United Overseas Bank Limited (U11) Earnings Call Transcript & Summary

Welcome to UOB's Fiscal Year 2020 Results Briefing. Today, we have Mr. Wee Ee Cheong, UOB Deputy Chairman and CEO; and Mr. Lee Wai Fai, our CFO, to present the results. So a few house rules before we start, please keep all your questions till after the presentations are done. We will take questions from the media who are with us in the room, followed by those who are joining us virtually. [Operator Instructions] For the media who are here with us, please be reminded to keep your mask on at all times and to keep a safe distance with one another. For those joining us virtually, we kindly request that you keep your cameras turned on for the duration of this briefing. [Operator Instructions] Mr. Wee, please.

Good morning. Thank you for joining us. I will speak slowly so that you will take your time to digest. And I hope everyone is saying safe and healthy. 2020 has drastically changed how the world operates. Vaccines are now available, but the pace and strength of economic recovery will be uneven across sectors and countries. At UOB, we are thankful that our strong balance sheet and fundamentals enable us to stay resilient, so we can continue to play our role in supporting our customers, colleagues and wider economy. We closed the year with net profit of SGD 2.9 billion and loan growth of 5%. During the year, we enhance our liability structure to manage margin compressions. We tightened cost discipline and increased provisions preemptively. Importantly, our capital funding and liquidity positions remain robust. We ended the year with a strong capital position with CET1 at 14.7%. Let me highlight some of our initiative in 2020. First, our loan relief program. The bank's role is to help our customers build their business and achieve their financial and lifestyle goals to be right by you. Over the years, we have been selective in onboarding customers, particularly those who can contribute to the development of ASEAN and Greater China. When these customer faced challenges during the crisis, we step in to support them. We were the first bank in Singapore to announce a relief program for our customers. We are also one of the largest providers of ESG loans. Credit goes to our regulator, MAS, the Singapore government, regulators and government bodies across the region for ensuring liquidity in the banking system and implementing much-needed relief programs for businesses and individuals. These measures have been instrumental in cushioning the economic shock and allowing time to work through restructuring solutions. As such, we see the economy improving. In UOB, we completed a detailed analysis of our books. We are happy with the resilience of the portfolio. As a result, we expect credit costs to reduce significantly this year. My CFO, Wai Fai, will share more details. Our capital position is strong, and we are well-placed to support our customers. For the full year, we are recommending a final dividend of $0.39 to reward our shareholders. As required by the MAS, the scrip dividend scheme will be applied but without discount. We will resume our 50% dividend payout once regulatory caps are lifted. Next, our digital transformation. We started this journey some years back investing in innovations and digital capabilities across various channels, products and services. In 2016, we ramp up our investments significantly. This resulted in the launch of our award-winning digital bank TMRW 2 years ago in Thailand after just 14 months of development. Last year, amid the pandemic, we launched TMRW in our second ASEAN market, Indonesia. It was a success with a threefold increase in customers across both markets. Riding on the foundations of our integrated banking platform, we can be nimble and achieve speed to market across the region. We also built on shared learnings and capabilities across our organization. Our ongoing investment in digitalization is showing results. In our larger markets, such as Thailand and Indonesia, where we have TMRW, we onboarded almost as many individual customers digitally as we did for our physical channels. Currently, 2/3 of all our individual customers are on our digital platform, up 8 percentage points from 2019. About half of them are digital-only with the cost to serve at -- 30% lower than those using only physical channels. As we deepen our relationship, these digital-only customers will evolve to assess our physical channels. Our omnichannel customers who use both digital and fiscal channels have easy access to services in whatever manner they prefer. This customer generate at least 50% more revenue than fiscal-only or digital-only customers. We are a dominant player in franchise wealth, given our role as a trusted banker for the mass affluent across the region. In a low interest rate environment and buoyant market, our wealth management fee did well, increasing 11% year-on-year. Wealth AUM also saw healthy growth of 6% to $134 billion. We continue to innovate and to launch digital capabilities to enhance our wealth management solutions. For our corporate clients in Singapore and the region, they now have a customizable digital financial dashboard, UOB Infinity. Our digital transformation efforts help us drive productivity and enable profitable growth even in a lower NIM environment. Next area to highlight is ESG. We have an extensive footprint and customer base across Southeast Asia. To facilitate customer growth while contributing to the region's economic development and connectivity with Greater China, we embed ESG principle in our business strategy. We focus on 7 sectors that drive economic flows in this region and on players which we think will contribute to sustainable growth. We have, so far, $11 billion of sustainable financing to-date, and we see a pickup in momentum. Loan dispersed in 2020 were 4x that of the previous year. Now beyond headline figures, our approach is holistic. We create end-to-end solutions and work with customers and ecosystem partners to help shape behaviors in the long run. And we see our role as a catalyst and enabler creating a multiplier effect across the region. For example, our smart city sustainable finance framework is the first dedicated framework by a bank in Asia to promote sustainable financing in the building of smart cities. Our award-winning new solar program launched in 2019 is Asia first solar industry ecosystem. It provides a one-stop solution to corporates and individual homeowners across ASEAN. Our network of industry partners is also expanding. We also promote responsible investing and integrating ESG factors into investment solutions for customers. Last but not least, our people. As business dynamics change, our people must also keep pace. We have in place programs to grow our timber and to enable our people to be future-ready. Last year, nearly 12,000 colleagues took part in our upskilling and reskilling programs. We launched our inaugural Regional Hackathon focusing on AI to promote innovative mindset and to develop AI skills. We have 5 centers of excellence, digital, technology, sector solutions, product innovations and transformation in Singapore. We continue to resource these centers through hiring, reskilling and investments. In caring for our people, we also see to their mental well-being, initiatives such as agile ways of working, employee support scheme and leadership development program help us achieve higher employee engagement scores. In the next 12 to 18 months, we will stay vigilant while targeting growth. Low NIM is expected to stay. However, drivers of growth persist. We will deepen our support of customers, facilitate intra-ASEAN business and flow with Greater China. Just to add, we were the first bank in ASEAN to set up a dedicated foreign direct investment advisory team in 2011. We have helped more than 3,500 clients grow regionally with our deep market insights. We recently expanded our MOU with Vietnam Foreign Investment Agency and tied up with SBF, reaffirming the value that we bring to client [ next-day spend ] across borders. We will continue to enhance our digital and omnichannel platform in ASEAN and build up our wealth franchise. Having made preemptive provisioning, tighten cost management and generated revenue productivity through digital engagement, we are well-placed moving forward. With this, we are targeting a rebound in profits, driven by high single-digit loan and double-digit wealth fee growth, stable cost income ratio and lower credit costs. To sum up, the bank entered this crisis from a position of strength and has proven robust. Our focus on strong balance sheets and capital position remains so we can continue to support our customers. We continue to monitor our asset quality closely with robust stress-testing to anticipate worst-case scenario. Some credit migration is inevitable. However, we have made sufficient provisioning and expect to stay profitable and resilient. We will continue to invest for the future. We are confident of becoming the most relevant financial partner and steward to support the development of economic flows in ASEAN and its connectivity with Greater China. Thank you for your support. Now I pass on to Wai Fai.

