United Overseas Bank (UOB) has announced a net profit of $4.6 billion for the FY2022 ended Dec 31, 2022. This is up 12% y-o-y, including oneoff costs of $246 million for the Citi acquisition of its Malaysian and Thai retail businesses. Excluding one-off costs, UOB’s net profit stood at $4.8 billion, up more than 18% y-o-y. The earnings include two months of Citi’s Malaysian and Thai businesses.
Similarly, UOB’s 4QFY2022 net profit was impacted by the one-off costs causing net profit to fall by 18% q-o-q to $1.15 billion. Net profit in 4QFY2022 would have been unchanged excluding these one-off costs. According to CGS-CIMB, UOB’s 4QFY2022 core net profit of $1.4 billion was in line with its estimate but 9% above consensus.
Dividends rose in 2HFY2022, with UOB proposing to pay out a final dividend of 75 cents per share, up from its 60 cents interim dividend. The total of $1.35 per share translates to around $2.26 billion or a payout ratio of 49%. UOB’s dividend policy is to pay out around 50% of its net profit.
Undoubtedly, both group CEO Wee Ee Cheong, group CFO Lee Wai Fai and UOB shareholders would have been pleased with the bank’s liquidity and capital ratios.
Adequate capital
Following the earnings announcement, UOB’s common equity tier 1 (CET1) ratio stood at 13.3%. Last year, UOB’s management had indicated that the Citi acquisition, which comprises its retail business in four countries, Malaysia, Thailand, Indonesia and Vietnam, would negatively impact CET1 to the tune of 70 bps. This caused a little concern among some market watchers, especially as UOB’s CET1 ratio had fallen to 12.8% as at Sept 30, 2022 from 13.1% as at June 30, 2022.
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The higher CET1 ratio as at Dec 31, 2022 is partly because loan growth slowed in 4Q2022 — high interest rates may have caused businesses to pause their investment plans temporarily — and partly because risk-weighted assets (RWA) eased.
Interestingly, UOB’s net asset value rose to $24.24 as at end-2022 (from $24.08 as at end-2021). DBS Group Holdings’ NAV fell by 30 cents to $21.17 for the same period.
Like DBS, Basel IV — where local banks have a five-year transition period — has a positive impact on capital during the transition, but is either mildly positive or neutral to UOB’s capital at the end of the transition period.
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“In between, we will benefit. Come 2024, we have to report two numbers, the transition number and the fully loaded number. At the final number, we will be neutral or slightly positive. Our SME portfolio will benefit. We were worried during the transition that [Basel Committee on Bank Supervision or BCBS] would put additional weights there. So, the SME portfolio is a lot better [than previously],” CFO Lee says.
UOB’s SME loan portfolio accounts for 13% of loans with corporate at 53% and personal loans at 34% as at Dec 31, 2022.
According to statements by the BCBS, Basel IV’s purpose is to restore credibility in the calculation of risk-weighted assets (RWAs) and improve the comparability of banks’ capital ratios. As consultants see it, Basel IV may constrain the use of internal risk models by banks as some advanced models give banks the most freedom to estimate their credit risk, often yielding a much lower risk than the regulator’s standard model to calculate RWA.
Basel IV also introduces an output floor, which prevents a bank’s own internal measurement of its risk exposure from yielding less than 72.5% of the standardised approach. There could also be risk weights of 150% for subordinated debt, 100% for equity holdings under national legislative programmes, 250% for all other equity exposures, and 400% for speculative unlisted equity exposures.
Citi to add $1 billion income in 2023
In his outlook for FY2023, group CEO Wee’s outlook includes mid-single-digit loan growth; net interest margins staying around 2.2%, cost-to-income at 43% to 44%; credit costs at 20 bps to 25 bps, and double-digit fees growth.
In addition, CFO Lee has said that the Citi acquisition will add $1 billion in income in FY2023 or 8% to UOB’s total income of $11.6 billion in FY2022. ROE is tracking on target, and both Wee and Lee expect ROE to exceed 14% by 2026.
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Wee once again emphasised three focuses — connectivity, personalisation and sustainability. “Our regional footprint positions us well to seize opportunities across our strategic pillars, connectivity, personalisation and sustainability,” he says.
“With both our organic growth and Citigroup acquisitions, 70% of the retail customer base is now digitally enabled. We will continue to enhance UOB TMRW and other digital offerings to provide best-in-class services,” says Wee, referring to the growing retail business. UOB TMRW is UOB’s digital bank.
