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

Good morning, and thank you for joining us. I think given the global environment remain uncertain, I think the three local Singapore banks, generally, I think, has been quite resilient, which is very encouraging. And even on our side, we see healthy trade and investment flow, stronger connectivity in Greater China and ongoing supply chain shift into the region. As businesses look to ASEAN for growth and diversification, I believe we are continuing to well position to support them. ASEAN is our home, our competitive advantage and our engine of growth. Over the years, we have built a differentiated franchise with deep local strong customer relationships and value-added ecosystems. We will continue to invest in our growth drivers. Okay. Let me just very briefly touch on three areas: Wholesale banking, retail and our priorities. Our wholesale banking franchise continues to benefit from growing trade, investment and connectivity across ASEAN. As clients increasingly operate across multiple markets, our regional footprint is a key differentiator. ASEAN-4 is key growth region, contributing about 27% of wholesale growing faster than. Transaction banking is a key pillar, contributing to nearly half of wholesale banking income. Trade loans grew over 30%, while wholesale CASA deposits increased 9% year-on-year in the first half. We see encouraging momentum in foreign direct investment in Southeast Asia with larger and more strategic. Over the past decades, foreign direct investment into ASEAN more than doubled even as global foreign direct investment declined by about [indiscernible]. Through our FDI advisory unit, supported more than 300 cross-border deals into the region in the last 6 months with projected investment totaling SGD 5.6 billion. More than 60% of these investments are in industrial sectors, reflecting digitalization, ongoing supply chain shift. This growth also create opportunities to deepen customer relationships across our retail and wealth businesses through our One Bank approach. On the asset quality front, we are addressing a few legacy accounts, Greater China real estate. These are well provided for, and total credit costs remain within our guidance. In retail banking, we have one of the region's largest franchises. ASEAN-4 markets now contribute about 35% of retail banking income and are growing faster. The scale we have built strengthened our brand, deepen partnership and enhances our ability to serve customers across markets. Our differentiated lifestyle solution help us in customer acquisition and engagement. Our wealth income, which every one of you are paying a lot of attention, grew 16% year-on-year in the first half with ASEAN-4 up 30%. Growth was particularly strong in Malaysia, 29%, and Thailand, 8%. Now looking ahead, we are focused on these growth priorities. First, to unlock the full value of our franchise. With more than 8 million customers across ASEAN, the opportunity is to deepen and become the primary bank for more customers. Our new value proposition for affluent and emerging affluent customer is gaining traction, and we will continue to build on this momentum. Second, to accelerate wealth growth, we see significant opportunities across our SME and business owner segments, and we are investing in talent, platform and products, while expanding our North Asia presence to support regional wealth. Our strategic distribution partnership with Allianz, we just announced yesterday, will further support our growth ambitions. We will sharpen our focus on wealth advisory and distribution by combining UOB customer reach and advisory strength with Allianz investment capabilities. We will strengthen our wealth proposition. This positions us well to meet customer evolving needs and support their long-term wealth growth. Third, to continue to capture a larger share of the trade and investment flows across ASEAN and between ASEAN and the Rest of the World. ASEAN see more than USD 200 billion annual FDI and more than USD 2 trillion of trade flow. With our transaction banking platform, sector expertise and regional network, we are well placed to support businesses as they expand. Fourth, to reposition our Hong Kong franchise for more diversified and asset-light growth. Hong Kong remain an important gateway between Greater China, ASEAN and the Rest of the World. Our focus is on building a more balanced franchise, including private banking and global markets. We, as usual, remain disciplined in how we allocate capital to drive long-term strategic priorities. As you can see from recent announcement, we seek to unlock value, drive sustainable earnings and enhance long-term shareholder value. At the same time, we are investing in our core business franchise, including digital platform, data infrastructure, cybersecurity and customer experience. We are committed to completing our $2 billion capital distribution plan by end 2027. Our ASEAN strategy is gaining traction. The opportunities ahead are significant. We are well positioned to capture them through our regional network, strong customer franchise and one bank approach. With that, I will hand over to my CFO to provide some financial details. Thank you.

