Review

• UOB’s 2QFY24 core net profit declined by 1.2% QoQ and 4.9% YoY to S$1,489mn. YTD core net profit slipped 1% YoY to S$3,054mn as lower total income and higher expenses were cushioned by lower allowances and higher profit from associates. Including Citi’s integration cost, the net profit eased by 0.4% YoY to S$2,912mn. Despite that, UOB’s results came within our expectations at around 49% of our full-year forecast. The 1HFY24 ROE stood at 13.7%.

• A higher interim dividend of 88 cents (1H23: 85 cents) per share has been declared, representing a 51% payout ratio. The dividend will be paid in cash.

• 1HFY24 Net Interest Income (NII) contracted by 2% YoY (+2% QoQ), attributed to lower net interest margin (NIM), which had narrowed by 9 bps YoY to 2.04% as deposit repricing outpaced asset yield repricing. However, NIM improved by 4 bps sequentially due to a wider loan margin.

• Overall, loans were up 2% QoQ and 3% YoY to S$328bn, underpinned by improved loan demand from trade and mortgages. YoY, loans and advances rose in Singapore, ASEAN-4 (Malaysia, Thailand, Indonesia, Vietnam) and the Rest of the World. Loans and advances in Greater China were stable at around S$52bn.

• Total deposits broadened by 3.3% YoY, driven by CASA deposits, which accelerated by 12% YoY due to promotional campaigns. CASA ratio improved to 51.5%. Meanwhile, FDs declined by 6% YoY. By currency, THB and IDR deposits rose by 4% and 9% YoY, while SGD rose by 2%.

• 1HFY24 fee income improved by 5.1% YoY (+6.6% QoQ) to S$1,198mn due to broad-based improvement in loan-related fees (+10.6% YoY) and the wealth management business (+12.8% YoY). The credit card fees also recovered QoQ and YoY after registering a decline in 1Q. Elsewhere, trading and investment income declined by 6% YoY (-24% QoQ), underpinned by lower net trading income (-4% YoY) and lower net gains from investment securities (-16% YoY). Nonetheless, customer-related treasury income continued to improve by 13%, supported by client demand for bonds, structured products, and hedging activities.

• 1HFY24 total operating expenses broadened slightly to S$3,105mn from S$3,087mn a year earlier, despite including a one-off expense of S$178mn related to Citi integration. The marginal increase in overhead expenses comes on the back of tight cost discipline while continued focus on investing for franchise growth and driving digital capabilities. The expense/income ratio for UOB stood at 41.8%, improving from 40.9% in 1HFY23. Including one-off Citi integration costs, the expense/income ratio would be at 44.4%.

• Total loan allowances improved YoY to S$380mn from S$430mn in 1HFY23. Total general allowances eased to S$53mn from S$64mn a year ago, while specific allowances also improved to S$328mn from S$366mn in 1HFY23. With that, the total credit cost strengthened to 24 bps in 1HFY24 (1HFY23: 27 bps), tracking slightly better than management’s 25- 30 bps guidance. Meanwhile, the formation of new NPAs (non-performing assets) improved QoQ and YoY to S$4,952mn. The NPA coverage ratio stood at 98% (June 2023: 99%). NPL ratio was steady at 1.5% (June 2023: 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 155%, while the net stable funding ratio (NSFR) was 118%.

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 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 (such as credit cards, retail deposits and wealth management) and countries, and higher cross-selling opportunities.

Valuation

• We adjust UOB’s TP to S$34.00 from S$33.00, derived from an implied PBV of c. 1.06x, based on the Gordon Growth Model and a 3% ESG premium. However, given that the risk-reward potential has narrowed due to the recent increase in UOB’s share price, we downgrade UOB from buy to HOLD.

Source: TA Research - 2 Aug 2024