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

Good morning, and thank you for joining us. We hope everyone is staying safe and healthy. Today, I would like to share 4 key messages to all of you. First key message, we have achieved strong first half this year backed by economic recovery, strong customer franchise, diversified growth engines and resilient portfolio. In the second quarter, we continued to build on our strong business momentum. First half profit rose 29% year-on-year to SGD 2 billion, with healthy contributions across our core businesses. Loans grew 6%, led by wholesale banking, which had a record quarter. This was driven by rising trade and investment flows and capital market activities as we provide targeted sector solutions for our clients. Fee income rose 28% on the back of strong wealth management, loan-related and fund management performance. If I break it down, the wealth management is up 32% year-on-year; loan-related 33% year-on-year; and fund management up 40% year-on-year. This was achieved despite uneven recovery across economies. Our diversified engines of growth have enabled us to deliver these results, especially in markets where local community COVID cases are more contained. Even in countries with strict COVID restrictions, our digital capabilities enabled us to continue to serve customers and to acquire new customers. We continue to invest. For example, in the last quarter, we launched new digital retail products, such as SimpleInvest and the response was overwhelmingly well received. And we're also onboarding capabilities in Malaysia and more to expect in the coming months. Our solutions for corporates are gaining momentum. We also issued our first digital bond and are working with ecosystem players on various initiatives. We expect growth in ASEAN markets to improve as vaccination rate increases, and this will further contribute to our performance. Our portfolio is resilient, and balance sheet is strong as we continue to support customers through difficult times. Having proactively set aside ample provisions in 2020, our total credit costs almost halved. Message 2, we continue to support customers to transition out of COVID as well as acquire new customers looking for support. We remain committed to working with governments across the region to provide liquidity support to affected customers and helping them to digitalize and transform for the future, especially for SMEs, the backbone of our economy. Since COVID started, we supported more than 1 million individuals and 20,000 SME across the region. As the first bank to set up a restructuring task force, we proactively reached out to our customers with customized approaches that can support them through this period. Similar programs are also rolled out in the region. As government-assisted program become more targeted, the amount of loans under relief has declined to $17.5 billion or 6% of group loans. Message 3. We continue to push forward our sustainability agenda. At UOB, our growth has always been balanced with responsibility to do what is right for our customers and the community. We are making good progress through embedding ESG considerations in our strategies and initiatives. We have extended $13 billion of sustainable financing to our clients and are on track to meet our goal of $15 billion well ahead of our original target. We see huge opportunities in green trade finance, with more than 1 trillion trade flow through Singapore, of which we estimate more than 90 billion are eligible for green trade finance currently and continuing to serve customers towards responsible investing. Beyond financial targets, we are aiming for impact as a catalyst and enabler. We continue to develop holistic framework to support ecosystem players in transitioning towards sustainability. Message 4. We confirm a positive outlook for the rest of the year. Overall, we are optimistic on growth prospects as economies pick up pace in recovery as vaccination levels increase. For this year, we continue to expect profit to rebound driven by high single-digit loan growth, backed by strong pipeline in corporate and institutional loans and mortgages. Double-digit noninterest income growth driven by continued traction in loan, wealth and recovery in credit card fees. Actually, no change to our previous guidance. Stable cost-to-income ratio. Again, that was guided previously, no change. And credit costs to be lower than 25 basis points is an improvement from previous guidance in first quarter '21. Credit costs to be lower than 30 basis points. With our earnings normalizing, backed by strong capital and liquidity positions, we will be resuming our 50% dividend payout ratio, translating to $0.60 for the first half. With countries speeding up their vaccination drive, we are optimistic that the situation will gradually pick up in Southeast Asia. We remain confident of the region, underlying prospects and ASEAN upside potential. We continue to invest and to innovate for the future, and we stand ready to support our customers with our strong foundation, built over years of discipline and prudence. I want to take this opportunity to thank my colleagues for their teamwork and dedication. Thank you for your support as we forge ahead. I will now hand over to my CFO, Wai Fai, to elaborate on our financials.

