When DBS Group Holdings (DBS) reported its results for 1QFY2024 ended March 31 on May 2, the market cheered the results by sending the share prices of all three local banks higher.
In contrast, when United Overseas Bank U11 (UOB) announced its results for the same quarter on May 8, the share prices of the three banks fell sharply on May 8.
Both UOB and DBS had beaten the Street’s estimates for net profit on better non-interest income measures.
UOB reported a 1QFY2024 core net profit of $1.6 billion, up 5% q-o-q but down 1% y-o-y. The q-o-q improvement was attributed to the higher net fee income and record trading and investment income. On a y-o-y basis, core net profit kept steady due to its diversified growth engines across its wholesale, global markets and retail businesses.
Upbeat on NIM
UOB’s net interest income (NII) for the 1QFY2024 fell 2% q-o-q and y-o-y to $2.36 billion due to the shorter quarter while its net interest margin (NIM) remained stable q-o-q at 2.02%. The stable NIM was attributed to active management of its excess liquidity buffer, which offset the lower loan margins.
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On a y-o-y basis, however, NIM fell by 12 basis points (bps) from 2.14% in 1QFY2023.
UOB’s CFO Lee Wai Fai says: “The y-o-y decline on margins is still there,” although the bank’s NIM held up stronger than expected after the US Federal Reserve delayed the cuts in interest rates.
While NIM was thought to be “a bit challenging” this year, UOB is now comfortable with its current NIM, adds Lee.
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During the quarter, UOB’s low-cost current account, savings account (Casa) deposits surpassed 50% for the first time since FY2022, up q-o-q and y-o-y, along with deposit growth. Casa growth was underpinned by growth from the bank’s cash management platform, new wholesale operating accounts and retail clients.
Competition for funds has eased, with UOB trimming rates it pays UOB One account holders with effect from May 1. Coupled with the delay in rate cuts, Lee figures NIM will hold steady through 2QFY2024 and 3QFY2024. “We hold to our guidance that we can keep it well above 2% and maybe I can add that we can keep it well above 2%,” Lee says. Of course, NIM also depends on whether the Fed cuts its rates sharply later this year.
On the other hand, fixed deposit rates are unlikely to be cut further partly because of competition for funding, Lee points out.
Higher fee income
Meanwhile, NII was a bright spot. In 1QFY2024, UOB’s net fee income rose by 2% q-o-q and 5% y-o-y to $580 million. The lift came from loan-related fees and a pick-up in wealth fees. Meanwhile, credit card fees grew by 11% y-o-y to $90 million but fell from 4QFY2023’s quarterly record-high of $125 million due to the seasonal increase usually seen in the final quarter of the year.
UOB’s deputy chairman and group CEO Wee Ee Cheong says: “Other than concerts, which all of you are very excited about, we plan to do more events targeting younger customers.”
Customers who used UOB’s cards to secure priority access to sing along with Taylor Swift have continued to “actively use” the bank’s cards.
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Beyond concerts, Wee also expects consumer spending to remain strong this year and the bank is expanding lifestyle offerings tied to its cards. The bank is “well placed” to milk the integration of its Citi portfolios in Malaysia, Indonesia and Thailand too. “Our focus on cross-sell synergies is starting to gain traction. We aim to uplift customer spend and strengthen deposit balances and investments,” he continues.
Resilient asset quality and balance sheet
UOB’s overall asset quality also stood stable with a lower new non-performing asset (NPA) formation. The bank’s non-performing loans (NPL) ratio stood at 1.5% unchanged q-o-q, and down by 0.1 percentage points y-o-y.
Its specific allowances over NPA remained unchanged q-o-q and y-o-y at 32%. As at the end of March, UOB’s NPAs stood at $5.05 billion, up 2.41% q-o-q but 1.79% lower y-o-y.
Its common equity tier 1 (CET-1) ratio stood at 13.9% while the net stable funding ratio (NSFR) stood at 121% as at the end of March 31. UOB’s liquidity ratio came in at 160% during the same time.
During the same period, UOB’s total credit costs on loans improved to 20 bps, down from 25 bps in the 4QFY2023 and 21 bps in the 1QFY2023.
This level is “comfortable” for CFO Lee, who notes that the bank has always guided its credit costs to range between 25 bps and 30 bps.
He adds that the figure is not surprising to the bank and there is no big single entity responsible for that.
“This time round, it’s mainly NPL formation. There are two parts of specific provisions (SPs) that we normally add. One is new NPL, and the second is valuation. Most of the valuation issue has been taken out of the equation,” he says, adding that the bank’s SP was higher in the 3QFY2023 or 4QFY2023 due to the valuation downgrades for properties made ahead of time.
“So 20 bps is something within our model and we’re comfortable. There’s no specific single factor,” he says.
Growing wealth sustainably
In the quarter, UOB attracted $3 billion in new money. This helped lift its assets under management (AUM) to $179 billion, up 11% y-o-y,
While a bigger AUM generates more fees, Wee does not believe in growing for the sake of it. Rather, he prioritises “growth with stability” by offering customers steady ways to grow their wealth instead of pushing new products to them.
“We prefer more conservative products [to ensure it’s sustainable for our customers], although some people think there is already a risk-on element,” says CFO Lee. “That’s our model itself — steady growth. We don’t know when the cycles will happen. We want to be responsible to our customers.”
Looking ahead, Wee stays pat on the current strategy of focusing on the Southeast Asian region, to capture opportunities arising from the tourism growth and also from ongoing shifts in global supply chains away from China. Nonetheless, Wee remains confident that China’s economy will recover. “The turnaround may take awhile but generally I’m confident.”
Analysts mixed
Following the results, Citi Research’s Tan Yong Hong has kept his “buy” call with an unchanged target price of $33.20. He notes that the bank delivered on NIM although this was driven by the more lumpy interbank and securities products.
Tan is also less positive on the average interest earnings assets (AIEA) base, which fell by 2% q-o-q. Citing the bank’s guidance of improving margins, Tan sees an FY2024 NIM upgrade but to be tempered by NII given 1QFY2024 AIEA –2% q-o-q.
UOB’s 1QFY2024, thanks to non-fee income and lower-than-expected credit loss costs, beat the expectations of Morgan Stanley by 6%. “While [UOB’s] drivers [are] similar to DBS, [the] extent of beat in lesser and y-o-y trends [are] softer than DBS’s,” write analysts Nick Lord, Selvie Jusman, Aitong Li and Yvonne To, as they kept their “overweight” call and $33.40 target price.
Similarly, UOB’s results beat the expectations of OCBC Research Investment’s Carmen Lee. While she kept her “hold” call, Lee has raised her fair value to $33.50 from $32.50, given how “higher for longer” rates should support the bank’s margins, prompting her to raise her FY2024 earnings projections slightly.
Lee acknowledges that the global economic outlook remains “cloudy” but she expects Asean to stay “fairly resilient”. “UOB’s focus on its Southeast Asia franchise should provide opportunities to tap into the rising affluence in this region with a combined population of more than 60 million people.”
Maybank Securities’ Thilan Wickramasinghe has also kept his “hold” call as he sees “slow, steady growth” and “limited dividend upside” in the near-term future.
“Operationally, we see slower growth for NII led by peaking loan yields and slow loan growth. Wealth management is a bright spot that needs to be watched as well as higher for longer interest rates keeping NIMs supported,” he writes.
The analyst has raised his target price to $31.03 from $30.88 after increasing his earnings per share (EPS) estimates for FY2024–FY2025 by 1%-2% after UOB’s results.
