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

Good morning, and welcome to UOB's First Quarter 2024 Results Briefing. I'm Wendy Wan from the Group Strategic Communications team, and I will be your MC for today. This morning, we have Mr. Wee Ee Cheong, UOB's Deputy Chairman and CEO; and Mr. Lee Wai Fai, our CFO, to present the results. A few house rules before we start. [Operator Instructions] Without further ado, I will now pass the time to our CEO, Mr. Wee, please.

Good morning. Thank you for joining us today. The global environment remains uncertain. For now, we expect fewer interest rates cut due to strong U.S. economy and sticky inflation. Interest rate is set to remain higher for longer. We are cautiously optimistic about this year's outlook. For Southeast Asia, despite the impact from high rates and a strong U.S. dollar, we continue to see ongoing shift in global supply chains and sustained tourism activities. China is taking steps to reduce its reliance on property sector and diversifying into new economic growth drivers. This should generate more trade and FDI opportunities between China and Southeast Asia. Against this backdrop, we have a relatively good start to the year. We delivered a core net profit of SGD 1.6 billion, held steady year-on-year and 5% higher quarter-on-quarter. Core ROE stood at 14%. Our core business driver for the first quarters are trending well overall. Net interest income was 2% lower as the 2% loan growth was more than offset by the lower net interest margins year-on-year. However, net interest margin stabilized at 2.02% quarter-on-quarter as we actively optimize our balance sheet. Fee income grew 5% across the board and momentum will pick up in the coming months. Other noninterest income surged with record high trading and investment income. We are keeping a firm grip on costs. We call cost-to-income ratio at 41.9%. Asset quality stayed resilient with NPL ratio stable at 1.5% and lower credit costs for the quarter at 23 basis points. our balance sheet remains strong with healthy levels of capital and funding. Now let me give you some update on our core business segments. Our Group Retail business, our Retail banking business has done well across different revenue drivers. Wealth management is picking up. Our bancassurance business remains strong, growing double digit year-on-year across all markets. We are seeing increasingly demand for investment products mostly into fixed income and structured products. There is potential to do more. At the same time, net new money continued to grow, bringing our total AUM to SGD 179 billion or 11% higher than last year. Deposit balances are seeing growth across all countries, reflecting our solid deposit franchise. As we transform our private wealth business, we added capabilities, we aim to attract new customers, grow our AUM and convert more of our AUM from deposits into wealth products. Our wealth offerings in the Singapore TMRW app, were recently refreshed, and we are seeing positive feedback. Just to give you an example, now 3 in 4 unit trust subscriptions are performed digitally. For new to wealth customers, 1 in 2 have started to invest in unit trust on our app. We will be launching a revamped advisory platform for our private bank with a focus on growing our customer wealth sustainably. We continue to attract quality RM and wealth management professionals to UOB. All of this should give a strong boost to our wealth management business. Card fee income grew 11% year-on-year to SGD 90 million. Other than concerts, which all of you are very excited about, we plan to do more events targeting younger customers and to share some colors, customers who use EOB cards to buy Taylor Swift's concert ticket have continued to actively use our cards, even after buying the tickets. We expect consumer spending to stay strong this year. With our expanded regional franchise and more lifestyle offerings, we are well placed to ride on this trend. Our Citi integration is on track. We have integrated our portfolios in Malaysia, Indonesia and just recently, Thailand. Our focus on cross-sell synergies is starting to gain traction. We aim to uplift customer spend and strengthen deposit balances and investments. Now on group Wholesale business. Our Wholesale business was resilient despite a challenging environment. We are now reaping the benefits from the investment in our platforms. Since 2018, after we roll out our cash management platform, Wholesale CASA has almost doubled, and customer cash balances are stable since last quarter. Our financial supply chain management platform has shown up in 6 of our key markets. Since then, we have added a healthy level of asset through the platform and the platform is set to further drive our asset growth in the region. Together with our deep expertise in 7 growth sectors that drive about 70% of Greater China and ASEAN FDI and trade flows. We have the platform ready to benefit in the next upturn of the trade and investment cycle. Our connectivity strategy is playing out well. Cross-border income now make up 1/4 of Wholesale banking revenues, while transaction banking income contributed more than half. These are stable revenue stream with low capital requirements derived from sticky client relationships. For this quarter, loan-related fee remained strong, driven by loan drawdown. Customer-related trading and investment income is up 8%. With our regional footprint, local expertise and sector-specific capabilities, we are well placed to connect our customers to opportunities across ASEAN and achieve our ambition of becoming the #1 cross-border trade bank in ASEAN. Looking ahead, 2024 so far has been good. While the operating environment ahead may be uncertain, we will stay vigilant and nimble. With ASEAN strong fundamentals, we remain confident of the region under underlying prospects and upside potential. As a long-term player, we believe in balancing growth with stability. We remain disciplined and prudent in maintaining surplus liquidity to give us strategic flexibility. When it comes to our customer investment, we believe in doing right by them, providing solutions to help them grow their wealth in a sustainable manner instead of product pushing. In recent years, we have invested in building product capabilities in a diverse engines of growth and we are now seeing positive results. We will also focus on harnessing these capabilities for our next stage of growth. Our 2024 guidance remains unchanged: Low single-digit loan growth, double-digit fee growth led by our Retail franchise, total income growth to be positive from 2023 levels, core cost-to-income ratio at around 41% to 42% on continued cost discipline and total credit costs at the lower end of 25 to 30 basis points. I thank my colleagues for their teamwork and dedication. I now invite Wai Fai to elaborate on our financials.