Good morning, everyone. Before I go through the financial details, let me take you through a few key messages. The first, our franchise continues to deliver resilient performance amid external uncertainty. The second quarter numbers for us in terms of net profit after tax was $1.5 billion, representing a 10% up year-on-year against the same period last year. The underlying business momentum remained healthy across all customer segments, complemented by some non-recurring gains from asset divestments. Secondly, our diversified franchise drives earnings stability. I mentioned earlier across customer segments, but it's also within the segments in terms of product categories such as wealth, cards and CASA in retail. And in the wholesale business, trade lending and CASA continues to contribute to our balanced and sustainable earnings. Next, we continue to have adequate provision buffers. Our credit costs remain within guidance. There is one specific exposure, which I'll talk about as I go through the asset quality slides later on. And lastly, in terms of capital position, our strong capital position allows us to support consistent shareholder returns. The Board has declared an interim dividend of $0.88 per share. This is consistent with our commitment to give a 50% payout ratio to shareholders. And as CEO mentioned, our $2 billion share return program is on track. We have completed 40% of the share buyback, and we'll commit to complete or return a total of $2 billion by the end of 2027. Let me now move to some details around the recently announced deal with AGI, which is short form for Allianz Global Investors. The purchase consideration was $535 million. This amounts to roughly a $330 million gain and an increase of CET ratio by around 14 basis points once completed. The price reflects a valuation of about 2.5x price to book and 1.3% of AUM. The partnership strengthens our wealth management franchise by allowing UOB to focus on open architecture investment solutions for our customers and reinforces our advisory-led approach to customers. This allows us to focus on driving sustainable earnings growth and enhancing long-term shareholder value. I'll next go into the second quarter results in more detail. I mentioned earlier on, the second quarter results delivered a net profit of $1.5 billion. That translates to an ROE of 11.8%. Net interest income did ease marginally quarter-on-quarter. But with healthy loan growth and active balance sheet management, we were able to cushion the impact of margin pressure from the lower interest rate environment. Net fee income maintained positive momentum, rising 4% from the last quarter, supported by record wealth fees, which has helped to offset a moderation in investment banking activities. Trading and investment income saw a 6% decline amidst fewer liquidity management and market opportunities. However, the customer treasury flows continued to hold steady, underpinned by healthy demand for hedging and investment solutions. Asset quality was at 1.6%. NPA coverage, including collateral, improved to 306%. Our capital and funding positions remain strong with CET ratio at 15.4% and NSFR at 114%. I'll next move to the first half of 2026 numbers. Net profit stood at $2.9 billion, resilient performance amid macroeconomic headwinds. This was a 3% increase year-on-year. Total income was flat compared to a year ago, reflecting the impact of lower benchmark rates and softer investment banking fee income. Other non-interest income remained resilient, supported by customer-related treasury activities and divestments. Expenses remained well controlled, modest increase of 2%, underscoring our disciplined approach to cost management. Allowance for credit losses declined 27% as the release of general allowance more than offset the specific allowance for a single real estate account in Greater China. Now let me take you through the business lines. In our group retail business, the franchise continued to demonstrate a consistent and disciplined delivery. Group retail income held steady at $2.6 billion, supported by strong growth in wealth and cards, which helped to offset margin pressures. Wealth delivered invested AUM and wealth income rising about 15% and 16%, respectively, year-on-year. Net new money flows was $4 billion for the first half of this year. CASA mix has also improved from 57% to 58%, reflecting the strength and stability of our deposit franchise. I'll next move to the Wholesale Banking business. Despite the twin headwinds of lower interest rates and heightened competition for quality assets, the transaction banking business remained a key driver of our wholesale banking franchise, contributing to nearly half of the segment's income. Strong growth in CASA balances and trade loans supported that. Trade loans actually grew about 33%. Customer treasury income rose 2% year-on-year on the back of sustained client engagement amid a competitive environment. Gross loans expanded 8% year-on-year, mainly led by demand from the technology and financial sectors. Our diversification strategy continues to underpin earnings stability with non-real estate sectors accounting for 72% of the portfolio and cross-border income at 28%, demonstrating our regional connectivity and client franchise. Next, in Global Markets, we saw a double-digit 15% growth year-on-year. The treasury income from customer activities rose to a record half year high of $584 million for the first half of 2026. This uplift was driven primarily by proactive asset liability and funding management, effective deployment of liquidity as well as timely capture of market opportunities. Next, I'll touch on net interest income and margin. There was indeed loan margin compression but mitigated by asset growth. On the left-hand side, you would see that the average interest-bearing assets actually grew 7% over the period and net interest income declined 3%. I'll cover a little bit more detail in terms of net interest margin movements. The first quarter of 2026, we disclosed a 1.82% net interest margin. It saw 8 basis points decline to 1.74%, and we are exiting the July -- end of July time line with 1.71%. This was largely due to loan repricing in a lower rate environment. During the quarter, we did see healthy customer deposits and other funding inflows, but loan growth opportunities helped, and we deployed excess liquidity to support the net interest income. SORA appears to be bottoming out and is expected to trend higher in the second half of this year, and that will support NIM. We continue to maintain a disciplined approach, balancing between NII optimization and NIM management. While we proactively pursue opportunities to enhance NII, we recognize that such actions may result in measured pressure on NIM in support of overall earnings performance. Next is on the gross fee income. Despite record wealth fees underpinning our second quarter performance, loan-related fees did soften. So overall fees stayed flat. In terms of expenses, we grew expenses 7% over the period, reflecting our continued investments in strategic priorities such as our people, technology and regulatory activities. We will continue to maintain a disciplined approach in terms of cost management. Next, I'll move to NPA formation and NPL ratios. NPL ratio at 1.6% with new NPAs at $902 million. This is largely the result of one real estate account in Greater China, which we have been monitoring closely. The provisions that we have set aside in the third quarter of last year had taken this into account. And we continue to remain very proactive in reviewing and monitoring our credit portfolio. In terms of total credit cost, it stood at 28 basis points this quarter or 27 basis points for first half, both within our guided range. Next. In terms of provisions coverage, it continues to remain adequate with an NPA coverage at 88%, but when NPA coverage includes collateral, that's 306%. We're confident of the provision coverage that we have put in place and our credit cost guidance of 25 to 30 basis points. Briefly on customer loans, it's up 5% year-on-year. It is broad-based across business segments and sectors. Healthy growth in wholesale term and trade lending as well as continued expansion of our mortgage portfolio underpins these numbers. On funding, liquidity and funding positions remain very strong with LCR at 159% and NSFR at 114%. Capital. CET ratio at 15.4% post dividend payout on a fully loaded basis at 15.0%. Next, on dividend. I mentioned earlier on, the Board has approved $0.88 per share. That's consistent with our payout ratio of 50%. Our share buyback program is guided by a disciplined capital management framework. We have, as I mentioned, completed about 40%, which amounts to $794 million. We remain committed to delivering this $2 billion capital return plan, either through share buyback or other means by the end of 2027. In summary, the four key messages again is a set of resilient performance amid external uncertainty, a very diversified franchise that drives earnings stability, adequate provision buffers to navigate uncertainties in the credit portfolio and capital strength supporting consistent long-term shareholder returns. On the right side of the page, the 2026 outlook and guidance from us for loans, low single-digit growth, full year NIM of about 1.75% to 1.8%, fee income at low single-digit growth, operating costs of low single-digit increase and credit cost of total credit cost 25 to 30 basis points. With that, I conclude my presentation, and we open the floor to questions.