Thank you, Ee Cheong. And good morning, everybody, again. I understand most of you will need to rush up for another meeting. So let me keep this briefing as short as I can. The group achieved a strong first half profit of $2 billion, an increase of 29% year-on-year. Business momentum continued into the second quarter, supporting the $1 billion profit that we achieved last quarter. This is 43% higher compared to a year ago, a testament to our customer franchise resiliency and the geographical strength. Quarter-on-quarter, NII was up 3% on steady loans growth as we continue to support our customers' funding needs as the economy improves. Corporate fees performed well with increased trade and investment transactions. On the other hand, wealth and fund management fees moderated towards the end of the second quarter. Overall, asset quality remained healthy as NPL ratio stayed at 1.5%, while total credit costs on loans eased to 20 basis points. With the lifting of the MAS dividend restrictions, we have reverted to a normalized 50% payout ratio. Together with the strong CET1 at 14.2%, proactive provisioning and stable funding position, we are continuing to support our customers through to better times. With the uneven economic recovery across markets, we have been proactively engaging and supporting customers in their investment or business needs. Retail operating environment was challenging as we continue to reinvent ourselves to engage customers digitally. With this, we managed to grow our wealth fees to record levels. This helps offset the effect of margin compression. Wholesale saw strong growth, led by demand for financing advice and funding opportunities from corporate clients, especially in Singapore, greater China and the developed markets. As our investments to strengthen connectivity, deepen sectors knowledge and wider products offering showed good results. Global market operating profit was lower because interest rates were relatively less volatile this year. There were also less opportunities for bond sales. Our wholesale sector performed well. Our sector specialization, strong ASEAN footprint and improved product capabilities showed -- allowed us to capture cross-border flows that are happening. Loans and trade-related fees rose 25% as customers increasingly leverage our sector-specific insights and solutions. In particular, our financial institution groups registered a 16% income growth in banking, property funds and financial sponsors, serving them with our strong structuring capabilities. Digital adoption by our customer -- by our corporate customers continue to grow, resulting in increased transactions and customer satisfaction. Similarly, our investments in our digital channels are gaining recognition by the market. Our knowledge of customer needs is evident as our AUM grew to $137 billion, a 7% year-on-year growth. Our mortgage sales per month is very strong at 20% growth year-on-year. This reflects the increased activities in that sector recently. Growth is similarly seen across our key markets in Singapore, North Asia and ASEAN. Despite the environment, our regional franchise still managed to show a 2% year-on-year growth as we continue to support the real funding needs of our customers through these challenging times. I will skip the next slide and let you read at your own leisure. Back to Slide 8. On the net interest income, we grew 2% last year, largely due to loans growth of 6%. For the past 3 consecutive quarters, we managed to maintain a stable NIM even as interest rates stayed low. Interest rates are likely to stay low in the near term. We will continue to dynamically manage our balance sheet to keep NIM stable. The first half fees income was at a new high of $1.2 billion. Wealth management fees reached a record level, with returning investor confidence on market recovery. Loans-related fees were also at a new high, following strong demand for trade and investment transactions from corporate clients. Year-on-year, customer-related treasury income rose 9% on the back of improved business sentiment. On the other hand, non-customer trading income decreased year-on-year on exceptional gains on investment last year. Our costs are well under control. While total income grew 5% year-on-year, total expenses were stable at $2.1 billion. The cost-to-income ratio for the year improved about 2% points to 43.8%. The overall asset quality of our loan portfolio remained resilient, with NPL ratio stable at 1.5%. The new NPAs were well within management expectations, and we have adequately provided for them. Total credit costs eased to 20 basis points as credit outlook stabilizes. As such, we do not need to increase general allowances beyond the level that is required to support the new loans growth. The group's total allowance was at $5 billion, of which the bulk were in general allowances. With the preemptive general allowances made last year, NPA coverage is high at 110%, or 265% after taking collateral into account. Performing loans coverage stayed above 1%. The path to recovery is uneven across countries. And there are pockets of vulnerable exposures. The strong reserve coverage gives us confidence to continue to support our customer to see through this pandemic. Loans momentum sustained well, increasing by 6% year-on-year. We are on track to deliver the high single-digit loans growth for the year. Deposits are also well-managed and increased 5% alongside loans. CASA to total deposit ratio remained stable at 52.7%. Similarly, our liquidity position is strong with LCR at 131% and NSFR at 123% that are well above the minimum regulatory environment. CET1 is also strong at 14.2%. With the lifting by MAS on this guide on dividend cap recently, the Board declared an interim dividend of $0.60 per ordinary share. We reverted to a 50% payout ratio. Post dividend, our capital position continues to remain strong. With our strong balance sheet, proactive provisioning and stable funding position, we remain committed to support our customers through to better times. With that, I conclude my presentation. Thank you.

We'll now move on to the Q&A. [Operator Instructions] First question, can we invite Chris from Euromoney?

