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

Good morning, and welcome to UOB's Third Quarter 2022 Results Briefing. I'm Wendy Wan from Group Strategic Communications and Brand, and I will be your MC for today. This morning, we have Mr. Wee Ee Cheong, UOB Deputy Chairman and CEO; and Mr. Lee Wai Fai, our CFO, to present the results. [Operator Instructions] Without further ado, I will now pass the time to our CEO, Mr. Wee, please.

Good morning. Goola and Kelly, yes, good morning. Thank you for joining us. It is great to see everyone here in this room again. Since we last met, uncertainties continue to cloud the global economy. But Southeast Asia has shown resilience as it is benefiting from the shift from globalization to regionalization, robust commodity prices and resumption of economic activities after countries move from pandemic lockdowns to endemic management. Last month, we launched our brand refresh. We laid out our sharpened purpose to build the future of ASEAN. We want to build the future of ASEAN for the people and businesses within the region and those connecting with us. We want to be a truly regional bank that grows with our customers and helps them achieve their ambitions. To reach this goal, we will double down on 3 strategic areas: connectivity, personalization, and sustainability. These are recurring themes you will be constantly hearing from us. Our third quarter profit was 34% higher year-on-year at SGD 1.4 billion. This boosted our ROE to 14% from 10.4% a year earlier. Core business is strong with robust net interest income, driven by higher margins as we remain selective on loan growth opportunities. Fees continue to be soft with current market sentiment, but the decline was more than offset by the net interest uplift. Other noninterest income surged with record high customer-related treasury income due to higher demand for hedging solutions. Asset quality is benign with lower total credit cost and NPL. We reversed our one-off real estate NPL classified last quarter after a successful restructuring exercise. Our balance sheet remains strong. We are well positioned to ride through this uncertain period and to see through the integration of Citi's retail business from next quarter. Now let me give some highlights on our business segment. Wholesale banking performed well. Income up 31%. As we grew our CASA balances and loans steadily over the past year, we achieved higher margin from rate hikes. Our clients are optimistic about Southeast Asia's potential as an alternative production base. For example, the nickel industry in Indonesia and its related upstream and downstream supply network is benefiting from the rapidly growing electric vehicle industry. Our extensive regional footprint, deep local and sector expertise give us a competitive edge in banking this trade and investment flows and enable us to facilitate and capture cross-border connectivity opportunities effectively. Our cross-border income rose 16% year-on-year and now accounts for 29% of our wholesale banking income. This was driven by growth across all major product groups. Our regional cash management platform, EOB Infinity, has helped our customers manage their businesses more efficiently. Consequently, our CASA balances trended higher and digital transactions jumped 14%. We have been recognized by large Asian corporates as the #1 preferred financial institution for cash management services in ASEAN. We will continue to help clients go digital, go green, and be future-ready. Our retail performance was supported by our balanced business model with diversified revenue drivers. While wealth management fees were lower as clients stay cautious in an uncertain market, but overall AUM held steady. We continued to see net inflows, which more than offset negative market impact. Our AUM saw an increase this quarter, reflecting customer trust in a UOB franchise for wealth management. And our bancassurance sales set a new record in September. Other parts of our retail business saw stable growth. Credit card fees grew steadily with higher billing from spending and travels. Mortgage business held steady despite market slowdown due to rising rates. Our new mortgage sales averaged more than SGD 1 billion a month, and our market share remained firm. Despite higher interest rates, our portfolio is expected to stay healthy. We are making meaningful progress in growing our franchise across the region. Our award-winning digital platform, UOB TMRW, reached a significant milestone in August, achieving 1 million digitally acquired customers, and more than 2/3 of these customers are new to bank. This platform will also be key in us serving digitally our incoming Citi customers across the region. On our Citi acquisition, we are happy with the progress. The regulators have approved our acquisition in Malaysia and Thailand. We will welcome Citi customers and staff in these 2 markets to our phone next Tuesday, 1st November. We are working towards taking over the business in Indonesia and Vietnam next year. The business remains strong and around 90% of Citi staff have agreed to join us. Next, on sustainability. We want to help customers in their transition journey from both the financing and investing angles. Our sustainable financing portfolio reached SGD 23 billion to date. As a leader in SME segment, we're helping our SMB customers jump-start their sustainability journey. We recently launched the UOB Sustainability Compass, a tool to help SMB identify steps that they can take to go green in their businesses. We know that climate action is an urgent task at hand. However, here in Asia, and particularly in our home region of Southeast Asia, socioeconomic challenges must also be carefully considered. There must be an orderly and just transition to ensure that lives and livelihoods can continue to improve. At UOB, our promise is to do right by our customers and our stakeholders. As a responsible steward, we have a role to play to help channel the resources needed to the relevant parties on this journey to reach global net zero. Looking ahead, the global economic outlook remains challenging. While growth in our region was slow, we are not expecting an impending recession in our key markets if there is an orderly foreign exchange and interest rate movement. As a long-term bank, we are no strangers to the up and down of the economic cycles. With our strong balance sheet, diversified revenue drivers and disciplined approach, we are confident to ride through this cycle with our customers. In the next 12 months, rising rates will continue to support our net interest income. We expect to end the year with mid-single-digit loan growth, margins above 2%, stable cost-to-income ratio, 20 basis points of credit cost. In closing, I want to thank my colleagues for their dedication and teamwork for this strong set of results. We remain committed to building the future of ASEAN, and we will continue to strive towards being the most preferred bank for both consumers and businesses across our key markets. Thank you. Now I will turn over to Wai Fai to elaborate on our financials. Thank you.