Thank you, Ee Cheong. And once again, good morning, everyone. On our results, I think Ee Cheong mentioned that our core net profit increased 5% against the last quarter to SGD 1.6 billion. I think, including the one-off Citi integration expenses, core profit would be down to SGD 1.5 billion. Net interest income is this quarter, first, going to shutter the account but NIM was stable at 2.02% as active management of the excess liquidity buffered the lower loans margin. Fee income saw a good start to the year. With higher loans-related fees and pickup in wealth demand, while card fees normalized from last quarter, seasonal high. Treasury and investment income surged to an all-time high boosted by record customer treasury income as well as strong performances from trading and liquidity management activities. Cost-to-income ratio, excluding the one-off expenses, improved to 41.9% from strong income growth and disciplined spending. Asset quality remained resilient with NPL ratios unchanged at 1.5%. Total credit cost on loans decreased as NPL formation was lower and exposures were well secured. Our capital and funding position remains strong with CET1 at 13.9% and NSFR at 121%, respectively. On some of the details, as mentioned, our first quarter core profit grew 5% Q-on-Q to SGD 1.6 billion, driven by record trading and investment income and higher fees income. Year-on-year, core profit saw a decline of 1% mainly due to lower net interest income. And the margins, I think the year-on-year decline on margins is still there. One-off costs are starting to taper off, as we progressively complete the operational integration of Citi. Let me go through the segment performance in the next few slides. Against last year, Retail registered healthy growth in card and wealth fees across the region. This, along with CASA volume growth helped offset the margin impact on the mortgage portfolio from intense competition. Wholesale store healthy CASA growth from last year, strong investment banking activities, coupled with the regional pickup in trade volumes, cushioned the impact of margin compression as the market competes for higher-quality loans. Global Markets captured opportunities in commodities trading alongside with improved performances from liquidity management activities. For our consumer business, post Citi integration, our retail customer base has further grown organically by around 1% to SGD 8.1 million. The proportion of digitally enabled customer continues to rise across the region, highlighting our success in onboarding the former Citi customers onto our TMRW platform. We continue to grow strategic partnerships with established brands in the region and we aim to boost the customer spending by providing a wider range of lifestyle offerings. Our quarterly cut fees has sustained at a higher level post Citi acquisition. Card fees for the quarter increased 11% compared to a year ago. Our assets under management continued to demonstrate strong growth. We saw another SGD 3 billion new money inflows in the first quarter this year, bringing our assets under management to SGD 179 billion. Our Wholesale business held up well in the face of an elevated interest rate environment. We continue to execute on our strategy by providing business connectivity across the region. Cross-border income is now 1/4 of our Wholesale banking income. While the number of anchor customers in our supply chain, those are more important because they bring in the rest of the [indiscernible], has risen by 5% year-on-year. Our diversified strategy also allowed us to capture opportunities in different segments with income from the hospitality sector rising 9 % and the healthcare rising 13% year-on-year. We have seen significant growth in transaction volume and cashless payment across the region on our cash management platform. For geography, we continue -- we saw continued franchise growth in Singapore, our ASEAN-4 and North Asia this quarter. Singapore recorded higher trading and investment income while North Asia benefited from commodity tradings. ASEAN-4 overall performance grew on a constant currency basis. Although card fees were seasonally lower, this was offset by a pickup on loans-related fees. The ASEAN-4 also registered higher trading and investment income from customer treasury flows and liquidity management activities. Let me go through the details of the income drivers. Net interest income is 2% to SGD 2.4 billion due to a shorter quarter while net interest margin stabilized at 2.02%. Loans margin continued to be suppressed by market competition for good quality credits, coupled with high cost of funding, as the impact from the recent deposit repricing has not fully come through in the quarter. Interbank and security margins improved 17 basis points quarter-on-quarter from active management of excess liquidity. We expect NIM to hold above 2% for the rest of this year. We have registered a good start to fees this year, increasing to SGD 580 million in this quarter, driven by loan-related fees and pickup in wealth and investor confidence gradually return. Although wealth fees increased by 8%, total Wealth product income, if we include the customer related treasury income, grew 19% quarter-on-quarter. Card spending was strong year-on-year. The decline in card fees quarter-on-quarter is mainly due to the seasonal higher spending in the fourth quarter and some annual fee waivers from our Citi conversion. We did some of our conversion, which we actually waive some of the fees to bring them on board. Customer-related treasury income recorded a new record at SGD 219 million. This quarter, as retail bond sales and hedging activities increased from market expectation on Fed rate cuts. So I think we sense the risk on elements slowly coming back into the market. This, coupled with robust performance from trading and equity management activities, boosted trading and investment income to an all-time high. On the back of an enlarged income base, cost-to-income ratio improved to 41.9% this quarter, including the one-off, the CIR would be at 44.6%. The one-off costs were tapered off in the second half as we have progressively completed the operational merger for 3 of the biggest subsidiary of Malaysia, Indonesia and Thailand. On asset quality, the overall asset quality of our loans portfolio remained resilient with NPL ratios unchanged at 1.5% from last quarter. New NPL formation also decreased with lower recoveries and write-off total NPL -- NPA inch up slightly to SGD 5.1 billion for the quarter. Total credit costs improved to 23 basis points. Special allowance is this quarter with net credit costs improving from 26 to 20 basis points due to lower NPL formation. At the end of the quarter, the group total allowances remain at SGD 5 billion, of which SGD 3 billion was in general allowance. Performance loans coverage at 0.9% as well as NPA coverage at 99% or 204% if we factor in the collateral, I think they are more than adequate. For loans, on a constant currency basis, loans grew 1% against last quarter and 3% from a year ago, the growth were mainly from selective good credits and short-term trade loans. Customer deposits rose steadily by 1% quarter-on-quarter and 4% year-on-year. Both Retail and Wholesale CASA deposits continue to register healthy growth, benefiting from our platform and client activities. Overall, CASA mix surpassed the 50% mark for the first time since 2022. Our liquidity position remains strong with LCR at 160% and NSFR at 121%. These are all well above regulatory requirements. Our CET1 rose from last quarter to 13.9% posted by profit accretion, while RWA remained relatively stable. With that, I conclude my presentation, and I pass to Wendy.

