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

Good morning, everyone, and welcome to UOB's First Quarter 2022 Results Briefing. This morning, we have our CFO, Mr. Lee Wai Fai, presenting the results. Our CEO, Mr. Wee Ee Cheong, is recovering from COVID and apologizes for his absence today. A few house rules before we start. [Operator Instructions] Finally, before we start, please put yourself on mute for now. Without further ado, I will now pass the time to our CFO, Mr. Lee, please.

Thanks, Lucy . Good morning. Firstly, our CEO, Mr. Wee Ee Cheong, send his apologies for not being able to join us today. He was looking forward to meeting all of you, but he's recovering from COVID. Hence, he asked me to deliver his opening remarks on his behalf. Since we spoke the last time, inflation, rising interest rates, supply chain disruptions and geopolitical tensions have all taken center stage. These events led to higher market volatility as concern rises over global growth outlook. Across most of our key markets in Southeast Asia, we see green shoots of recovery as borders reopen, including in Singapore. However, in North Asia, the situation remains challenging. The unpredictable COVID-19 situation has triggered lockdowns and disrupted economic activities. We posted a lower net profit of $906 million, mainly due to the impact of some structural hedges in our trading and investment line. Of which, we expect to offset higher net interest income as risk increases. More important to note, our core business drivers remain strong. On a quarter-on-quarter basis, net interest income was higher, led by margin improvement and healthy loans growth, especially in the trade and term corporate loan side. Loans fees hit a new high, supported by strong demand in our lending and advisory business. Credit cards fees was seasonally lower while wealth and fund management fees were impacted by weak market sentiments. Asset quality remains resilient with NPL ratio stable at 1.6% as specific allowances on loans improving 3 basis point to 19 basis point. Total credit costs, however, close to 19%, mainly because of the lower general allowances due to write-back last quarter. Our balance sheet remains strong with healthy levels of capital and funding. As a Southeast Asian bank focusing on intra-regional flows, we are less directly impacted by the Russian-Ukraine conflict. Economies in our part of the world are recovering. Consumption is picking up and business activity is resuming. We remain focused on supporting businesses to help them seize opportunities as border reopens. The trade and investment corridor between ASEAN and China takes us in a unique position to serve customers' need. The current disruptions to global supply chain will show up the importance of the role of our region. Our extensive regional network, deep local knowledge and sector expertise will serve our customers well. Our cross-border revenue grew 11% year-on-year. We have successfully rolled out our digital cash management system for corporate clients in the region across 5 markets. We are seeing good traction. Adoption has been strong in these markets. User numbers grew 6% year-on-year and a 19% growth in corporate customers' CASA balances. Looking ahead, we see strong demand for loans with a robust pipeline, especially for working capital. On the retail front, we are on track with our Citibank integration and digital initiative. In Malaysia and Thailand, we have appointed senior management team pending regulatory approvals. Working on integration is progressing steadily. Digital is at the core of our growth strategy, and we are gaining traction. For UOB tomorrow, we expect to additionally acquire 500,000 customers this year compared to only 300,000 last year. Our omnichannel approach enables us to cross-sell to customers as their needs grow. On the whole, our digitally engaged customers contribute 66% to our retail revenue, up from the 52% in 2019. Our mortgage pipeline remains strong with increasing loans drawdown as more projects get completed. More people are also actively refinancing. Travel-related credit card spending has picked up, and we expect the momentum to accelerate in the coming months ahead. Our own great efforts and support for our customers to make positive impact are progressing well. Earlier this month, we issued our first externally assured sustainability report. Our sustainability financing portfolio reached $18 billion to date. And total AUM in the ESG-focused investments grew to $13 billion. We are building decarbonization sector pathways to support our clients' transition to a low carbon economy. And we aim to announce our net zero plans by the end of this year. Looking ahead, our full year guidance is as follows: Mid- to high single loans growth, focusing on quality amid the uncertain market conditions. We expect higher margins from rising interest rate. We expect a high single-digit fee growth. Cost will remain stable with stable cost-to-income ratio at around 45%. Asset quality to stay resilient. NPL ratio may inch up as the various relief programs taper but remaining below 2%. Credit cost to be manageable at around 20 to 25 basis point. We expect ROE to be back above 10% on interest rate increases and stronger earnings power. CET1 will be in the healthy range of 12.5% to 