[Foreign Language] So happy Chinese New Year to everyone. I think thanks for joining us for today's briefing. I know that we are the last, and many of you will be rushing back to complete your analysis of the banking sector after this. So let me quickly go into my presentation. I think 2020, like Ee Cheong said, had been a trying year for everybody. We adapt to new norms, new way of living. I think you look at the way we wear masks today, something that we are never used to learning and working. I mean even today's setup, we have virtual and physical. But we see glimpse of hope. As the new year dawn on us, we have destination available. So come to the results. I think the group reported net profit after tax of $688 million for the fourth quarter of this year, 3% higher than the previous quarter as market sentiment and business momentum improved. Quarter-on-quarter, NIM improved 4 basis points to 1.57% as a result of proactive liability management. We expect NIM to stabilize at this level with rates likely to stay low in 2021. Fee base remained resilient as wealth gain momentum, and that put us into a very strong start into the new year. We set a slight $0.9 million of preemptive credit allowance to strengthen our coverage. We are comfortable that we will have sufficient to cushion the effect of new NPA formation in 2021, should it happen. Hence, we expect credit costs to ease significantly. Our CET1 is strong at 14.7%. And we will resume the 50% dividend payout ratio once the current regulatory dividend cap is relaxed. Our client franchise did well amid the challenging year. Both retail and wholesale were affected by low interest rate environment. However, finding solutions to meet customer needs help keep fees' momentum going and market sentiment improved, especially in the second half. Retail fees did well as we continue to provide wealth solutioning to customers, especially in the areas of bancassurance and treasury needs. Our wholesale bankers, with their deep industry knowledge, help customers grow originally with innovative solutions in cash trade FX and, of course, with the support from our global market folks. Global market had also a strong trading performance when we benefited from the wider spreads following the shortfall in interest rate, especially in the first half of the year. Most of this Ee Cheong has touched on. Let me give you the details on some of the KPIs. Operating profit for wholesale banking increased 1% despite the challenging environment, I think thanks to our continuing effort in enhancing our capabilities and diversifying across geography, sectors and products. Today, cross-border income accounts for $1.2 billion or 29% of group wholesale banking income. We expect this figure to grow, as I think COVID has accelerated the pace of supply chain diversification into Southeast Asia. With the recent conclusion of the Regional Comprehensive Economic Partnership, we expect further deepening of the trade corridors between China and ASEAN and as well as among ASEAN countries. UOB is well-positioned to write on this emerging trends to capture the rising trade and investment tools because of a comprehensive regional network and deep local knowledge in Southeast Asia. Our sectors, specific insights and solutions also help to synergize business and to mitigate risk across our customers' value chain. Our financial institution groups have been able to capture the flows to this region as we deepen relationship with global funds, banks and nonbank FIs to register a 17% growth. Our digital investment shows results as we deliver greater convenience to corporate customers by empowering them to make safe, similars and secure digital transactions. I think over the years, the number of cashless payments to SMEs and corporates by our corporate play now in Singapore and the digital banking transactions by our BIBPlus has grown by 6x and 23%, respectively. For the retail side, the group retail operating profit was 6% lower as margin compression more than offset the 11% growth in wealth management fees. Assets under management rose 6% to a new high of $134 billion. Of this, 59% was from overseas customers across the group network. Today, like Ee Cheong mentioned, the higher 67% of our customers are digitally engaged. At the heart of our customer engaged strategy is our omnichannel approach, where we complement our digital engagement with fiscal RMs to best serve customer needs. I think Ee Cheong mentioned the statistics that our omnichannel customers are able to generate at least 50% more revenue than fiscal only and digital-only customers. In Singapore, we're expanding our range of wealth management products and services under our UOB Mighty app. Recently, we have launched the simple Insurer Digital Bank Assurance products that requires just simple health decoration. Our digital bank, TMRW, has also become a hit with young professionals and their