has stabilised and we continue to have new customers. Our branding is regional. For example, when Taylor Swift came to Singapore, there were queues in our Vietnam branch,” Wee says.
Wee has guided for loan growth of low single-digits this year. “Net interest margins have stabilised at 2.05%. We will try to hold that. We are very proactive in managing fixed deposit costs,” Wee says.
As for the banking book, he reckons it is a judgemental call. The inverted yield curve appears to be normalising as shorter rates are falling faster than longer rates. However, shorter rates are still a tad higher than longer rates.
“We are on an inverted yield curve. The curve is normalising. We have extended and continue to extend the duration,” Lee says, referring to UOB’s securities portfolio.
UOB declared an interim dividend of 88 cents per share for a payout ratio of around 51.6%, up from 85 cents in 1HFY2023.
