The local banks, in particular United Overseas Bank (UOB), are proxies to regional growth, opportunities and challenges. The message UOB’s group CEO Wee Ee Cheong and group CFO Lee Wai Fai delivered on July 27 reflected the strength of its regional franchise, but also its challenges.
In sum, its earnings numbers were boosted by its group retail segment, which benefitted from the Citigroup (Citi) acquisition. On the other hand, UOB has to navigate and manage the foibles of Asean corporates. It reported a specific provision of around $174 million in 1HFY2023 ended June for Thailand, which is related to a company in the manufacturing sector that is under investigation.
CFO Lee says: “The Thai corporate is in manufacturing; unfortunately, it is an account that was beset by fraud, and we decided to take the prudent stand to make a provision. In fact, we’ve fully provided for it. If there is any recovery, that would be an upside to us. So it doesn’t affect our balance sheet and our results going forward.”
According to The Nation, “Stark Corporation, a wire and cable manufacturing company, which is listed on the Stock Exchange of Thailand (SET), is suspected of fraud by its former executives who allegedly tried to hide the company’s accumulated loss during 2021–2022 of THB12 billion, THB4 billion of which is reportedly negative shareholder equity”.
The Thai issue is unlikely to change UOB’s forecast of around 25 bps of total credit costs for 2023. “We are sticking to our guidance. So, we’re guiding that for the next two quarters, credit costs will be back to normal,” Lee says.
In 1HFY2023, UOB set aside more for general provisions, which rose by 5.3% q-o-q to $3.058 billion. The general allowance is 1% of performing loans. The non-performing assets coverage strengthened a few percentage points to 99%, or 209% after taking collateral into account. The NPL (non-performing loans) ratio stayed steady at 1.6%, unchanged q-o-q.
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Earnings growth underpinned by NIM, cross-border flows
Despite the hiccup in Thailand, UOB reported 1HFY2023 net profit of $2.9 billion (including one-off expenses related to the Citi acquisition), up 45% y-o-y; 2QFY2023 net profit of $1.4 billion (including one-off expenses) fell 6% q-o-q, but rose 27% y-o-y. As a result of net profit growth, and with a payout ratio of 49%, UOB shareholders will receive 85 cents in interim dividends.
CEO Wee says: “Global growth outlook continues to be uncertain. External demand has been soft. Concerns about commercial real estate are also spreading from the US to other developed markets, but we expect the Southeast Asia region to stay relatively resilient.”
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As long ago as 2009, UOB has been investing in a regional standardised banking platform to work as one bank across its five main markets. “The wholesale banking unit spent $800 million over the past eight years to build capabilities including regional payments, trade and cash platforms. [These business units] are all recording double-digit growth annually,” says Wee.
“We are now powering our connectivity business. Everyone can talk about connectivity, but without infrastructure, it’s difficult,” he cautions, but adds that UOB’s cross-border and transaction banking income continues to grow.
Over the years, UOB has been viewed as a somewhat conservative bank. However, in 2011, it started its Foreign Direct Investment (FDI) Advisory Unit to capture the flow of business for its Asean footprint even before Chinese President Xi Jinping’s Belt and Road Initiative. Its digital bank, UOB TMRW, had already been launched in Thailand in 2019 and in Indonesia the following year, ahead of the new digital banks in Singapore. Similarly, UOB has a Financial Supply Chain Management unit providing regional solutions for its customers.
“The number of suppliers and distributors within our financial supply chain management rose 35% year-on-year,” notes Lee.
“The region is also benefitting from supply chain diversification. Companies and individuals are diversifying their assets overseas, including to Singapore, in the flight to quality. I believe UOB is well-positioned to capture some of these flows with our extensive regional footprint,” Wee indicates.
UOB experienced an inflow of funds with AUM rising by $12 billion y-o-y in 1HFY2023 to $165 billion. In 1HFY2023, its cross-border income rose 17% y-o-y and accounted for 23% of wholesale banking income.
Although wholesale banking income rose 7.7% h-o-h and 40% y-o-y to $2.8 billion in 1HFY2023, profit before tax (PBT) for wholesale banking at $2.1 billion in 1HFY2023 was flat y-o-y and 17% lower compared to 2H2022 because of the specific provision charge.