families. That's recording a threefold increase in customer across Thailand and Indonesia last year. 70% of TMRW's new customers are new to UOB Group. As a digital bank, TMRW has enabled us to transcend the physical boundaries of our branch network, enable us to acquire and onboard significant customers even among a pandemic year. Like my CEO mentioned, the TMRW customers now account for 26% of our retail base in Indonesia and 12% of our retail base in Thailand. At the same time, 25% of TMRW customers are highly active customers who transact at least 4 times a month. Complementing our omnichannel approach is our ecosystem partnership. I think we'll continue to widen and deepen our franchise with relevant ecosystem partners to provide holistic solutions for our customers. Singapore actually felt the biggest impact of COVID with margins declining by 35 basis points to 1.13%. Despite a 3% loans growth in Singapore, operating profit still declined by 21%. Our Southeast Asia franchise helped well, growing 7% year-on-year. I think this is mainly supported by strong growth in Indonesia and Malaysia. North Asia looks flattish with a slowdown in Greater China but is offset by better performance in South Korea. Our developed markets grew 9%, showing the diversification of our footprint. We see signs of economic stability, and we expect our operations in Singapore, North Asia and the developed markets to do well this year. I think this slide I touched on earlier, and you'll read the details on your own on NIM. Net interest margin increased 4 basis points to 1.57% this quarter as we see the results from our active liability management flowing through with lower cost of funds and improved CASA mix. We expect NIM to stabilize around this level in 2021 as interest rates are likely to stay low in the near future. On fees. Our quarter-on-quarter fees income grew 2% higher, led by credit card fees with more consumer spending during the year-end festive season. Fund management activities also picked up, including the newly launched ESG thematic-related funds, which were very well received by investors. For a year where all economy slowed down, our wealth management fee grew 11%. This shows our franchise resiliency as customers continue to entrust us to help them grow their AUM with AUM growing 6% for this year. Loans and trade fees, however, contracted as business were affected by the lower trade flows and also lower capital commitments as a result of the COVID pandemic. Trading and investment income declined 28% this quarter to $152 million. I think this is in line with the year-end seasonally low customer's volume and the flattish market rate. For the year, trading income was also helped on the back of volatile markets in the first half. But customer-related income, I think you look at it, remains stable. On expenses. Expense increased 4% quarter-on-quarter due to higher staff cost. I think for the year, expenses fell 6% to $4.2 billion as we continued to strive for the right balance between strategic investment in people and technology while reducing discretionary spending. Over the years, we have been spending more on technology, building capabilities to enable easy banking access anywhere, anytime, expanding product offerings, improving our cybersecurity capabilities, and at the same time, allowing work flexibilities for our people. These investments are necessary to support our broader product offerings and to be more productive in the coming years. For the year, cost-to-income ratio inched up marginally to 45.6% mainly due to the decline in revenue caused by the pandemic uncertainties. Okay. This is a favorite topic of everybody, okay? The loans under relief. I think throughout the year, like Ee Cheong said, the group has been steadfast in supporting customer needs across the region, providing various relief assistance programs in addition to the government relief measures. So you noticed that there were many figures being published, but this was our basis. It actually comprises of 3, 1 was government relief. The 1 was the proactive standby UOB to offer relief programs to our customers that were in need even before the customers -- even before the government started. And of course, the ESG on the risk sharing where we are the biggest components. So as the loans [ momentum ] around the region tapers off, so we all know that the government relief, a lot of them have ended last year. But -- so that number has come down to $3 billion. However, I think instead of pending NPLs, a lot of them are resuming their loans repayment, okay? So this led to loans under relief reducing to $18 billion. But more importantly, to get the comparative figures on what you see with the industry, the loans under government relief program fell to 1% of our total loans. But that to me is not important, okay? The most important part was the dedicated restructuring task force that Ee Cheong mentioned. These