[Operator Instructions] First question, from Bloomberg.

This is [indiscernible] from Bloomberg. I have 4 questions. First, can I have NIM outlook for 2024, net interest margin outlook for 2024. Second question, given your CRE exposure mostly in Singapore, can we get some outlook about the market? Do you see a softening trend? And are you concerned? The third question on wealth. congrats on the rising AUM. Could you share how much the net new money is of the total? And I noted that 60% plus came from overseas customers, could you provide the breakdown on dominant origins of the funds? And fourth question. At the beginning, Mr. Wee mentioned cautious optimism, could you give some colors? What are the main rigs that you see that keep you cautious?

We thought that NIM will be a bit challenging this year. Now that the Fed has deferred. I mean we started the year with cost of 13 big cuts. Now we are down to maybe 2 as there are even questions whether you happen. A lot of this will be pushed back to the last quarter. So our NIM held up stronger than we thought, okay? So you expect -- actually, I personally expect some positive upside in the short term, okay? Because we have cut rates on deposits. A lot of them will flow through in the second, third quarter. After that is the function on whether there will be rate cuts and how steep are the rate cuts. So we are a little bit positive. We still hold back to our guidance that we can keep it well above 2% and now maybe I can just add that I think we can keep it well above 2%. If I can keep it at current level, it will be something that we aim to do. But to keep it above current level, we will be what we hope to do. Depending on the last -- if the Fed certainly cuts sharply but I think if the things go that are going, we are actually comfortable keeping it at the current level.

But you also mentioned pressure on competitive -- competitiveness and quality deposits.

So no, no, it's not the competitiveness, it's on loans. Because there are 2 things, right? You really look at it, the you saw the ones coming down, okay, especially in Singapore. Because Singapore, I mean, all the competitors have excess liquidity. And if you were to compete, like I said, don't to look at margins, also help us look at volume. If I go in and compete more on the trade, which we are more optimistic, if Mr. Wee's vision on rising ASEAN and a little bit more positive in more trade flows that those are slightly lower margins but it should add to the total income. So that's why we entered a range of where margins would be. NII, we are quite positive that we will bring it back to a positive level from the negative 2% that we saw in the first quarter drop.

I think the fundamental is, I think the philosophy is we need the liability in order for us to grow loans. This is where the quality of the deposit is important. If the loan is robust, of course, we can go to the market and buy some fixed deposits, right, to support the loan growth. But generally, we will focus on the investment that we have put in to grow CASA. You can see the CASA is picking up, right? That is important. The stickiness, that is very, very important for us in the long term. You talk about the commercial real estate, right? I would say, generally, even our building here, I think the demand is still quite high. What is the rate now today? Is it about $11, $12.

It got past $11.

So I think with the foreign people coming in, I think there is still a demand. It's unlike other market. So Singapore in a way is quite fortunate, right? So I would say commercial property will continue to stay quite firm.

Quite firm?

Quite firm, yes.