Thank you, Ee Cheong. Good morning, everybody. Thanks for joining us today, including those that are dialing in online. I think it has been an exciting quarter for us. The quarter profit reached a high of SGD 1.4 billion from record net interest income and lower credit costs. This is 26% higher than last quarter and 34% higher than a year ago. For the 9-month period this year, profit increased 12% to SGD 3.4 billion. Strong NIM expansion of 28 basis point to 1.95% drove NII to register another quarter of double-digit growth, surpassing the SGD 2 billion. Loans-related fees moderated from last quarter's high, while wealth fees remained soft as investors continued to be cautious. Customer-related treasury income continued to remain strong. It surged to a record high from the increased demand for hedging activities. Trading and liquidity management activities also achieved better performance amid the market volatilities. Asset quality stabilized with NPL ratio improving to 1.5%. Total credit cost on loans also improved to 17 basis points. We continue to focus our effort on selective growth, with our loan book growing 1% quarter-on-quarter and 6% year-on-year. Our capital position remained healthy with CET1 at 12.8%. I think bear in mind that this is actually post our interim dividend payout for this quarter. On the business front, retail operating profit benefited from the stronger deposit growth and higher margin. This was partially dampened by the lower wealth fees on the back of cautious market sentiment. We are confident that with the Citi consumer portfolio adding to our regional franchise next quarter, there will be more opportunities to grow in the retail space. Wholesale did well and saw double-digit growth led by volume and margin expansion with loans and investment banking fees at record levels as well as strong customer-related treasury income. Global market benefited from the market volatilities and achieved better trading results. The wholesale business continued to register strong growth momentum on the back of diverse growth engines. As we've often emphasized, our comprehensive ASEAN footprint, sector specialization, and deepened product capabilities has enabled us to capture the growing cross-border opportunities as economies open and companies diversify their supply chain. Cross-border income rose 16%, loans-related fees grew 7%, and our Global Financial Institutions Group rose 26%. Across the region, our new cash management platform is driving higher digital adoption by our corporate customers with robust growth in transaction volume and cashless payment. For the retail side, we continue to grow our franchise and deepen capabilities in our retail business. We are on track to digitally acquire 500,000 new customers across the region by the end of this year. In Indonesia itself, the UOB TMRW registered remarkable customer growth of 2.4x year-on-year. Ecosystem partnership has been key in scaling our franchise. Today, we have established more than 140 ecosystem partnerships across the region to drive customer acquisition, engagement and cost efficiencies. In fact, 1 in 4 of our digitally acquired customers were successful partnership referrals. Despite market volatilities, our asset under management increased 2% year-on-year to SGD 140 billion, underscoring our customer trust in us, Notwithstanding the negative market sentiment for the quarter, our wealth AUM showed an increase of 1% as highlighted by my CEO. Our omnichannel bancassurance solutions continued to be well received by our customers. Bancassurance sales grew 23% in the quarter. In fact, like what Ee Cheong said, in September, we recorded our highest monthly growth over the 13 years' partnership that we had with Prudential. For the quarter, we saw good momentum in ASEAN and Singapore. Singapore showed strong growth from NIM expansion and exceptional trading income. Our regional franchise continues to be a key platform for our customers to gain market access across as we fund cross-border activities and trade flows. Actually, if you look at it, Malaysia actually showed a similar momentum as Singapore. I think margins improved 21 basis points for the quarter and also very good trading income. For