[Operator Instructions] Any questions.

I'm Rthvika Suvarna with Bloomberg. I have a couple of questions for you. Let's start with MAS data roughly shows healthy loan growth in Singapore. Why is UOB still in the low digits -- low to single digit?

Fee or loan growth?

Loan growth, sorry.

Loan growth at 8% in wholesale banking growth is low.

Yes. Yes. Okay. Let me recheck that. What is your outlook for loan growth in the second half of this year?

Sure. I think our full year guidance for loan growth is at low single digits. If you look at wholesale banking loan growth was about 8% and our retail banking loan growth was about 4%.

How come UOB kept its targets largely unchanged compared to the other two banks?

Which targets are you referring to?

The 2026 outlook.

Earnings outlook?

Yes.

Our outlook for 2026 earnings is flat to 2025. It's consistent with what we've projected.

Yes. There are no changes. Okay. And is there -- what we do with the proceeds from the sale to Allianz?

Firstly, the sale proceeds from Allianz will only come in when the deal is completed, and that's expected sometime in 2027. I think it's premature to look at the allocation of the use of proceeds. But suffice to say, it will be used in terms of investing in capabilities to ensure sustained earnings for our shareholders. If you're asking that in the context of potential dividends and so on, we will look at it holistically, taking into account the needs of the organization and where we are operating at the point in time.

You mentioned that the new NPA formation was largely linked to one account in Greater China. Can you give us more color on what drove that? And which market is it in? Is it in Hong Kong?

Sure. It's one real estate client in China but booked in Hong Kong. That explains why the complication around using the Greater China terminology.

Could we get any other question?

I have two questions. The first one, the 2026 outlook fee income and low single-digit growth. The previous quarter, I think you mentioned high single digits. So just wondering what's the reason for the lower forecast? And secondly is just wondering if -- what UOB's exposure to the iron ore trader Radiant World that was in the news overnight regarding Deutsche Bank freezing some of the Singapore accounts.

On the second question, first, we never comment on customers specifically. On the first question, it was around fee guidance, right?

Yes.

So some of the fee deals in the pipeline have been pushed into the second half of the year. I think with some of the pushback in terms of our pipeline, it does not look like a high single-digit fee income guidance would be accurate to reflect. So we're guiding to a low single-digit income -- fee income.

