UNITED OVERSEAS BANK LTD (SGX:U11)
United Overseas Bank 2Q22 - Sufficient General Provisions To Cushion Against External Uncertainties
- UOB reported net profit of S$1,113m for 2Q22 (+11% y-o-y and +23% q-o-q). NIM expanded by a sizeable 9bp q-o-q to 1.67%. Loans & trade related fees hit a new record high of S$283m (+10% y-o-y) as UOB supported business clients in their regional expansion.
- UOB declared an interim dividend of 60 cents per share, representing a payout ratio of 50%. It guided mid single-digit loan growth, low single-digit growth in fees and normalisation of credit costs higher to 25bp for 2022.
UOB's 2Q22 Results Highlights
- United Overseas Bank (UOB, SGX:U11) reported net profit of S$1,113m for 2Q22 (+11% y-o-y and +23% q-o-q), in line with consensus’ estimate of S$1,095m.
- Spectacular NIM expansion. Loan growth was strong at 8% y-o-y and 1% q-o-q, driven by short-term working capital loans. Loans for Singapore and Greater China grew 6.7% and 9.0% y-o-y respectively. Sustainable finance rose to S$20b. NIM expanded by a sizeable 9bp q-o-q to 1.67%. The US Fed hiked the Fed Funds Rate by 50bp in May and 75bp in June. There was strong pass-through to domestic interest rates with SORA and three-month SIBOR rising 105bp and 112bp q-o-q respectively to 1.66% and 1.91% during 2Q22.
- Drag from wealth management. Fees & commissions declined 3% y-o-y and 1% q-o-q in 2Q22. Loans & trade related fees hit a new record high of S$283m (+10% y-o-y) as UOB supported business clients in their regional expansion. Credit card fees grew 44% y-o-y due to increased customer spending after Singapore reopened its international borders in April. Wealth management fees slumped 27% y-o-y and 14% q-o-q as investors turned cautious. AUM was stable at S$138b.
- Positive momentum for hedging demand. Trading & investment income increased 9% y-o-y to S$214m due to customer-related income with greater demand for hedging.
- Maintaining tight control on discretionary spending. Operating expenses increased 12% y-o-y. UOB continues to prioritise strategic investment in people and technology while maintaining cost discipline. Cost-to-income ratio was stable at 43.8%.
- Downgraded a major corporate account in 2Q22. NPL ratio edged higher by 0.1ppt q-o-q at 1.7%. NPLs increased 7% y-o-y. NPL formation was S$661m in 2Q22, higher than S$462m in 1Q22. NPLs for Greater China increased S$524m h-o-h in 1H22 due to downgrade for a major real estate corporate account. Total provisions was S$137m in 2Q22 (-25% y-o-y) comprising mainly specific provisions. We estimated there was a write-back in provisions for securities at S$35m.
- UOB has declared an interim dividend of 60 cents per share (1H21: 60 cents per share), representing a payout ratio of 50%.
Highlights From UOB's Results Briefing
- Guidance for 2022. UOB guided mid single-digit loan growth for 2022. Management expects disbursement for working capital loans for SMEs and drawdown for residential mortgages in 2H22. Fee income is expected to grow at a low single-digit rate, supported by cross-border transactions and sector solutions for wholesale banking. UOB will continue to exercise discipline in control expenses so as to keep cost-to-income ratio stable at about 45%. Management guided credit costs at 25bp for 2022 (2021: 20bp).
- Weathering near-term headwinds. Economic activities are agreeing to stay on and join UOB.
- Sufficient general provisions to cushion against external uncertainties. UOB has set aside general provisions equivalent to 90bp of total loans, compared to 70bp before the COVID-19 pandemic. Management sees its general provisions as sufficient but does not intend to write back its general provisions. UOB does not expect asset quality to deteriorate in 2022. There could be pockets of weakness, such as construction companies affected by supply chain disruptions and shortage of manpower.
- Exposure to Chinese developer. Management disclosed that UOB has S$3b exposure to Chinese developers (state-owned enterprises: 50%, privately owned enterprises: 50%), which represents only 1% of group loans. Management is comfortable with loan-to-value ratio for these real estate developers and they are not in danger of turning into NPLs. UOB does not have exposure to residential mortgages in Mainland China.
- See
UOB has taken legal action against Shimao Group
- Separately, based on Bloomberg, UOB has taken legal action against Shimao Group at the High Court of Hong Kong for breach of terms for loan and security agreement for a residential development project in Kowloon. Shimao is alleged to have re-allocated loans and shares between entities without UOB’s consent.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-08-01
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