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Net interest income continued to rise in 2QFY2023 by 1% q-o-q and 31% y-o-y to $2.41 billion. “Exit” net interest margins (NIM) in 2QFY2023 were 2.14%. Lee indicates that the rest of the year should see NIM at around these levels. The general view among market observers is that the largest gains in NIMs are likely over, as the US Federal Reserve announced what appears to be its final 25 bps hike in the current interest rate cycle.
For UOB, cost of funds pressure has eased as the marginal cost of repricing deposits declined, while Casa (current account savings account) remained stable at 47.6%, after four quarters of decline.
Retail unit boosted by Citi
Meanwhile, UOB’s group retail unit was boosted by Citi’s customers. In 1HFY2023, the group retail segment recorded a 46% y-o-y surge in PBT to $1.2 billion, compared with a year ago. Excluding one-off costs in relation to the Citi acquisition, core PBT tax would have registered a 71% y-o-y growth. Compared with 2HFY2022, PBT rose by 24% as UOB had already consolidated Citi’s Malaysian business in November 2022.
Indonesia is likely to be operationally consolidated (in an operational day 1) by the end of this year, and Thailand and Vietnam will be consolidated next year. The operational consolidation will lead to lower costs next year. Instead of a 10% attrition in customers, in Malaysia, Citi appears to have brought in more customers than originally expected.
“With our standardisations, we don’t foresee any problems to integrate Citi. Our customer base has grown beyond 7 million (to 7.3 million). Initially, when we acquired Citi, we actually expected a 10% attrition rate for that customer base, but the customer base actually grew more than that after integration,” Wee observes.
“There is a huge opportunity that we can cross-sell into the Citi customer base. These people are quite digitally savvy,” Lee says, adding that they are being onboarded into UOB TMRW.
“Wealth and deposits need some of the omnichannels we have. Malaysia was where we saw a huge uptake after operational day 1. We think there is where we can work on the potential [integrations]. Some of the customers are benefitting from it now, but will get the full impact after the operational merger with Indonesia at the end of this year and Thailand early next year,” Lee elaborates. “The UOB-Citi customer base increasing was surprising to us and reflects the confidence in UOB.”
The inflow of net new money in 1HFY2023 was underpinned by new hires in UOB’s private bank. “The focus is on some of the family offices. We have a new breed of relationship managers getting some new customers as we refocus on our private bank. We’re behind the market, we’ll have to catch up. The next phase of growth is looking at our private bank,” Lee says.
Basel IV transition to start in 2024
As UOB starts to deepen its footprint in the region, its management is looking at Basel IV and its impact on UOB’s loan portfolio.
“Overall repositioning will not immediately take place because there is a five-year transition. Under the new Basel proposals, [risk weights for] certain industry asset classes are different. The most obvious is the mortgage [risk-weight] which currently has a generous RWA [risk-weighted assets] treatment. There will be capital implications. We’ve factored it in. Industry players are using 25 bps of RWA as a guide,” Lee points out. “SMEs have more favourable treatment,” he adds.
Bloomberg Intelligence has said that the capital impact of fully-loaded Basel IV rules on Singapore banks looks modest and is unlikely to change dividend policy or require capital raises, given ample capital.
“Diverse portfolios mean shortfalls for some RWA can be offset by RWA above the output floor in other cases. The output floor and risk-insensitive standardised approaches have the most impact on low-risk assets like mortgages and corporates. Banks with big trading books will be hit by Basel’s fundamental review of them. As they’ve guided, the initial move to Basel IV in 2024 may lift CET1 ratios by 2% for DBS and UOB due to provisions such as removal of the 1.06 multiplier for internal ratings-based RWA and a lower loss given default for loans to unsecured corporates under a foundation internal ratings-based approach,” Bloomberg Intelligence says.
In the meantime, Wee remains focused on his Asean network and integrating the remaining Citi units. Because of the Taylor Swift concerts in Singapore, UOB’s credit card applications grew by 45% (in recent weeks) across the region.
“People want to get our credit cards to apply for the concert. It demonstrates the power of a big customer base not only in Singapore but also the region,” he says.
He plans to “harness more business” with this enlarged customer base along with UOB TMRW, the bank’s digital platform, its data infrastructure and AI, in order to cross-sell products, all thanks to its regional platform.
“All these things happened because we started a decade ago. We standardised our regional IT platform and now we’re reaping the benefits. The standardisation will cut across the four markets we’re in,” he says.
— With additional reporting by Felicia Tan