13.5%. In summary, we remain optimistic of the recovery of our region and the longer-term potential of Southeast Asia. With our strong balance sheet, backed by healthy capital and liquidity position, we are well positioned to navigate this uncertain times together with our customers and the community. We will continue to invest for the future to support trade and investments across borders, to help our customers transact and bank digitally and reduce carbon footprint for ourselves and our customers. I thank my colleagues for their teamwork and dedication and thank you all too for your support. Okay. Now I will move on to the financials where I'll give you a bit more details, okay? For the quarter, I think at the start of 2022, we were fairly optimistic towards the road to recovery as the world learns to cope with the pandemic. Soon after, emerging geopolitical tensions introduced new uncertainties to the market. Our net profit for the quarter was at $906 million, 11% lower than the previous quarter. The softer quarter-on-quarter performance was mainly due to lower trading and investment income, mainly from hedging-related impact and lower write-back in general allowances. Excluding this -- excluding the market impact, our customer franchise showed steady growth. Net interest income rose as NIM was 2 basis point higher at 1.58% and steady loans growth of 3%. Fees were largely flat quarter-on-quarter as record loans-related fees was offset by lower wealth and fund management fees with customers being more cautious and seasonally lower credit card spend. Customer-related treasury income showed strong growth amid market volatility. However, this was more than offset by impact of accounting asymmetry of hedging activities with unrealized mark-to-market losses showing up on our investment line. Customer loans growth grew steadily by 3% quarter-on-quarter and 9% year-on-year as we continue to support trade flows and find pockets of opportunities for strong credit term lending. Asset quality remained resilient with NPL ratios at 1.6%. Total credit cost on loans normalized to 19 basis point as the previous quarter had higher general allowances write-back. Our capital and liquidity position remain healthy. You CET1 at13.1% and NSFR at 113%, respectively. Retail operating profit was lower year-on-year as wealth activities slowed down on the back of dampened market sentiment. This was partly cushioned by sustained CASA growth. I think just to recap, we actually had record fees in the first quarter last year as customers were a lot more bullish coming out of COVID. We are confident that with a more positive outlook, together with the Citi consumer portfolio fortifying our regional franchise, there'll be opportunities ahead across products and markets for growth in the retail space. Wholesale saw double-digit growth, led by strong demand for lending and advisory businesses from trade flows financing to some funding opportunities with good credit customers. Global market, on the other hand, benefited from market volatility and achieved better trading and liquidity management results. Our Wholesale Banking business continued to deliver robust performance on the back of diverse growth engines. Cross-border income rose 11% and now accounts for 31% of our Wholesale Banking income. Loans-related fees grew 7% year-on-year to a record high this quarter. Our global financial institution group registered 25% income growth in banking, global funds and financial sponsors. Across the region, we have witnessed rapid growth in transaction volume and cashless payment following the acceleration of digital adoption by our corporate customers. Across the region, we have digitally acquired 140,000 customers in the first quarter. And we are well on track to acquire more than the 500,000 customers this year. Of this 140,000 acquired so far, more than 80% were new to UOB. Our investment into building strong ecosystem partners started to bear fruit with 30% of our digitally acquired customers in Thailand and Indonesia being referred to by our partners. Such partnerships are instrumental to our retail franchise group. For example, Indonesia, we have secured 5 extensive strategic partnerships that we can leverage on to promote the use of TMRW Pay. We managed to grow asset under management by 3% year-on-year to a new high of $140 billion. Our customers really appreciated our omnichannel services. I think in the 2021 franchise -- finance sector ranking our Customer Satisfaction Index of Singapore, we actually came out top. Operating profit in Singapore and North Asia decreased due to lower trading and investment income amid market volatility. For the other ASEAN countries, operating profit improved as we have been more disciplined with spending while monitoring for new opportunities when economic recovery can be more sustained. Our regional franchise continues to be a key platform for our customers to gain market access as they fund cross-border capital and trade flows. As a result, our overseas contributions stayed strong at 49%. Just to recap some of the key highlights for the quarter. Our customer franchise remains strong with net interest income, stable fees and expense well managed. Operating profit was lower, mainly due to the accounting asymmetry impact of our hedges and market-driven