UOB: Looking towards better loan growth in FY24F
- 3Q23 net profit of S$1.4bn (-1% y-o-y/-2% q-o-q) in line
- 3Q23 NIM declined 3bps q-o-q on lower interbank and secruities margin
- Higher specific provisions driven by lower collateral valuations of commercial real estate in US, China, and Hong Kong
- Maintain HOLD, TP S$30.30
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- UOB: NIM has stabilised08 May 2024
- UOB: More upside in the works22 Apr 2024
- UOB: 4Q23 NIM declined 7bps q-o-q23 Feb 2024
Non-interest income declined from previous quarter. Net fee income rose 14% y-o-y/13% q-o-q to S$591m in 3Q23, driven by a modest recovery in wealth fees alongside record-high card fees. Other non-interest income of S$436m (+1% y-o-y/-25% q-o-q) declined, as other trading and investment income was impacted by volatility in the valuation of investments. Trading and investment income of S$375m (+1% y-o-y/-22% q-o-q) declined from the previous quarter: Customer-related treasury income of S$198m (+4% y-o-y/+9% q-o-q) sustained its momentum while other trading and investment income of S$177m (-1% y-o-y/-67 % q-o-q) was affected by volatility in the valuation of investments.
Lower credit cost of 19bps; NPL stable at 1.6%. 3Q23 credit cost was lower, at 19bps, on the back of higher specific allowances, which was offset by a write-back in general provisions. Total loan allowances of S$151m, 19bps (2Q23: S$238m, 30bps) include general allowances (stage 1+2) of -S$78m, -10bps (2Q23: S$36m, 4bps) and specific allowances (stage 3) of S$229m, 29bps (2Q23: S$202m, 26bps). General allowance performing loans coverage declined to 0.9% (2Q23: 1.0%). New NPA formation was lower, at S$267m (2Q23: S$364m, average of S$318m over the last four quarters); NPL remained stable q-o-q at 1.6%.
2024 guidances – to see better loan growth alongside higher credit costs. UOB expects to see mid-single-digit loan growth and for margins to remain at the current levels. Fee income is expected to see double-digit growth, while CIR is expected to be stable as one-off costs from the Citi acquisition substantially roll off. Management is guiding for higher credit costs of 25-30bps (9M23 at 25bps).
Takeaways from analyst briefing
Details on 3Q23 NIM. The 17bps q-o-q decline in interbank and securities margin, which drove the NIM compression during 3Q23, was due to UOB swapping excess USD deposits from clients back into SGD – while interbank NIM declined, UOB saw a pick-up in treasury income. Some of the excess USD deposits are also placed into trade assets that yield 5.5%-6.0% on a gross basis, which is still positive. Exit NIM of September 2023 was 2.08%-2.09% (3Q23: 2.09%) (blended basis), while loan margins continue to be at ~2.6%. There is some pressure on loan repricing that UOB is seeing currently as competitors cut pricing for volume growth. UOB’s guidance for stable NIMs in FY24F at the current levels assumes one further rate hike.
Asset quality. The spike in specific provisions during 3Q23 is due to collateral revaluations. These collaterals relate to commercial real estate exposure in the US as well as HK/CN for existing NPLs. UOB has previously provided for some US exposures and took further provisions during 3Q23. While HK/CN has strong collaterals and UOB remains comfortable with top-tier sponsors and LTV of 40%-50%, management decided to make a more prudent move on a few collaterals by taking specific provisions, as there are concerns over the decline in collateral values as well as the ability to dispose of collateral. During 3Q23, there were also non-loan credit costs due to contingent charges. Some exposures have been flagged during the annual review and have been downgraded by 1-2 notches out of 16 notches, though not downgraded to NPL status. Some pockets of weakness still exist for Singapore construction, as well as a couple of Indonesia names. Management believes more specific provisions could arise in FY24F relating to specific accounts.
Integration costs. 4Q23 expenses will be similar to that of 3Q23, as a slowdown in the integration costs for Citi Malaysia will be offset by an acceleration in Indonesia integration costs. FY23F Citi integration costs will be ~S$350m. 1H24F will still see substantial one-offs due to the Thailand integration costs, with FY24F costs at half of FY23F’s, while management targets a 41% CIR run rate for FY25F.
FY Dec | 3Q2022 | 2Q2023 | 3Q2023 | % chg yoy | % chg qoq |
Net Interest Income | 2,234 | 2,437 | 2,429 | 8.7 | (0.3) |
Non-Interest Income | 950 | 1,105 | 1,027 | 8.1 | (7.1) |
Operating Income | 3,184 | 3,542 | 3,456 | 8.5 | (2.4) |
Operating Expenses | (1,357) | (1,453) | (1,423) | 4.9 | (2.1) |
Pre-Provision Profit | 1,827 | 2,089 | 2,033 | 11.3 | (2.7) |
Provisions | (104) | (365) | (235) | 126.0 | (35.6) |
Associates | 18.0 | 26.0 | 20.0 | 11.1 | (23.1) |
Exceptionals | 0.0 | (92.0) | (97.0) | - | 5.4 |
Pretax Profit | 1,741 | 1,658 | 1,721 | (1.1) | 3.8 |
Taxation | (338) | (243) | (339) | 0.3 | 39.5 |
Minority Interests | 0.0 | 0.0 | 0.0 | - | - |
Net Profit | 1,403 | 1,415 | 1,382 | (1.5) | (2.3) |
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Growth (%) |
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Net Interest Income Gth | 19.9 | 1.2 | (0.3) |
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Net Profit Gth | 26.1 | (6.4) | (2.3) |
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Key ratio (%) |
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NIM | 1.7 | 2.2 | 2.1 |
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NPL ratio | 1.5 | 1.6 | 1.6 |
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Loan-to deposit | 85.2 | 83.5 | 82.3 |
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Cost-to-income | 42.6 | 41.0 | 41.2 |
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Total CAR | 16.2 | 17.3 | 16.6 |
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