“We expect a stronger pick-up in loans from the second half. We have been investing to become the number one cross-border trade bank in Asia. In 2022, our cross-border income rose 12% accounting for about a third of our wholesale banking income, and transaction banking business expanded significantly contributing 35% to wholesale banking income,” Wee says.
Wholesale banking income benefited from rising interest rates. Infinity, UOB’s wholesale banking cash management platform, is credited with boosting wholesale banking Casa (current account savings account) by 9% even as total Casa slipped from around 56% a year ago to 47% as at Dec 31, 2022.
“Wholesale banking has been very resilient. We are pleasantly surprised by our cash management platform. Wholesale banking is a lot stronger than 10 years ago. Our retail Casa dropped but not wholesale Casa,” Lee echoes.
However, Lee expects most of the rate increases are probably over. He is looking for stable rates this year which would encourage businesses to invest. The 2.2% NIM forecast for this year is premised on policy rates reaching a plateau in the first half of the year. Uncertainty surrounds the intentions and views of US Federal Reserve chair Jerome Powell but inflation targets of 2% a year are a lot lower than current levels.
Lee acknowledges that funding costs may remain elevated. Yet, he points out that UOB’s fixed deposit drives were done at 3.9% a year, lower than some peers. As the war for deposits continues, recent anecdotes have emerged of POSB Bank offering 3.9% for five months. Local banks have been in competition with six-month T-bills issued by the Monetary Authority of Singapore for several months.
Asean footprint
“On the geography side, we continue to see very strong momentum in Singapore and Asean. Singapore shows strong growth from margin expansion. For Thailand itself, we saw the same momentum. Actually, margins in Thailand surged by 99 bps for the fourth quarter, mainly because of the Citi acquisition,” Lee says.
In fact, the Citi Malaysia and Thai acquisitions added 11% to the Asean loan book in 4Q2022 according to a results presentation. “In Malaysia, we had a lower operating profit for the quarter, mainly because we are increasing our IT costs to support the new and larger customer base,” Lee adds.
He explains that Malaysia is in what he terms operational day one which refers to the Citi acquisition being integrated into UOB’s banking platform. This so-called OD1 sets the base for the regional platform for Thailand, Indonesia and Vietnam, to be fully integrated into UOB, Lee explains. Additional costs for integration could be in the $300 million to $400 million range, he indicates.
Wee sees these costs as necessary as UOB continues to onboard new customers across the region. Citi’s Malaysia and Thailand businesses have already added a million customers. The portfolio is performing above expectations, Wee says. By 2024, UOB’s cost-to-income ratio should fall to below 43%, he adds.
In the meantime, UOB’s Foreign Direct (FDI) Advisory unit continues to bring in customers. Says Wee, “We have a team of people in 10 different cities in Asean which help customers and potential investors tie up with law firms and accounting firms. We support our customers not just with commercial banking and providing loans, but we have a holistic offering. We can set up family offices for them, we help them with estate planning, and so on.”
FDI Advisory is part of UOB’s overall Asean strategy. As economies reopen and travel resumes, Wee reckons that UOB can continue to capture the “flow” business. “The number of Suppliers and distributors within our financial supply chain actually rose 20% last year,” he says.
CGS-CIMB says UOB’s 2026 promise is to remain well capitalised, with ROE of above 13% (FY2022: 12%) and return on RWA of above 2% (FY2022: 1.8%) with the dividend payout ratio maintained at around 50%.
“Over the medium-term, UOB targets a cost/income ratio of around 43%–44% and to derive more revenue from outside the Singapore market,” OCBC Investment Research says.
“With its recent Citi consumer business acquisitions, UOB aims to further build on its strategic positioning to capture growth in the Southeast Asia region. While the bank should see positive net interest income (NII) growth and NIM expansion ahead, and benefit from the ongoing reopening of regional Asean economies, the global growth outlook has become more uncertain due to elevated inflation and aggressive Federal Reserve rate hikes,” OCBC analysts caution.
The street’s forecast, based on a Bloomberg poll is for UOB to report a net profit of $5.5 billion in FY2023, up 14% on FY2022’s $4.8 billion, and up 19% based on $4.6 billion. UOB is trading at around 1.22x its book value compared to around 1.6x for DBS. Both are trading above their means.
