UOB: 3Q22 earnings beat on strong NIM
- 3Q22 revenue/net profit of S$3.2bn/S$1.4bn strongly ahead of consensus
- Record NIM expansion of 28bps q-o-q to 1.95%, ahead of management guidance
- New guidance: 4Q22 NIM >2%, FY22F credit costs lowered to 20bps from ~25bps
- Maintain BUY with unchanged TP of S$34.20
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3Q22 results strongly ahead of consensus. 3Q22 revenue of S$3.2bn grew 30% y-o-y/18% q-o-q while net profit of S$1.4bn improved 34% y-o-y/26% q-o-q, a strong beat of the consensus and our expectations. Net interest income of S$2.2bn rose 39% y-o-y/20% q-o-q, driven by NIM that increased 28bps q-o-q to 1.95%, a record quarterly growth. This is also ahead of management’s guidance of >20bps improvement by year end from 2Q22 NIM of 1.67%. Operating costs increased by 27% y-o-y/15% q-o-q, in line with income growth and strategic investments. Cost-to-income ratio improved to 42.6% (2Q22: 43.8%) on robust income growth. Capital ratio stood strong with a healthy CET1 ratio of 12.8% (2Q22: 13.1%).
Weak fee income offset by other non-interest income. Net fee and commission income declined 10% y-o-y/8% q-o-q, due to a moderation in loan/trade-related fees after an impressive 2Q22 and muted wealth fees amid the soft market sentiment. However, the lower fee income q-o-q was offset by record-high customer-related treasury income driven by hedging demands and investment opportunities, and strong trading and liquidity management activities boosting other trading and investment income (+80% y-o-y/+73% q-o-q).
Credit cost inched lower to 17bps; lower new NPA formation and NPL ratio. Credit costs improved q-o-q to 17bps (2Q22: 22bps) mainly due to lower specific allowances, while 9M21 credit costs stood at 19bps, with management lowering FY22F guidance to 20bps (prev: ~25bps). Total loan allowances for 3Q22 were lower at S$135m, 17bps (2Q22: S$173m, 22bps); including general allowances (stage 1+2) of S$8m, 1bps (2Q22: S$7m, 1bps); and special allowances (stage 3) of S$127m, 16bps (2Q22: S$166m, 21bps). New NPA formation was lower at S$214m (2Q22: S$661m, average of S$407m for last four quarters). NPL ratio fell to 1.5% (2Q22: 1.7%), on the back of the reversal of Shimao’s NPL exposure.
Takeaways from analyst briefing
NIM outlook. Management guides for >2% NIM in 4Q22, with no change in sensitivity to Fed rate hikes – every 100bps hike will add S$800m to net interest income. Should the Fed deliver another 75bps rate hike in November 2022, management expects ~10bps q-o-q improvement conservatively, as exit NIM as of end-September already crossed 2%. 80% of its loan book is on floating rates, which will get repriced within one to two months as short-end rates moved up sharply.
Going forward, the Fed hikes will still remain positive for NIM, with some NIM expansion coming from the SEA countries in the region. However, the increases in NIM will be of smaller magnitudes, as the cost of deposits will continue to increase. The 28bps q-o-q NIM expansion in 3Q22 is expected to be the strongest q-o-q improvement.
UOB’s in-house assumptions are that the Fed will continue hikes into 1-2Q23, and NIM will peak during 1-2Q23 as well. Management sees terminal Fed rates at ~2.5% and terminal NIM at >2%, with Citi portfolio adding ~10bps to UOB’s NIM organically due to the portfolio having higher margins.
Credit costs outlook. Management guided for 20bps credit costs in FY22F, though the Citi portfolio will add another 5bps, as the portfolio is largely unsecured. With close to 80% of the mortgage loan book owner-occupied with LTVs hovering around 50%, we understand that management is not concerned about the mortgage portfolio quality. Management is also not expecting any major stress in the SME portfolio, as most of UOB’s SME customers rely heavily on domestic markets and not export markets like China, and credit conditions are still positive in the region. Further, UOB has recently adjusted its portfolio, with SME loans <15% of the total loan book. Management believes that the worst of the relief programme is over, with loans under moratorium now accounting for <2% of the total loan book. 3Q22 saw some weakness in Malaysia with small business loans contributing to new NPAs. Management has shifted the provisions set aside for COVID-19 to MEV overlays and is comfortable with the big buffer in provisions, as they did not reverse any previously.
Fees outlook. Softer fees could last another one to two quarters due to weaknesses in equity markets, while wealth fees should start to pick up and insurance sales and bonds should remain strong. 1H22 saw higher loan-related fees from the FIG/funds segment, which has since moderated. Management expects a double-digit y-o-y improvement in FY23F, given the low base this year.
Operating expenses. Expenses have been on the uptrend, but management highlights that they will continue to work on staff efficiency. Staff costs increased 18% q-o-q during 3Q22 while the YTD increase stands at 9%, with management guiding for a 10%-12% increase for the full year. IT expenses could grow 18%-20% y-o-y on continued investments as well. This would likely bring FY22F CIR to 42%-43% excluding Citi one-off costs and 45% including Citi. With FY23F being a transition year for the Citi integration, CIR is likely to be 43%-44% before management looks to bring it down to 40%-42% by FY24F.
Citi impact. Management expects integration costs of S$700-800m over two years, including S$200m in stamp duty tax during year one (FY22F) and the remaining costs relating to systems and marketing/branding to be incurred over years one and two. FY22F will see the completion of the Thailand and Malaysia acquisition on 1 November with ballpark costs of S$78m + S$200m for stamp duty, respectively, in FY22F (DBS estimates). The completion of the Vietnam and Indonesia acquisition is to be done by end-2023. According to management, accordingly, the capital impact in FY22F/23F is 40-50bps/20-30bps.
ROE guidance. Management believes that ROE could be ~13% in FY23F, including the Citi one-off costs, and ~14% in FY24F, after the completion of the acquisitions and systems integration.
| FY Dec | 3Q2021 | 2Q2022 | 3Q2022 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Net Interest Income | 1,604 | 1,863 | 2,234 | 39.3 | 19.9 |
| Non-Interest Income | 848 | 840 | 950 | 12.0 | 13.1 |
| Operating Income | 2,452 | 2,703 | 3,184 | 29.9 | 17.8 |
| Operating Expenses | (1,072) | (1,184) | (1,357) | 26.6 | 14.6 |
| Pre-Provision Profit | 1,380 | 1,519 | 1,827 | 32.4 | 20.3 |
| Provisions | (163) | (137) | (104) | (36.2) | (24.1) |
| Associates | 29.0 | 23.0 | 18.0 | (37.9) | (21.7) |
| Exceptionals | 0.00 | 0.00 | 0.00 | nm | nm |
| Pretax Profit | 1,246 | 1,405 | 1,741 | 39.7 | 23.9 |
| Taxation | (201) | (292) | (338) | 68.2 | 15.8 |
| Minority Interests | 0.00 | 0.00 | 0.00 | nm | nm |
| Net Profit | 1,046 | 1,113 | 1,403 | 34.1 | 26.1 |
| Growth(%) | |||||
| Net Interest Income Gth | 1.6 | 10.5 | 19.9 | ||
| Net Profit Gth | 4.3 | 22.8 | 26.1 |
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