volatilities impacting our trading and investment income line. As my CEO earlier articulated from his speech, the impact on hedges will be more than offset by increasing net interest income in the coming months. Excluding this impact, total income actually grew 1% quarter-on-quarter and 4% year-on-year. I will go through some of the key drivers in my next few slides. As you heard, net interest income increased 1%, led by healthy loans growth and a 2 basis point improvement and margin to 1.8% on the back of rising interest rate. So we expect this to continue to increase because most of our books are actually floating rate. So it will be beneficial to us when the short end starts going up so we can reprice our assets more aggressively next few quarters. Total fees was actually flat at $502 million. Loans-related fees hit a new high, recording 14% growth quarter-on-quarter as we see trade flows returning and structuring opportunities to support strong customer demand. On the other hand, wealth and fund management fees dipped as market sentiment was dampened alongside geopolitical tensions. Credit card fees were seasonally lower compared to last quarter, but above the same level same quarter last year. I think this sort of indicates the increasing customer confidence and we expect increasing customer spend as border reopens. I want to spend a little bit more time to explain the reason for the lower trading and investment income for the quarter. Our trading and investment income can be broadly classified into customer-related activities such as helping customers to hedge their business risk and our own activities such as hedging, trading and exercise deployment of our banking book. On the customer-related front, we are at record high, growing 18% quarter-on-quarter as demand for hedging activities rose when more customers want to hedge their own businesses risk in this volatile market. Other investment income showed a sharp drop, mainly from the accounting asymmetry on hedges for our perpetual capital securities. These hedges I think we did this earlier when risk was lower and when the outlook was more uncertain, was meant to match our funding profile to the asset book repricing. However, from the accounting perspective, there is a mismatch between the mark-to-market line on the hedges, which is showing up in test T&I line and the accrual of the income showing up in the NII line in the assets. So if you think about it, if we expect short-term interest rate to rise faster than the longer-term rate in the coming quarters, then our repriced assets will generate significantly higher net interest income than the mark-to-market losses, which is onetime that occurred this quarter. So we have earlier guided that we have estimated that for every 25 basis point rate increase, our net interest income will improve by $150 million on an annualized basis. For the quarter, like I said, the trading and liquidity management results from our global market actually did reasonably well. However, this was offset by some of these mark-to-market impacts from the hedges. So moving forward, as the market stabilizes over time, we expect some of these mark-to-market losses and the credit that happened in this quarter to reverse in the coming future. Expenses, I think well managed, decreased 3% Q-on-Q in tandem with lower income. And I think our CIR stayed steady at 44.8%. Asset quality of our loans portfolio also remained resilient. NPA formation reduced this quarter with NPL ratio stable at 1.6%. I think for the countries with extended relief program, we'll continue to monitor and assess the residual risk of this portfolio. We believe that the impact on credit costs of future NPAs will be manageable as the general losses set aside remain adequate. Total credit cost at 19 basis point were in line with management's expectations. The increase in allowances this quarter was mainly due to higher general allowance write-back last quarter. We expect credit costs for the year to stay within the 20 to 25 basis point guidance range. The total allowances for our book were at $5 billion for this quarter. Of which, $3.4 billion was for general allowances. I think NPA coverage at 94% or 216% after taking collateral into account and performance loans coverage at 0.9%, they all remain adequate. We are confident that our general allowances is sufficient to absorb anticipated credit loss from our portfolio. Loans growth momentum sustained well, increasing 3% growth for the quarter and 9% year-on-year. I think this quarter-on-quarter growth was largely to fund trade flows as economic activities resume and pocket opportunities for strong institutional loans while market continues to be very competitive in the lending space. We're very encouraged by these results as it shows that we are able to support our customer needs. Our liquidity position remains healthy with the quarter's LCR at 129% and NSFR at 113%, both well above regulatory requirements. Capital was deployed to mainly pursue loans growth opportunities. I think this led to the RWA growth of 3% for the quarter. We ended the quarter with CET1 at 13.1%. With a solid balance sheet and adequate general allowances, we are comfortable with our current CET1 position. I think with that, I conclude my position -- my presentation, and I'll pass it back to .

