Review

• UOB reported stronger FY23 results, with net profit rising by 25% YoY to S$5,711mn due to higher operating income. Excluding one-off Citi integration cost totalling S$350mn, UOB’s core net profit rose by a slightly stronger 26% YoY to S$6,060. UOB’s results came within our expectations. ROE stood at 14.2%.

• A final dividend of 85 cents per share was proposed. With that, total dividends for the year stood at 170 cents (FY22: 135 cents) – representing a payout ratio of 50% (FY22: 49%). The Scrip Dividend Scheme will not apply to the final dividend.

• The Net Interest Income (NII) increased by 16% YoY. The healthy yearly increase was underpinned by broader net interest margin (NIM), which had improved by 23 bps YoY to 2.09% in FY23 due to the higher interest rate environment. QoQ, NIM continued to soften, moderating by another 7 bps to 2.02% due to competition for high quality credits. Overall loans were of little changed YoY at S$321bn, as the 1% loan growth increase in the ASEAN-4 (Malaysia, Thailand, Indonesia, Vietnam) and North Asia (+4% YoY) were muted by a decrease in Singapore (-2% YoY).

• Total deposits broadened by 5% YoY (+2% QoQ), driven by deposits gathered in ASEAN-4 (+3% YoY), Singapore (+6% YoY) and North Asia (+14% YoY). Customer deposits rose by 5% YoY (+1% QoQ). CASA deposits improved YoY, widening the CASA/Deposit ratio to 48.9% from 47.5%in December 2022.

• FY23 fee income improved by 4.3% YoY. 4Q23 fee income slipped to S$569mn vs S$591mn in 3Q23 on softer loan/trade-related fees amid cautious corporate sentiments. Meanwhile, the credit card fees continued to sustain their healthy momentum, boosted by higher credit card spending on the back of a larger regional franchise. Wealth fees also recovered modestly QoQ. Elsewhere, trading and investment income surged to S$1,690mn in FY23 from S$829mn a year ago, anchored by resilient customer-related treasury income. Other trading and investment income also accelerated favourably YoY due to better trading and liquidity management activities.

• FY23 total operating expenses rose to S$5,778mn from S$5,016mn a year earlier. Management noted that the higher expenses aligned with income growth and continued focus on investments to enhance capabilities to drive strategic initiatives. Despite that, the expense/income ratio for UOB stood at 41.5%, improving from 43.3% in FY22. Including one-off Citi integration costs, the expense/income ratio would be at 44.7%.

• Total loan allowances rose YoY to S$784mn from S$628mn in FY22, largely due to an increase in specific allowances on a few non-systematic corporate accounts. Total general allowances also rose to S$111mn in FY23 vs a net writeback of S$154mn a year ago. With that, the total

credit cost widened to 25 bps in FY23 (FY22: 20 bps), in line with management’s guidance. Meanwhile, the formation of new NPAs (nonperforming assets) improved QoQ and YoY. The NPA coverage ratio stood at 101% (4Q22: 98%). NPL ratio was steady at 1.5% (December 2022: 1.6%).

• UOB’s capital position remains healthy, with a Common Equity Tier 1 (CET1) of 13.4%. Additionally, the group’s all-currency liquidity coverage ratio (LCR) stood at 157%, while the net stable funding ratio (NSFR) was 120%.

Impact

• Incorporating the FY23 results, we adjusted our FY24/25 net profit estimates to S$5,909/6,198mn from S$6,075/6,457mn. We forecast the net profit to grow by around 6.7% to S$6,616mn in FY26.

Outlook

• Management expects a more stable and balanced 2024, with earnings prospects underpinned by 1) a low single-digit loan growth, 2) “doubledigit” fee income growth, 3) stable CTI ratio of 41-42%, and 4) a credit cost within a range of 25-30 bps.

• UOB continues to hold a long-term positive view on the ASEAN region and sees numerous opportunities in the field of Environmental, Social, and Governance (ESG) as the demand for sustainable products and services accelerates. As a financial provider, UOB believes it is well positioned to assist its customers in transitioning to more sustainable practices.

• We also foresee growth prospects from ongoing integration with Citi’s operations. To recap, management projects a revenue uplift from these four markets, underpinned by an increase in the customer base, more diversified earnings across products (in particular credit cards, retail deposits and wealth management) and countries, and higher cross-selling opportunities.

Valuation

• We maintain UOB’s TP at S$32.10. The TP is derived from an implied PBV of c. 1.08x. Buy reiterated on UOB.

Source: TA Research - 23 Feb 2024