On Oct 26, during a results’ briefing, United Overseas Bank U11 (UOB) announced it has taken steps to strengthen its balance sheet, tweak its macroeconomic variable (MEV) model to be more forward-looking, and increase liquidity as competition for loans heats up amid a decline in mortgage costs. It also wrote back $78 million in general provisions but increased specific provisions to $229 million in 3QFY2023 for the three months to end-September (up $102 million y-o-y, and up $27 million q-o-q).
In 3QFY2023, UOB reported a net profit of $1.48 billion, up 5% y-o-y but down 2% q-o-q; and within analysts’ expectations. However, including one-off expenses of $97 million for the Citigroup integration cost, UOB’s net profit dips to $1.38 billion, down 1% y-o-y and down 2% q-o-q.
Net interest income (NII) was unchanged q-o-q but up 9% y-o-y to $2.43 billion. Fee income for the quarter was near an all-time high of $591 million, underpinned by loan-related fees (+19% q-o-q, 5% y-o-y) and credit cards (+44% q-o-q, +89% y-o-y). Some recovery was reported in wealth management.
Despite a stable NII, net interest margins (NIM) eased marginally q-o-q to 2.09%, from the 2.12% NIM in 2Q2023. While loan yields held up q-o-q, interbank and securities yields fell q-o-q and y-o-y.
‘Defending the balance sheet’
Two messages on the results stood out during the results briefing on Oct 26. First, was an emphasis on “defending the balance sheet” by tweaking the bank’s MEV model which helps to guide expected credit loss (ECL) levels following a writeback of $78 million of general provisions, an unusual move by the bank.
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Second, while the guidance is for mid-single-digit loan growth in 2024, the message on Oct 26 is that competition for mortgages is heating up, as is competition for high-quality customers. Anecdotal evidence points to mortgages costing as low as 3%. Is this true?
Most likely, yes. UOB’s group CEO, Wee Ee Cheong, says: “Given the high interest rate environment, you expect good customers to repay their loans, which is why I’m not overly concerned about the low loan growth. It’s a healthy sign. It means we have good long-term customers. Every bank is chasing after good customers.”
Group CFO Lee Wai Fai points out that UOB’s loan rates remain competitive. “Our pricing is market-driven. Where the industry or competitors are struggling to deploy excess liquidity, Singapore mortgage is a comfortable asset class because over the long term, asset quality is very strong. Mortgages are an important asset class for us and we compete to stay relevant.”
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Lee goes on to cite that new developments are slowing down, and something of a mini-war has surfaced for refinancing housing loans.
Building up low-cost Casa portfolio
To keep NIMs stable, Lee’s view is that UOB has to build up a low-cost Casa (current account savings account) portfolio. The bank is doing this through its One Account and UOB TMRW on the retail front, and from transaction banking on the corporate front. Customer deposits rose 1% q-o-q and 2% y-o-y.
“Our capabilities in UOB TMRW have helped us build strong deposit balances. Our One Account value proposition refresh is bearing results,” Wee says. UOB’s liquidity position appears resilient with liquidity coverage ratio at 153% and net stable funding ratio at 121%, both well above regulatory requirements. Common equity tier 1 ratio ended the quarter at 13% (including the impact of the Citi acquisition). Partly, risk-weighted assets (RWA) and specific provisions rose as a result of “defending the balance sheet”.
“We’re not going into a crisis but we expect weakness. We changed some of our MEV models to include a more difficult macro environment. As a result, we lowered the value of our loan collateral. Specific provisions went up not because of new non-performing loan (NPL) provisions, but because of this defensive step to reduce the balance of the collateral.”
UOB’s specific provisions or ECL 3 rose to 29 bps as at end-September from just 16 bps a year ago and 26 bps a quarter ago, as a result of the bank pre-emptively lowering collateral valuations.
Downgrading the credits by a couple of notches is not sufficient to push those accounts into the NPL category, hence the rise in specific provisions. One of the results of the downgrade is an increase in RWA despite the absence of loan growth. As at end-September, RWA rose 3.1% q-o-q and 2.1% y-o-y.
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As the US Federal Reserve approaches the end of its rate hike cycle, loan yields for the local banks are likely to taper off. “As a result, we want to be defensive about funding costs. If not, [loan] repricing will catch up,” Lee says. “We’re worried about the discipline of some of our competitors, whether to get that volume growth including for mortgages, they underprice.”
UOB’s strategy is to lean on its Asean footprint for growth. “We are looking at other opportunities besides the traditional path of using pricing. Our sector solutioning, ESG strategy, supply chain management and transition financing are some of the new segments we are looking at,” Lee says.