the numbers itself, I think as we mentioned earlier, we achieved a record quarter of the SGD 1.4 billion. I will go through the key drivers in the next few slides. Key margins. I think on the back of rising interest rate environment, net interest income registered another quarter of double-digit growth and crossed the SGD 2 billion mark. NIM expanded by strong 28 basis points to reach 1.95% for the quarter. On a year-on-year basis, NII grew 23%, boosted by NIM uplift and the 6% loans growth volume. For fees, our 9-month loan fees grew to a new high, split by trade and investment growth. Credit card also increased as consumer spending picked up with the reopening of the borders. On the other hand, wealth and fund management fees slowed as investor sentiment turned cautious alongside the market volatility. For the quarter, loans fees moderated from an exceptionally high second quarter, while wealth momentum remained soft. As mentioned by Ee Cheong, the decline in fees, especially in the real estate, is more than compensated by our NII expansion. Customer-related treasury income rose to a record high this quarter as customers seek hedging opportunities during this time of market volatility. Other trading and investment income also surged on improved performance from both trading and liquidity management activities. Expenses rose in line with income growth with cost-to-income ratio improving to 42.6% for the quarter. I think if you noticed, year-on-year staff cost increased 9%, okay, as we responded to the tight market labor condition, especially in Singapore. Asset quality. I think asset quality improved this quarter. I think NPL formation was lower coupled with better recoveries, especially with the single credit case that Ee Cheong mentioned. And NPL ratio improved to 1.5%. NPA coverage remained stable at 33%. Credit costs also improved by 5 basis points to 17 basis points this quarter, mainly from lower specific provision. In anticipation of the heightened taxation risk, we are maintaining similar levels of general allowance this quarter. We expect credit costs for 2022 this year to close at around 20 basis points. The group total allowances were at SGD 4.9 billion for the quarter, of which SGD 3.2 billion was in general allowances. NPA coverage at 98% or 207% after taking collateral into account, and performance loans coverage at 0.9%, I think both remain adequate. We are confident that our general allowances will be sufficient to cushion the anticipated credit losses should that happen from the portfolio. Loans growth momentum sustained well, increasing 1% quarter-on-quarter and 6% for the year. I think there was some impact on exchange rate. So if I take a constant exchange rate, year-on-year growth would have been 7%. But more important is our ASEAN region would have grown 7% year-on-year, okay, at constant rate. With rising interest cost in the wholesale market, we maintain our focus on customer deposits as a major source of stable funding. Customer deposits grew steadily at 5% quarter-on-quarter and 6% year-on-year with fixed deposits being the largest contributor. I think most of you will ask me that question, but with the rising interest rate, we do notice customer switching, okay, from the current account into FDs. However, we do have net positive fund flows as customers reacted favorably to our FD campaign. In fact, 20% of the FDs open were new-to-bank customers. In addition, we still get a positive carry. I think, as you know, we are competing with the government, right, the Singapore treasury are already closing this quarter, but we still can get short-term EU paper at above 4%. So we are not having a negative carry. Our liquidity and funding positions strengthened this quarter with LCR at 142% and NSFR at 114%. Despite seeing some volatility in our OCI reserves, our capital position remained resilient with CET1 at 12.8% post the interim dividend payment. I think it's good to note that the back-to-market losses in the OCI reserves, these are mainly due to our holdings of our statutory reserve and there is no real credit risk. These losses will be reversed when the holdings mature. With that, I conclude my presentation, and I'll pass it back to Wendy. Thanks.