were the task force that we have been proactively engaging customers so that we can give them more comprehensive support should they need help. More importantly, I think this extensive review from a restructuring task force showed a better-than-expected portfolio health, okay? On a conservative basis, we think that the vulnerable accounts identified only amount to $2 billion. So -- and this is roughly 0.7% of our portfolio. So we expect credit costs for 2021 to be significantly lower because we have done a lot of GP that can cover this risk, lowering to 30 to 40 basis points. In fact, our internal base case assumption is at the low end of that range. On NPA formation, I think overall, like I mentioned, asset quality remained intact. There were some pickup this quarter because there was a few secured corporate customers that were identified from our restructuring task force. So like I say, it doesn't matter whether it's on any program. If they are weak, we recognize them upfront so that we make provisions and see what else you can do for the customers. However, I think there is no concentrated risk, okay, we don't see widespread of this weakness. So NPL ratio did increase marginally to 1.6%. On the allowances, I think we mentioned this that, for this year, we proactively set aside the $900 million of additional GP, even as NPL formation stayed low, okay, although this resulted in total credit cost increasing to 57 basis points. But more important to note is that this preemptive provisioning, okay, further strengthened our balance sheet and allow us to continue to support our customers through these difficult times. The other thing to note was the allowance coverage, okay, how much we have done? Because the first one was the year. This is how strong is our balance sheet. I think we continue to build up provisioning, bringing total allowance to $4.6 billion, of which $2.9 billion is for nonimpaired assets of [ we call ] GP. I think this has strengthened NPA coverage to 107% or 245% after taking collateral into account. But more importantly, as you look at those ratios, we have actually increased GP coverage for performing loan significantly, okay? And this is where the strength of the buffer will come in if we need it. Specific provisions coverage for nonperforming loans stood at 37%, okay? A lot of people says that if the NPL goes back, the whole lot will be written off. But only 1/3 of them around 37% because our collateral -- our portfolio is actually well-collateralized. So should they become NPL, the financials impact are significantly less. Okay, let's look on the bright side of loans. I think amid all the challenges, okay, we still see pockets of growth opportunities in Singapore and North Asia as the pandemic uncertainties subside. Customers' loans grew 5% year-on-year from corporate loans from Singapore, North Asia and developed markets. On the deposit side, I think we'll continue to gather more stable funding through CASA, coupled with a more focused liability management, CASA to total deposit ratios rose steadily through the year to 53.5%. I think you noticed that this strong CASA growth is across all territory of the group. On liquidity, we want to make sure that we have the liquidity and the structure to support the changing interest rate outlook. So our group liquidity and funding positions remain very robust. So you look at the equity coverage ratio of LCR, we are 139%. The longer-term net stable funding ratios were at 125%. So we are well above minimum regulatory environment. And we are actually watching the interest rate, long-term outlook to make sure that we are able to manage that capital. We ended the year with a strong CET1 at 14.4%. So I think before I conclude, let me do a quick summary on the resiliency of our balance sheet. You noticed that we are very comfortable with the additional allowance that we set aside, and this will be more than enough to see us through 2021. We have ensured there's ample liquidity because, when loan demand goes up and interest rate environment changes, we have to make sure that our liability structure is right. Capital is strong, so we are able to absorb shocks if it happens, okay? I mean, we always says that we hope for the best, but our balance sheet is prepared for the worst. We support additional customer needs, okay, which is really, in this time, as economy recovers. So UOB, like Ee Cheong said, is well positioned to help customers and community weather through this pandemic and to drive growth and market recovers. So on dividend, I think Ee Cheong has touched on this that the Board declared a final dividend of $0.39 per share with option for scrip without discount. I think this line with the MAS guidance that to get our total dividends per share to 60% of last year's DPS. We plan to resume 50% dividend payout ratio once the dividend cap is relaxed. I think with that, I will pass it back to my CEO.