So my question is regarding the easing of your credit costs, both in your current numbers and your outlook and the fact that the NPLs are remaining steady. Obviously, good news, but I just find myself looking around the regions in the markets where you operate, with Indonesia in just the worst conditions at the COVID crisis to date, Vietnam which sail through very nice originally now facing, Sudan and Malaysia having hard times. I just was wondering how both things can be true, but you can have much of the region, and particularly, I would imagine the SME customer base, in exceptionally difficult times and yet an easing outlook on credit costs? So I mean, what is your read on how your customer base, particularly SME customers have come through this in such solid shape? I mean how have they survived 3 months of this to the point that you don't need to worry about levels of envisioning your credit costs?

I think it's a combination of reasons. First of all, this is a health crisis. This is not economic crisis to start off with. Secondly, I think the selection of customer base is equally important, okay? Thirdly, I think, yes, I agree with you. If you look at it on the face of it, we are still in -- especially in ASEAN, we are still in the middle of the COVID crisis. But thanks for the respective central banks, the government relief program and we also stepped in to help our customers to prolong the repayment. But generally, it's more working capital facility. It's not so much a gearing that if a company is highly geared, I think they will get into a problem. So there is a combination of reasons that also give us a lot of comfort. And because of that, if you remember during the COVID, we have massive provision. Our thinking is that -- we are thinking like you, right? We make as much as possible. We just provide as much as possible. And we are in a better position today to help our customers, right? And we -- in fact, we have a restructuring unit within the bank to help to provide a solution to the customer, see how we can defer some of the repayment. And more than that, I think if you look at our loan book in the region, they are usually very well collateralized and the business they're doing well and partly because of the COVID situation. So we are actually making a big step to help our customers. That to me is very important. And hopefully, with the Western Asian picking up, I see there's limited downside. There are more upside now, right? I think we can see better solutions globally. And this is why I think we are still fairly optimistic in the next 6 to 12 months.

So maybe just to complement what Ee Cheong has said, I think it's true that in the region with the increasing COVID cases, there are worries, okay? There are worries whether the SMEs and the smaller SMEs, which we call business banking, will continue to retract down. We have proactively supported this on a more proactive basis in the sense. So in our recent disclosure, we actually said that we supported more than 20,000 customers, okay, restructuring them. And our recent statistic shows that actually less than 2% of those actually turned back, in fact, around 1.5% actually turned back. So yes, there could be some more of it happening. Two things, one is, like Ee Cheong said, we continue to restructure those loans. Number two is, business banking and SMEs, especially the smaller ones, are smaller in terms of quantum. So at the entity level, when you talk about provisioning, the management overlaid at the $3 billion of general provisioning that I have in my balance sheet, okay? We feel very confident that it's more than adequate, should there be short-term or delay in recoveries into the...

When you talk about supporting more than 20,000 customers, is that simply a matter of giving them relief on repayment of existing facilities or the support, in some cases, actually mean putting more money out there in terms of helping them through working capital base?

We do a combination. Like I said, we actually will look at the actual business of the company. Do they have any possibility of survivor, okay? We knew that in the highly stress in some of those in the restaurants, F&B business, we know some of them will not make it, okay? Both we will restructure and let them turn NPL, okay? Or those that we restructured are those that we think are customers that need temporary cash flows, working capital, okay? Those are the ones we restructure, whether we allow interest payment or some of that with deferred payment, okay? Very small amount that actually stays that we put in more capital, okay, more funds. But the first consideration is that, is that customer going to survive? If it is, we will support. If it's not, we'll find a way to get upgrades fully together. So you see that our new NPL formation said, we have been gradually taking it. In fact, those of you that followed us for the last 2 quarters, my business banking was more battery shipped in December, in the last quarter, fourth quarter and the first quarter, okay, in Thailand. So we actually proactively already took that hit. Those that we think were not survive. So those are in our books, we think that our trends of survivors are high.

Next, can we invite Goola from The Edge?

Can I ask, I think, 3 areas? The first, of course, is, okay, so have your forbearance loans or restructured loans, have they been stable? Or have they increased or decreased? And what is the percentage of total loans in terms of those forbearance loans? Are they the same as well the quarter or have they changed? That's one. Then is your position the same as the last quarter on your write-backs? Because as you have seen, some of your global peers -- can't mention names, global peers have written back billions, yes, some have been back even more than the net profit. So just wondering whether your position has changed because you said that you don't plan to do any. And see because your general allowances were just -- was they just $6 million in the second quarter? And is that sufficient for the loans? Because you had loan growth of 6% year-on-year, you said, yes. And then is your management overlay the same as in the first quarter? So those are the questions on the credit cost side. There was a pickup in special SPs in specific provisions in Q1, Q2. Just wondering what that was because of, okay? And then on the broader business part, can you give us some update on TMRW? How are the metrics tracking? And how is your onboarding? And how does it compare with other digital banks? I mean how does your performance compared with other digital banks in places like Indonesia, where I think there were about 4 or 5 digital-only banks? Yes. So those are the main question. And in general, where do you see NIMs and loans going in, in terms of percentages in general in the next 6 to 12 months, that means looking out to 2022?