So I think we disclosed the commercial real estate outside of Singapore, right? In total, we have 7.4%, more than half is in Singapore. There are 2 big markets that we highlighted, which is Hong Kong and U.S. Here, the rest are the market, I think LTVs occupancy raise [indiscernible] customer. I think we are positive if some of the actions taken by the Chinese government on stabilizing the commercial on the property sectors in China itself, okay? That should help us. We always say is that our customers they are actually asset rich. It's just that they take time to restructure and sell it. So we are confident that we can manage the Hong Kong portfolio. U.S. is where, I think there's some stabilization coming in. We do -- we have taken the big hits. I think last 2 years, we already have taken some to NPLs. I may have 1 or 2 remnants coming in, but they are not big. So overall, we are quite comfortable with the commercial real estate exposure. You had a question on wealth? Like I say, the 60% that we talk about origin, actually, it's quite wealth spread. This 60% is the base. And remember, before the days of China, a lot of rich from Indonesia, Thailand, et cetera, keep their wealth here. So that continues to be true. Of course, the recent talked about how much of that flow originates out of China itself. It does. But I think they haven't picked up significantly to the momentum. And to be very frank, there were some cautiousness and some slowdown because of the enhanced due diligence that we put on that. So it's quite a good spread self that we have. We will make sure that there are 2 sectors of the Wealth. One is private banking, one is consumer. And the consumer side, with the Citi asset integration, that will pick it up, okay? And that will pick up. So that will really be a regional focus. Our bank has just started building. Our North Asia exposure has done well although it is a small portfolio, it will continue to. The challenge in that segment, like Ee Cheong, said was that, our philosophy is very different. We look at Wealth preservation. So as wealth preservation deposits is actually a key element that we bring in, okay? And then the question is cross-sell of that into wealth products and they happen, okay? And I think recent statistics for those FDs in the private bank, we are cross-selling 70%, 80%. But again, it's the type of products you cross-sell into, that's the next one, okay? We prefer more conservative products, although there are some people who think that there is already a risk on element. I think we prefer conservative products to make sure that it's sustainable for the customers. So that's probably our model itself, steady growth. And so that -- I mean -- we don't know where the cycles will be right, cycles will happen. Now maybe we are positive on the upside equities in the U.S. is still positive but if interest rates drop or go up. But that's where we watch that. That means we want to be responsible to customers.

I think this is something very important. That is our DNA. That is our philosophy. You cannot compare UOB as a commercial bank compared to the wealth bank, okay? You look at UBS of the world. I would say, generally, the wealth product would tick up maybe 80% of the AUM. But for us, we are talking about maybe 30%, 35%. But we are focusing not only just on wealth product but certain segment, yes, private banking, maybe we'll focus a little bit more. But if you look at it as a group, okay, our privilege banking customer cut across the whole ASEAN market. We don't just sell -- continue to sell push product, we're focusing on liquidity deposits, providing solution to the customer to hope -- to make them how to generate, how to create wealth for them, solution.

Could you share specifically how much is the net new inflows in the quarter and...

I mentioned it's about SGD 3 billion last quarter.

Next question, sorry, from [ Flops. ]

Just a follow-up on the wealth question. Could you give us some color on the outlook for wealth considering your fee income from wealth has been steadily increasing in the last 5 quarters, at least I see from my screen. And what's driving this? And then second question, with the completion of the Citigroup -- Citibank integration, are you looking at more M&A opportunities around region?

Give us some digestion first, okay? We are still yet to meet our customer base, the new customer base that we have in Citibank, okay? But you can see the Q2 sign is encouraging because you must remember the portfolio that we bought for Citibank is basically credit card and unsecured, okay? There is no wealth piece in the 4 markets, okay? So our job is to make sure that we are able to offer multiple products deposits, wealth mortgages and all this thing. This is where the cross-selling become very important, okay? So that is something we are still working on. So as far as M&A is concerned, yes, we're always on the lookout, I think for the time being, I think this is something quite strategic for us. I think we have gained a lot of tractions in the region. We want to make sure it's successful. So that the next move that we have to make the shareholders will be a bit more confident in our acquisition.

Next question from [indiscernible].

Could you share the outlook of China? Because I noted that the bank exposure is about 45% to Mainland China. So what is the outlook given the uncertainties in the economy? And would you think that this 45% is comfortable? Or would you seek to reduce or increase?

Our exposure -- immediate exposure to China is not big. Our -- we have 16 branches in China but basically, we make money outside of Chinese company, right? Because that is where our competitive advantage is. We don't compete with the Chinese bank in the domestic market. So our exposure is actually manageable. And if you ask me about China economy, yes, I think for the time being, no different than any economy. I think -- they are facing a bit of headwind. And I'm very confident, Chinese people, they are very enterprising, right? They have no energy, there's no work life balance, okay? They are very productive, it's so much so that created a bit of threat to a lot of people outside of China. But as an economy, I think it's big economy, right? The turnaround may take a while. I think generally, I'm confident, give them some time they will turn around.