Review

• UOB’s 1QFY24 core net profit declined by 1% YoY to S$1,577mn due to flattish income growth but slightly higher overhead expenses. Including one-off Citi integration cost totalling S$67mn during the quarter, UOB’s Reported Net Profit Fell by 2% YoY to S$1,511. Despite That, UOB’s Results Came Within Our Expectations at Around 25% of Our Full-year Forecast. Core ROE Stood at 14.0%.

• The Net Interest Income (NII) contracted by 2% YoY and 1.7% QoQ. While QoQ Performance Could be Due to a Shorter Quarter, the YoY Decline Is Attributed to Lower Net Interest Margin (NIM), Which Had Narrowed by 12 Bps YoY to 2.02% in 1QFY24 Due to a Softening in the Loan Margin. Overall Loans Were of Little Changed QoQ But Rose by a Modest 2% YoY to S$323bn, as the 1% and 3% Loan Growth Increases in Singapore and North Asia Help Cushion the Softer Loan Growth in the ASEAN-4 (Malaysia, Thailand, Indonesia, Vietnam).

• Total deposits broadened by 3% YoY (-2% QoQ), driven by deposits Gathered in North Asia (+6% YoY), Singapore (+5% YoY) and ASEAN-4 (+1% YoY). Total Customer Deposits Rose by 4% YoY (+1% QoQ), While Wholesale Funding Declined by 1% YoY (-16% QoQ). CASA Deposits Improved YoY, Widening the CASA/Deposit Ratio to 50.6% From 47.9% in March 2023.

• 1QFY24 fee income improved by 5.1% YoY and 1.9% QoQ to S$580mn due to a pick-up in loan-related fees and the wealth management business. Meanwhile, the Credit Card Fees Slipped, as Management Noted That the segment is normalising from the previous quarter’s seasonal high. Wealth Fees Also Recovered at An Encouraging Pace of 8.6% YoY and 5.1% QoQ. Elsewhere, Trading and Investment Income Surged to S$521mn in 1QFY24 From S$362mn in 4QFY23 and S$474mn a Year Ago, Anchored by Resilient customer-related treasury income due to increased retail bonds sales and Strong Hedging Demands. Other Trading and Investment Income Also accelerated favourably YoY and QoQ due to better trading and liquidity Management Activities.

• 1QFY24 total operating expenses broadened slightly to S$1,475mn from S$1,440mn a Year Earlier. Management Noted That the Higher Expenses Aligned With Income Growth Due to Continued Focus on Supporting the franchise and driving strategic initiatives. The expense/income ratio for UOB Stood at 41.9%, Improving From 43.2% in 4QFY23. Including One-off Citi Integration Costs, the Expense/income Ratio Would be at 44.6%.

• Total loan allowances improved YoY to S$186mn from S$192mn in 1QFY23, Largely Due to a Decrease in Specific Allowances on Lower NPL Formation. Total General Allowances Were Unchanged at S$28mn YoY. With that, the total credit cost improved to 23 bps in 1QFY24 (1QFY23: 25 bps), in line with management’s guidance. Meanwhile, the formation of new NPAs (non-performing assets) improved YoY but rose slightly QoQ to S$5,051mn. The NPA coverage ratio stood at 99% (1QFY23: 96%). NPL ratio was steady at 1.5% (March 2023: 1.6%).

• UOB’s capital position remains healthy, with a Common Equity Tier 1 (CET1) of 13.9%. Additionally, the group’s all-currency liquidity coverage ratio (LCR) stood at 160%, while the net stable funding ratio (NSFR) was 121%.

Impact

• No change to our earnings estimates.

Outlook

• Management reiterates its view for a more stable and balanced 2024, with earnings prospects underpinned by 1) a low single-digit loan growth, 2) “double-digit” fee income growth, 3) a 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 of 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. Additionally, We Remain Optimistic About the Growth prospects from ongoing integration with Citi’s operations, with potential revenue uplift from an increased customer base, more diversified earnings across products (in particular credit cards, retail deposits and wealth Management) and Countries, and Higher Cross-selling Opportunities.

Valuation

• Rolling valuations forward to FY25, we adjust UOB’s TP to S$33.00 from S$32.10. The TP is derived from an implied PBV of c. 1.06x, based on the Gordon Growth Model. Buy Reiterated on UOB.
   

Source: TA Research - 9 May 2024