UOB - OCBC Investment 2022-07-29: Decent 2Q, But Guidance Trimmed


UOB - Decent 2Q, But Guidance Trimmed

  • UOB's 2Q22 net profit increased 11% y-o-y, driven by net interest income (NII) growth and net interest margin (NIM) expansion.
  • UOB's guidance for 2022 was trimmed given higher macro uncertainties, with a base case of a potential slowdown ahead but no recession expected.
  • UOB's management remains comfortable on the adequacy of its provisions and optimistic on the medium-term growth outlook of its ASEAN franchise, which should be strengthened by the phased legal completion of the Citi integration by 4Q23.

UOB's 2Q22 results

  • UOB (SGX:U11) released a stable set of 2Q22 results with strong NIM and NII as expected, although guidance ahead was slightly reduced (mid single-digit loan growth, versus mid to high previously; low single-digit fee growth vs previous high single digit; credit costs at 25bps vs previous range of 20-25bps).
  • 1H22 net profit of S$2b was flat y-o-y, as higher NII was moderated by lower fees and trading and investment income as market sentiment softened amid economic uncertainties. Pre-provision operating profit (PPOP) was up 2% driven by higher NII (+4% y-o-y).
  • An interim dividend of S$0.60 per share was declared, in line with expectations and represented a payout ratio of ~50%. CET1 ratio was maintained at 13.1%, unchanged q-o-q and within its comfort range of 12.5-13.5%.
  • 2Q22 net profit of S$1.113b increased 23% q-o-q and 11% y-o-y. 2Q22 NII grew 11% q-o-q and 18% y-o-y, driven by NIM expansion (expanded 9bps q-o-q to 1.67% in 2Q22) and healthy loan growth (+8% y-o-y).
  • UOB highlighted record loan, trade related and credit card fees, which were moderated by lower wealth fees (-36% y-o-y) amid cautious market sentiment. Treasury and investment income grew from 1Q22 lows, with 8% increase in customer-related treasury income. Customer loans of S$322b was steady, growing +1% q-o-q and 8% y-o-y, mainly from term and housing loans and was broad-based across geographies as business momentum improved with regional economies re-opening. Cost income ratio improved slightly q-o-q to 43.8%.
  • Performance update by segments:
    • Group retail banking reported 1H22 operating profit decline of 10% y-o-y as the business was impacted by slower wealth activities amid higher investor caution, which was partially offset by sustained deposit growth and higher margin.
    • Global wholesale business (GWB)’s 1H22 operating profit grew 20% y-o-y, supported by higher margin, record loan and investment banking fees, as well as solid treasury customer flows. Cross border income grew 13% y-o-y, accounting for 29% of GWB income. Global markets was stable, with 1H22 operating profit increase of 2% y-o-y, helped by higher income from foreign exchange and commodity trading amid higher market volatility.
  • By geography, steady growth was seen across Singapore (2Q22 operating profit +21% q-o-q) and North Asia markets (2Q22 operating profit +18% y-o-y) while South East Asia’s 2Q22 operating profit declined 1% q-o-q, with overseas contribution making up 45% of its group operating profits.
  • UOB's higher non performing asset (NPA) formation in 2Q22 was largely due to downgrade of a major real estate client. Overall asset quality remained largely benign with total credit costs of 22bps (in line with expectations) which increased 3bps q-o-q and +2bps y-o-y. Non performing loan (NPL) ratio increased slightly from 1.6% in 1Q22 to 1.7% due to a large corporate downgrade in North Asia. NPA coverage was ~185% inclusive of collateral.

Estimated ~S$3b of loans to Chinese developers, which accounts for ~1% of UOB's group loans and has low borrower concentration.

  • In its post-results briefing, UOB's management updated that current provisions are looking adequate and it does not see systemic risks in the rest of the loan book. Looking ahead however, it does not expect to have any writebacks and expects to add modestly to provisions depending on how the macro risks develop.

Fair value estimate for UOB is reduced in view of lowered guidance and higher macro headwinds

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-07-29
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