Good. Thank you for your patience. Any questions?

Chris Wright from Euromoney. Thank you very much for your presentation. It's very good to see you in-person today and all in good health, which is good. A couple of questions from me, if I may. You mentioned the $2 billion of potentially vulnerable elements of the book. If we break that down, does it roughly mirror the sort of geographical split of the rest of your loan book? Or is there any particular areas where you see more or less vulnerability within that $2 billion that you've identified? Related to that, when you launched TMRW and some of the related new ideas of digital banking, it brought you into a slightly different method of client assessment and risk assessment than you've done before. That was a greater use of data and analytics to decide who was a suitable customer to lend to. I just wonder, as we've gone through COVID, has there been any difference in the creditworthiness of that newer group of customers as compared to your more traditional clients? And just finally, you mentioned RCEP, a very interesting trade partnership at a time when there hasn't been a great deal of internationalization and trade. Are there specific trade cover doors that you particularly expect to benefit from RCEP? Any particular covers door that will be better than others.

Why don't you take the first.

I'll take first one. I'll take the first question on the $2 billion of potential NPL. I think, yes, roughly, it reflects our geographical mix. And in terms of values, okay, the big values are still in Singapore. So yes, roughly, that's excitement. On your second question of TMRW, Ee Cheong?

Well, for TMRW, I think this is -- actually very happy with the progress. It's a very powerful engine to scale our presence in ASEAN. We have very limited distribution channel outside of Singapore. So that actually give us a lot of opportunity for us to grow our customer base, especially the younger customer base. We have today, I think, as far as TMRW is concerned, we have a customer base of 300,000 customer. Just remember, we just launched our Indonesia TMRW late last year. So it's only a matter of a few months. The traction is actually very good. If you break it down, the customer base, Indonesia is about 260,000, right, customer base. And Thailand will be about 70,000, 80,000. Indonesia is the bigger country, and it's also adding. Thailand, I think the competition is a lot keener. But I think we are still very confident, both countries, given the huge population base, we'll continue to invest. Now you talk about the unsecured lending as far as TMRW is concerned. We are actually still looking at it. We are not aggressive in doing this. We are [indiscernible]. Now we are -- what we are doing is to deepen our customer engagement experience. We are looking for eco partnership -- ecosystem partnership. And we are trying to do more -- introduce more products, deposits, insurance, certain wealth products just to deepen the customer experience. And our target is not just -- we are talking about in 2024 a 5 million customer base we are looking at. And for us, I think, given our central infrastructure for us to replicate across the whole ASEAN country, it will take us 6 to 8 months. Any country that we think, right? It's important for us, we can roll that out. So I hope I can answer you the questions on TMRW.