I will take the first 2 questions, and I think Ee Cheong can give you better insight of where our TMRW and digital banking are aiming. First is a question on what we call loans under relief, which whether you call it restructured loans and all. It's the few 6% that we talk about is slightly lower than last quarter level, but technically roughly the same. And our bottom-up review of this portfolio, we continue to remain confident that our last estimation as to how many of this will survive, those statistics are technically still similar. So that's why we argue that our general provision and the management overlay and the GPs that we added were sufficient. Your next question is basically on, did I technically change MO? No, I did not. As a result, we did not write back GP as compared to some of the global peers that use it. What are the conditions that will make us consider whether we start writing back? How we see a GP for a specific purpose? One was the COVID. Number two was the general economic condition. And third, are customer-specific. And I don't see the first 2 conditions improving to an extent that I can read by GP, okay? I think Chris just alluded to that the COVID crisis are still challenging into the region. And we see economic recoveries, but I think a lot of those are at a lower pace and maybe more towards next year. So if ever write-back GPs are for cases that I actually was part of this restructured programs that I actually see and a lot of those are not happening yet. so significantly, in my way, I will not write back GP unless I see NPLs significantly going up, which means that, in technical terms, the SPs will go up because it was a condition that I forecast and a write-back GP since then. The other question was very specific on a bit of the SPs or the new NPL formations that were in Q1, Q2. I think those are -- a lot of those were very specific to areas across. We see some of those in the building and construction, and we see some of those in the overseas for this quarter. But this is fine in between. It's not a case where we see something that's actually happening across the industry itself. It's very, very industry-specific and probably 60% or 70% of those were already part of our original portfolio that we think will turn back. And I'll take your last question on NIM. Yes, we are actually forecasting for stable NIM. We do not expect the 10 years rate to go up significantly, although there are views that it will grow up. But we think that the short insight will be, it will continue to stay low and that will be the bigger impact to where our NIM is. So we are guiding for a stable NIM from going forward. Ee Cheong is for TMRW.

Yes. As for TMRW, I would like to share with you, generally, we are very encouraged with the progress. In fact, their independent research indicates that we are actually ahead of quite a number of established local peers in Indonesia and in Thailand. And the cost -- the acquisition cost is actually very low from our experience, I think, fell by about 40%. And what we are trying to do is to continue to leverage on our shared regional infrastructure. so that we can, first of all, speed to market as well as the cost of setting up the digital bank. And our priority now is to continue to grow scale through ecosystem partnership. We try to commercialize through growing new product stream, lending, fixed deposit, insurance, leverage on our alternative data to enhance our credit scoring. So this is -- all these things are geared towards that. But as far as the customer service is concerned, I think we are quite successful and we are winning awards. So we are actually trying to replicate our success in TMRW to our Singapore Mighty as well as Malaysia, see how we can combine together. And this is something we are still working on it. We will be announcing our plans soon to see how we can replicate, how we can achieve more scale to have another channel to serve our different segment of the customer. Goola, I hope I answered your questions.

Excellent. Thanks, Mr. Wee. There's one more question, Mr. Wee, on Vietnam. You had no -- you had nothing much from Vietnam this quarter. Was there a reason for that? Because at one point, you're quite positive. I know they're in lockdowns up there. I mean they're in lockdown, they're out of lockdowns the way we are. But if you could just give us some updates on the Vietnam?

Well, Vietnam is a country we continue to be positive. We have recently just -- we're going to increase our capital because you need capital to run a bigger scale of the operations. So we have just increased our injection of capital to Vietnam. But having said that, I think the country that we are in, in Indonesia and in Thailand is a much bigger scale. So we thought to take any initiative. We should work on a country that we have the scale first. So all this digital initiation like TMRW, we started of Thailand, Indonesia. Ultimately, Singapore, again, is a market that we should continue to focus on is our home market. We also want to demonstrate that we are able to do it and compete in our own home ground. And Vietnam, obviously, is one of the focused country that we will be actively looking at it.

Next, can we have Chanya from Bloomberg?

This is Chanyaporn Chanjaroen from Bloomberg. I have 3 questions. The first one, do you see major corporations NPLs forming over the next, I mean, the rest of the year? My second question is about Citi asset sales. Are you still involved in the process and in which countries? The third question is about crypto exchange in which, I mean, the licenses are being given by the MAS. What is UOB's view and stance on this matter? Is it a business that you would be interested in?