Thank you, Mr. Lee. We will now move on to the Q&A. [Operator Instructions] First question please.

So can I just ask about the NPL recovery. It was just that one customer from North Asia?

We specifically mentioned about 1 real estate company. But we are confident, because as it turned out, and then after heavy negotiation, it's a very well secured property with a very low LEV, and it's a very good location, so we are able to write back. So because of that I think the whole NPL situation is improved.

So in terms of the overall outlook for credit costs and the stresses in the portfolio, are you seeing any? Because interest rates have risen very sharply, and also, have you repriced most of your portfolio...

I think, 70-over percent of our loans are floating, right? So as interest rates were to go up, I think we will get some floating effect, right? And you should not just look at -- because of the high interest rate that will equate to higher NPL, because they are equally important factor to consider. In fact, even more important is the growth of the economy; the employment situation, that is also equally important, okay? And today, if you look at Singapore, you look at employment is very, very tight, okay? The growth is opening up. So all these factors, you have to look at it holistically, right? Interest rate is only one factor. But it is a sequential increase. And with people continuing to be employed, hired, I don't see any major issue. And if there are some, I will urge my customers to talk to us, we will know how to restructure, how to make sure that the situation will be further improved.

Thanks for the presentation and congratulations on your results. I think you mentioned earlier that you don't foresee a recession in the region. So could you elaborate on like what are some of the opportunities that UOB hopes to tap in ASEAN? How much do you think the bank could benefit from like the reorientation of supply chains towards our region?

We have invested heavily in the past 5 to 10 years, right? So in my speech, we focused on connectivity. I think that is an area that we will benefit the whole ASEAN. If you look at the whole ASEAN, with the exception of Cambodia and Laos that we are not present, the rest of the countries we are there, okay? So we should be able to seize the opportunity. So that's one thing as far as the physical branches is concerned, but we also invest in our technology, our cash management system that is equally important. We are focusing on trade, on sector that I think it will benefit the region as well as us. So we are seizing that opportunity. And if you look at the whole ASEAN, generally they are fairly strong, right? And if the geopolitical risk between U.S. and -- you will see the continuously shifting of supply chain activities in this part of the world. And for Singapore, there's a fair bit of inflow. You can see from our funds, right, partly due to some political risk elsewhere. So we also get the benefit. So I think, overall, I would say if U.S. interest rates continue to rise, U.S. may potentially face recessions, but our part of the world, I think it could potentially be just a slowdown, but I don't see any major hiccup in our economy.

The CET1 of 12.8%, does it include the Citi acquisition, because you've brought on already Malaysia and Thailand?

No, no.

I think Malaysia, Thailand is scheduled to come on next week, 1st November. So you'll see that impact more in the next quarter. But like I said, we are confident that we'll be able to maintain it above the 12.5%, like we have guided the market. And we need 2023 to make that portfolio work. And then by 2024, we'll get the full benefit coming on stream.

So has there been any change in your wholesale funding costs because of the lower CET1? Or has that remained stable? Because the ratings, I mean, it's...

I think the market -- we just did some road shows and all, the market is still fairly confident of our credit quality. Some of the lower CET1 doesn't reflect the weakness. Part of it is the mark-to-market losses that will recover, but more important is the underlying momentum, right? We are now earning that we can actually -- I mean, if you are debt investors, you just want to make sure that your interest is being paid. You look at performance itself. I think there is no issue getting there. So we are still highly sought after credit when we did that. But in general, it's not because of UOB market funding cost has gone up, okay? Even for wholesale funding, somebody asked us why did we go and do FDs at 3%. Because if I've gone to the wholesale market, okay, even some of our customers, now they're demanding 3.5% to 4%. So I think that is what we are looking at. And we always urge people to think that should it stabilize, I don't think we'll go back to the 2019 low-interest rate environment. We're probably going to go back all the way to 2008, where interest rate was at that level and we have to start understanding to operate. I think some of our customers are getting the message. That's why you look at them hedging a lot of their positions as previously. They always think that we want to make money out of them. But now they realize that they want their risk to be hedged. So I think that's where we are. So wholesale funding costs in general has gone up, not because of our credit.

So the decline to 12.8% was because of the securities portfolio, which has hit the European and the U.S. banks, but our banks as well.

Correct. So because we -- I mean commercial banks have a natural holding for liquid assets, right? I need to do that. And when you look at the rise in short-term and long-term rates, definitely, we have some impact, but over the next 2, 3 years, we'll get it back, because as we reverse...

Let me also further add, these are all government securities, okay? There is no credit cost there.

Any other questions from the floor? Maybe I can open it up to our online media friends. We have one question from Bloomberg Channel.

Mr. Lee and Mr. Wee, congrats on the big beat. I have a question on the 2020 trade outlook. Are you seeing a peak in net interest margin this year? Or when is it going to be from your expectations? And also, earning outlook for 2013, are we going to see more good news from UOB next year?