So if I may, I guess, supplement it a bit. I think Ee Cheong actually make the right call. We are still experimenting with this alternate data. It's a new field. The quality of credit assessments will be depending on quality of data. So how do we make sure that we go into a new area when you don't have that historical data, which Ee Cheong mentioned the partners are very important, okay? Because if I go into the market and acquire a massive amount of customers, I will run the risk. Where else, if I can get that historical data from a partner, the right partner in the right segment in the right target that we are targeting, that will reduce that credit risk significantly. So looking for a partner is actually very critical, in fact, more critical in my mind than coming out with the credit engine. So we are doing both, okay? We are doing both. At the same time, engagement with customers are very important. So our Promoter Scores in all are best-in-class in Thailand and Indonesia. And we have to make sure we stay that way because customers, if they're comfortable with you, will be able to do more products with you. So it's a multi approach. And TMRW, like we say, it's a feeder into our bigger omnichannel. So you acquire investors. You understand that portfolio. So you now have a bigger base to choose the right customer segment it can cross-sell into and increase that revenue. So that, to us, is the strategy. And we are starting in there, but the digital acquisition proved to be very encouraging like Ee Cheong said.

So in practice, there's no material difference in the creditworthiness of the customers you're gaining in this way? Or do you not yet have enough unsecured lending for it to matter either way?

Yes. We don't -- but Ee Cheong said, we have not actively turned on that program. But we -- the size says that it's a combination of developing that engine that we are working with a third party and also getting the relevant partners. But you will see more tractions coming out. So the next time we look at the announcement of our partners, look at it as a potential for that customer base rather than just a partnership itself.

Next question from Bloomberg.

This is [indiscernible] from Bloomberg. Congratulations on a good set of results. One item to clarify on dividend. When you say that you will resume payments at a normal level once the cap is lifted, is it now clear that there will not be an extension beyond March 2021. Could you clarify? That's the first question. Second one, TMRW partnership. What type of partners that would qualify or fit the bill? You already have a partnership with Grab. Are you looking to expand that partnership? Or are you looking for a new one? The third question, I would like to get succession plans for Mr. Wee.

So I think your first question is on dividend, whether MAS will relax or not. I don't think MAS has made that decision. MAS actually has time because, the next time it affects is when we do our half yearly, okay? You look at the 3 local banks, that's the only time where the new product dividend policy is. So MAS will take the next 2 months to observe the development in the region and the work before they make that call. They have not done that call yet. They have not then.

Now for TMRW. The partnership, we are looking specifically is retail sector, e-commerce lifestyle because these are where the consumer, when you spend money -- when they start to spend, we can start to see pattern of how they spent the records. This is where we can come in, and we can work together with them because, as a retailer, you ask yourself, right? They don't have the deposit base so we can work together with them. To generate more sales for them, if we were to come in to help to support their business. So this is a segment. You talk about succession planning, or frankly, we have a very robust succession planning process.

So that is your number 2, and who can be...

I have many number 2. So, so far, we are still working very much work in progress. We have a very robust nominating committee we are tracking of some of my younger set of colleagues. I think that is important for the bank to sustain long-term sustainability. You cannot depend on 1%. In fact, we have a whole team, so I'm not actually worried about succession planning.

But are you thinking to step down anytime soon?

I will let you know when it's time.

First, right?

Yes.

And now we take the next question from The Edge.

Jumping on [indiscernible] point just quickly. Are there any women in your potential succession planning?

Actually, according to the index study, we have more women in our group than men.

But potential for the top job?

Well, we'll see? We do have a talent pipeline, the makeup of men and women.

[indiscernible]?