Thank you, Mr. Lee. We will now move to the Q&A. [operator Instructions] Can we have the first question, please? We have Goola from the Edge. [Operator Instructions]

Yes. I'm a bit -- I'm sorry, I have to say that I'm confused by the hedging impact. So would you be able to explain that again?

Okay. I know I have to go into a bit technical. So bear with me for the rest. Normally, when we do hedging, I convert fixed to variable, okay? So on the normal cases, there will be some natural hedges because we can actually recognize profit of the revaluation. For the specific case of protections, which we call Tier 1, alternate Tier 1. The lag that we actually pay interest is actually recognized as dividend. So it goes into retained earnings rather than a P&L impact. Whereas the hedge that we take now is straight to way-to- market, okay? What we did was we actually patched it to match the variable part. That means I'm converting fixed to variable so that the interest expense will actually coincide with the interest income as the repricing works. So from an economic standpoint, it makes sense. But because of this accounting side that they only recognize half of it, okay, I've part of it going to my retained earnings as dividend payment. The second impact is that all this maths that we have, okay, is actually -- because they are treasury instruments are actually mark-to-market. So 2 impact that you think about. A lot of these mark-to-markets, a longer-term present value add, so as the rising interest rate goes up. For example, you have $1 billion coverage. The $1 billion will hit me straight away because the mark-to-market is on the whole balance sheet. Where else if I put it to earnings, okay, if I had a 1% increase in earnings because interest rate goes up, it will be spread out over the year, which means that it wouldn't happen all in 1 quarter, we will see over the coming quarters. So that's why we argue that, yes, you are hit by this. But going forward, my earnings will more than offset this. Just to give some color because this was us. During the quarter was very exceptional. The short-term risk, okay, if you look at the 3 months, probably went up by maybe 40 basis points, okay, from a very low, a bit higher to the last quarter. The long end rate when we started the quarter, okay, was way below 1, close to 3. So the long end rate moved by more than 200 basis points. So you think about it if you go forward, okay, most people think that the long end rate, yes, there will be some increase, but it won't be as significant because you already reached the upper limit. Whereas the short-end rate has a lot more potential because if you think about the 6, 7 rate hikes that's coming up, then we will have very little impact on this mark, but very high accrual coming out from the interest income. So bear with us on this accounting asymmetry in that sense. But if you ignore this and you look at going forward next 3 quarters, we won't see this impact. And I would expect C&I to be coming back by at least $150 million to $200 million because some of this will not recur. Sorry, I have to be a bit technical, Goola, so I hope the rest there will be...

Because this is a one-time impact.

Yes. Because of the movement between the 2 risks, which was really exceptional for the quarter.

And secondly, in terms of credit cost, the macroenvironment changed because of the MEV -- with your MEV model because of all these headwinds that we're seeing now? And is your forecast of 20 to 25 bps, is that sufficient? And also, is the buffer from your management overlay also is sufficient to tide you over if things become very challenging?

Yes. Look, as part of this, [indiscernible] quarter, right? Beginning last year, you're asking me whether I will write-back because the MEV will improve. And this quarter, people are asking us, will it become worse? So I think we are reviewing that to be fair. But I think we have sufficient, in my mention overlay to cushion that shouldn't happen. I have especially a lot of access in the region. Our concerns are more in the region. I think Singapore, we are well managed. So we do have enough should that scenario that happen.

There's a question on funding costs. I just wondered -- because your CASA you say has proportionately risen, but have funding costs risen? Or will there be an impact from that? Or is there a lag?

No, funding costs will definitely go up. You already see reports about people competing for FDs and all. So in the industry, I think, FDs now will grow a little bit more than CASA. But the good news is that we are holding on to the CASA. And hopefully, the wholesale part itself, we're trying to hold on because of all the systems that we have and they are making us as the primary account holders. We are building up in the retail space. That's more important. Yes, it might be a bit more costlier. But I think when you match it to the expected rate hikes that we are expecting from loans, it will be positive for us, okay? So yes, there will be some impact. But we think that we will -- and is during the scenarios that we actually plan for ALCO.

The next question comes from [ Dylan ] from .

Just want to get more color on the quarters ahead. You mentioned that your Southeast Asia franchise, I think, will be a strength for you in the coming months. That said, the macro environment may be deteriorating as a result of the Ukraine war and other factors. Do you have any visibility on how that might impact your earnings going forward, perhaps whether in your wealth management or the units which might see some impact?

Actually, if you look at a region itself. Yes, they are actually even more and less impacted by the Russia-Ukraine war because a lot of them are domestic. Like Malaysia and Indonesia, they have a lot of oil reserves. So technically, as a country, they might be stronger. But of course, the second other impact will affect everybody. And that's why the question by Goola itself, whether I have enough GP to cover that, should that scenario occur and we're actually confident. So there might be some uptick in credit weakness when it actually happens. But I say we are quite comfortable in the region itself. In the longer term, whether wealth will be affected itself, I think depending on how long this will carry on and the outlook that the world has on -- whether the geopolitical situation is the solution coming out of it, okay, I think if it's not then -- just being very frank, market sentiments will be affected, okay? But we are hopeful. And as you look at the recent things like if the war is still happening, but people seem to be taking it in their stride. And hopefully, life will come back to normal. We don't think that there will be a serious happening this year. Some of you asked whether the taxation will happen, which is the short term will go higher than the long term. It might be a scenario. But I think for the time being, we are still looking at continued economic growth as the economy opens up, right? Because that was one of the major factors that was holding back economic growth. So with the things coming through, we're actually more confident that there's growth, maybe growth will be slower, but there's still growth in the region.

