With the global focus on bank capital, United Overseas Bank (UOB) U11 announced that its common equity tier 1 (CET1) rebounded to 14% in 1QFY2023 ended March 31 compared to 13.3% in 4Q2022 and 13.1% in 1Q2022.
When UOB announced its Citigroup acquisition in January 2022, the pro forma CET1 based on FY2021 would have translated to around 12.8%. However, as earnings accrete to shareholders’ funds coupled with mark-to-market gains of its modest portfolio of available for sale (AFS) securities and high-quality liquid assets (HQLA), CET1 increased by around $1.7 billion q-o-q and around $1 billion y-o-y as at 1Q2023.
Based on regulations by the Monetary Authority of Singapore (MAS), no more than 2% of total capital can be in the form of additional tier 1 (AT1) and tier 2 capital. UOB’s ratio is well below that.
“MAS has put a limit to how much we can have as AT1 and Tier 2, above which it won’t be counted. We are way below those limits for AT1,” says UOB group CFO Lee Wai Fai. “Both regulators and rating agencies place a lot of focus on a minimum level of CET1 which we can’t disclose. We’re one of the few banks in the world — there are three of them in Singapore — [rated as double A],” Lee says.
Banks have to ensure they have minimum levels of CET1, AT1 and tier 2 capital in the event of shocks. In March, Credit Suisse’s AT1 capital was wiped out. Credit Suisse was a G-SIB or a global systemically important bank. As a result, investors are concerned about bank capital.
Dividends could rise
Lee adds: “We’re guiding CET1 a bit higher, and keeping it above 13%. That gives us a prudent mix between growth, dividend and CET1 ratio. Obviously, there was a worry about CET1 a few quarters ago because of the Citi acquisition. It has all eased, we did risk-weighted asset management and interest rates went up. If they didn’t go up, we would’ve moved back to 13% by the end of this year. We are two years ahead of where we want to be. We are extremely comfortable and we can go back to our organic growth strategy.”
Wee Ee Cheong, deputy chairman and group CEO of UOB, says: “As long as our capital is above 12.5%, we will pay out 50% of our net profit.”
“The guidance is quite clear. If we maintain strong capital, we’ll pay out 50% of net profit. Technically, we can’t promise a 74% profit growth for the year; 1Q2023 was a bit exceptional. But profit will definitely be higher than last year. So, technically shareholders can expect a higher dividend per share,” Lee points out.
See also: Banks in Singapore can withstand multiple shocks: MAS
Commercial mortgages well collateralised
As for credit quality, there could be some uptick given the uncertainty in the global economy, especially around commercial real estate concerns, Lee acknowledges. “We might have some NPL [non-performing loan] uptick but the good news is this [loan] is heavily collateralised,” says Lee. The loan-to-value (LTV) of UOB’s commercial property loans are all at around 50%, including Chinese commercial property.
Local banks including UOB have small exposures to US and Chinese commercial property, believed to be through the S-REITs with overseas assets. These are less than 2% of UOB’s overall loan portfolio.
“We’re not focusing on some of the Western countries. Whatever balance sheet we put into the US or UK, the company must have aspirations of coming to Asia. This is where we can support them,” Wee says.
At any rate, UOB has a lot of cushion to withstand shocks. Total allowances in 1Q2023 stood at $4.9 billion of which $3.3 billion was for general allowances. “We continue to build general provisions over performing loans. We have gradually moved up to 100 bps and back to pre-Covid levels,” Lee says.
In addition, Lee admits to adding to the bank’s management overlays and hints this is more than $1.5 billion. Management overlays are amounts over and above what banks are required to set aside in their provisioning.
Wee says that the Citi integration is better than expected. He expected an attrition rate of around 10% when the acquisition was first announced. “After the merger, it’s actually up 3%. The Thailand and Malaysian portfolios show that people are willing to accept us. We can anticipate a lot of growth from the Citi portfolio. Hopefully, the earnings will be more than what we anticipate,” he says.
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Earnings beat consensus
Better-than-expected treasury income coupled with a doubling of retail operating profit boosted UOB’s core net profit in 1QFY2023 by 13% q-o-q and 74% y-o-y to $1.58 billion. According to CGS-CIMB, net profit beat its estimate by 5% and consensus estimates by 12%. The beat was largely due to stronger-than-expected treasury income, CGS-CIMB says.
As was anticipated, net interest margin (NIM) of 2.14% contracted by 8 bps q-o-q, but was higher than the 1.58% recorded in 1Q2022. Meanwhile, net interest income (NII) of $2.41 billion eased 6% q-o-q but was up 43% y-o-y. The 6% q-o-q decline was due to higher deposit costs and a focus on liquidity. Loan to deposit ratio (LDR) as at March 31 was 83.3% versus 85.6% as at 4Q2022 and 87.3% as at 1Q2022.
The lower LDR appears to be deliberate. “We are a long-term player. Our profit was good. Don’t just look at margins, look at liquidity. We have to anticipate these problems. Liquidity is key. We’re happy to ensure the balance sheet is strong, and we’d rather sacrifice a bit of NIM,” Wee explains.
“For us, NIM will moderate to around these levels (2.14%). We are confident in keeping it between 2.1% and 2.2%. The average NIM in 2022 was 1.86%. Even if we stay at 2.1%, we have more than 30bps to buffer our balance sheet. We have diversified our income beyond margins. We are focusing on fees and see the momentum returning,” says Lee.
“Fee income climbed 14% q-o-q (–3% y-o-y) on the back of a strong recovery in wealth management fees due to improved customer sentiment. Credit card fee momentum stayed strong while loan-related fees rebounded. Treasury and investment income more than doubled q-o-q amid strong hedging demand and good performance from trading and liquidity management activities,” CGS-CIMB describes in an initial look at UOB’s 1Q2023 results. “We expect neutral to positive share price momentum given the beat on consensus,” the report says. CGS-CIMB has an add recommendation on UOB.