[indiscernible]

Earlier, Mr. Wee mentioned about the accelerate wealth growth you see significant opportunities across SME business owners. Could you expand what these opportunities are? And then you also mentioned investments [indiscernible] platform and products, what this investments mean? And is this also sort of a way for UOB to differentiate itself in the wealth acquisition?

I think it's a good question. I think generally, we focusing on one side, right? Yes, besides the private banking side on the standalone, we will continue to improve the platform, improve the product, taking in more headcount. And the fact is we are selling our asset management to Allianz, and Allianz' global fund managers that will accelerate and that will continue to sharpen, continue to make our capability stronger as well as better customer outcome. So that itself is taking care of, right? So when I talk about one bank, that cut across a wholesale part of corporate banking, the SME, the whole regional franchises, right? You can see the growth is actually double digits. So this is where I do think we have the competitive advantage. First of all, we have the most comprehensive footprint. Secondly, you know UOB, we started this foreign direct investment unit 12 years ago, and you can see the traction of getting people to invest. That has nothing to do with the wealth that we are talking about, companies who are interested and company to a certain extent are owner driven, some of them. So the wholesale piece will double up to complement our private banking, right? Are they able to do it because given our footprint, all these foreign direct investments when they come to Singapore, they will see UOB has the most comprehensive, the likelihood, everything equal, they will [ bank ] with us. And when we support them in the business, no reason for them, everything equal, they will give us a piece of the wealth business. This is where I think -- at the moment, this is our competitive advantage that we will continue to push, right? At this point in time, we are continuing to improve our infrastructure. No point to push something if your infrastructure is not ready. End of the day, we are going back to the customer service, going back to the accuracy of reporting. We don't want to short change our customer. We want to make sure that the whole infrastructure is well in place, and we [ move. ] Actually, we are already in place. We are just fine-tuning some of this. We align our interest, right, within wholesale and retail. So I think for the next 1, 2 years, you'll start to see the growth. And we are openly articulate that we want to double our wealth fee. And this is where we are coming from. I don't know, Yung-Chee want to add?

I think that's absolutely right. And I think that was what was driving the whole partnership with Allianz, right? We did earlier communicate the ambition to double down on wealth. If you sequence through the steps that we are taking, record wealth fees, the shifting of our AUM, invested AUM mix up to 42%. If you look at the partnership that focuses on open architecture platform, but with a long-term partnership that enhances the products that we make available to customers, I think that reinforces what we said we were going to deliver. And if I may, sorry, there was one other item regarding the fee outlook conversation. Aside from some of the sizable deals that are shifting into the second half, they are delayed. They're not going away. But there was also an element where credit card fees, which today roughly accounts for about 1/3 of our fee income, the outlook has changed for that as well. And that outlook has changed primarily because there have been some shift in spending patterns of consumers and the shift in the patterns have resulted in lower interchange fees in the buckets which they spend on. There are also cost pressures arising from higher miles redemption as people travel more, and there have been higher scheme fees by the interchange as well, primarily from Mastercard and Visa. So that's the basis of some of the fee adjustment.

And also just to answer you again Mike, [Indiscernible] with Allianz, given the very overcrowded wealth activities generated by every bank. And even every bank is having an open architecture, that arrangement will give us a lot of broader strength, right? We just want to focus on distribution. I don't want distribution manufacturing that aggregate, I will have a bigger problem to solve -- bigger challenge to solve. Based on the product capability for us, we focus on the platform, the customer base that we build. Hopefully, we are in a better position.

That partnership allows us to co-create solutions with the capabilities that they bring, but with the very local knowledge that we have in the markets that we operate in, that ability to co-create solutions is one of the reasons why we've tied up with a global asset manager.

Any other question?

Two questions. One is on just manufacturing of fund management product take up capital.

Sorry, not so much taking up capital. It's the people that you have to attract. It's the infrastructure that you have to build. And today, with AI, with all the infrastructure, with a continuous challenge on protecting the customer on scam, we have to focus as a bank to protect them, right? Because otherwise, my focus will be -- my technology is going to have a challenge, fund management, banking, insurance company, too much attention. We just want to focus what we think we can do better. And just remember, we acquired Citibank portfolio. We have to make it, the [ 8 million ] customer, in fact, is growing organically, right? And we have the beautiful product, consumer product. We just have to approach one bank approach to sell them. The mortgages, the credit card and need the fund management because fund management is a big industry. You need scale. Without the scale, by the time you invest, your return is not going to be good. And we are very focused on ROE, okay? We just want to make sure that we want to make sure it's asset-light, do the right thing. So hopefully, the next few years, we'll start to see UOB will navigate into a different shape of the bank.