Okay. Thank you, [ Dylan ] . The next question comes from Farish from Bloomberg.

Just one quick question. Operating profit for Greater China fell and I'm just wondering whether ahead in the subsequent quarters as China is still maintaining a COVID-zero policy and you have lockdowns happening there, how much of the concern it is for the bank going forward?

I think our portfolio in China itself is still pretty healthy at this point. The operating profit is mainly because of some mark-to-market gains in our portfolio last quarter. I think if there are weakness coming up from what you are seeing on our portfolio, it will appear in the provisioning line -- in the credit [ SP line ]. Our China portfolio of onshore is not big okay? You look at our disclosure, it's not big. So yes, we are concerned. We are monitoring that. We are also worried about the second order impact because we are actually not in retail in a big way in Mainland China. So we are watching that, but we think that the impact at this point is manageable. And our book in China itself, we have actually slowed down while we think for better, clearer direction above how the COVID situation will affect the bigger economy. So yes, there will be some impact. We might see some credit coming up, but our positions are not big in China. So we do have enough to be able to offset that in dimensional overlay.

[ King ] from Straits Times.

Just 1 question. Does UOB plan to raise savings rates?

I think there are 2 ways in the retail side, right? One is whether we raise savings rate. I thought it was small whether we raised FD rates. I think that's not actually seeing the market. There will be -- we need to in response to market, okay, increasing. But for savings and CASA, like you said, we do have that benefit that I don't have to time it as aggressively as my loans rate hike, and that's how banks make money from that. So I mean it's only logical to expect funding costs to go up. I think that's only logical, especially with the inflation. So I think we are actually looking to make sure that our rates are competitive. And we are also watching whether the movements of our customers' behavior, okay? And to make sure that the -- that's why I was saying that the good news that in my retail side, the CASA is still growing, okay? And that was the important part that we have basically because of the products that we're actually introducing, we do have a lot of new-to-bank customers. That's where the focus is. But I mean it's only logical to expect some increases in CASA rates.

Okay. Thank you, [ King . Any follow-up questions from you?

What about loan rates going to go up, sir?

Loans rate, definitely yes. Like we said our -- we are more sensitive to loans repricing because most of my books are shut in, okay? So within 2, 3 months, probably 70%, 80% of my books will be repriced. So if there is another rate hike, we will be more positive about it. We already see that happening. We are already anticipating that. So definitely, loans -- because of the direct formula because many of our -- are tied to the benchmark rate, so you see that direct correlation more coming out of loans.

Okay. Thank you, [ King ]. Goola has a followup question. Can we invite Goola next.

I'm just wondering, what's the update? What is your management overlay? Is there any difference from the last quarter?

Okay. We have utilized, some, okay? But we are still very strong. We have above $1 billion, okay? So we still have very strong in there. We are keeping most of it. Although we are not adding on to it. We are keeping most of it because of the uncertainty in the region. So there is some movement utilize a bit, but it's not -- we have not reversed aggressively. We prefer to keep that overlay to buffer the economic shocks should it happen.

So we can ask also about the UOB's any further update plans Citi -- the Citi acquisition?

In Ee Cheong's speech, I think he did give some updates. Today, we are working well, okay, together. So remember that there are a few things that we need to do, one is to get the people over. That's the most important thing. And I think we have got the leadership in the 2 big markets of Thailand and Malaysia, okay, confirmed. We are actually now working on the other 2 markets. So that's probably the good news. The systems integration is doing well. We are actually looking at -- talking to Citi to make sure that the transitional period, okay, between legal day one to when our systems are ready, the systems are able to support us. So that's also doing well. So I think so far, it's good. Now there is a lot of people engagement that's happening. And so far, I think has been very positive, okay? The 2 teams now are coming together regularly, and that's important for us because we buy it for the people as well as the portfolio. The second thing is, the good news is that the portfolio is not weakening, okay, during this period, okay? We have actually, in fact, until this slight slowdown, they are showing the same thing that we have, okay? So they are quite well professionally run. So I think it's doing well. And now we are working with regulators more important is when they were approved. We don't see a big problem. Regulators are asking for documentation that we will provide. So we think that it will be on schedule. And we are quite happy with the progress, especially on the people's front that we have managed to anchor because that's the most worrying because we want to buy a portfolio without people. And that, we are very, very happy.

Okay. Thank you, [ King ]. I think that's all the time we have today. Thank you, everyone, for joining us this morning, and we wish you a good day ahead. Stay safe, stay healthy.

Thank you.