Since the last time United Overseas Bank Ltd (SGX: U11), or UOB, reported its fiscal 2022 third quarter (3Q2022) earnings, the Federal Reserve raised interest rates a total of three times.
While the Federal Reserve has slowed the pace of rate hikes, it reiterated that ongoing interest rate increases will persist as the US central bank continues its fight to tame inflation.
More interest rate increases spell positive news for the lender as rising interest rates help to lift its top and bottom lines.
Here are five highlights from the blue-chip bank’s latest earnings report card for 2022.
Net profit hits a new record
UOB’s total income for 2022 rose by 18% year on year to S$11.6 billion.
The increase was supported by higher net interest income (NII), which surged by 31% year on year to S$8.3 billion, offset by a 9% year on year dip in fee and commission income which came in at S$2.1 billion.
Operating expenses rose less than total income, rising by 16% year on year.
As a result, operating profit climbed by 20% year on year to S$6.6 billion.
The bank recorded lower provisions which was offset by a smaller profit contribution from its associates and joint ventures.
In light of the above, UOB’s net profit shot upwards to a new record high of S$4.6 billion, representing a 12% year on year increase.
This figure includes the one-off expenses associated with the acquisition of Citigroup’s (NYSE: C) consumer businesses.
Net interest margin continues its rising trend
Banks are beneficiaries to the latest series of rate hikes.
As a testament to this, UOB’s net interest margin (NIM) has increased every quarter in 2022, settling at 2.22% for 4Q2022 which was 0.27 percentage points higher than 3Q2022’s 1.95%.
On a full year basis, NIM widened by 0.3 percentage points in 2022 to 1.86% versus 2021’s 1.56% due to the aggressive rate hikes.
Besides higher NIMs, NII was also driven upwards by a modest loan growth of 3% year on year.
The slight expansion of UOB’s loan book was predominantly driven by Malaysia and Thailand.
This encouraging set of results may persist in 2023.
Just this month, the US reported tighter labour market conditions, which in turn feeds inflation.
In response, there are signals that interest rates will not only continue to increase, but they will also remain at elevated levels for some time.
As such, the lender projects that NIM will stabilise around 2.2% for 2023.
Muted fee income
UOB’s fee and commission income of S$2.1 billion in 2022 contributed only 19% to the bank’s total income, relative to the prior year’s 24%.
The lower contribution was mostly attributed to the easing of wealth and fund management fees, which declined by S$312 million year on year.
2022 had been a turbulent year for both the stock and bond markets, which led to subdued investor sentiment.
Coupled with a seasonally-softer fourth quarter, wealth and fund management fees dragged overall fee income downward.
Nevertheless, the bank’s assets under management enlarged by 11% year on year to reach S$154 billion as of end 2022.
On a brighter note, credit card fees counterbalanced the disappointing results, growing by a healthy 41% year on year to reach S$628 million.
The improvement was due to higher customer spend and consolidation from the acquisition of Citigroup’s credit card business.
Trade and loan-related fees also crept upwards slightly to support overall fee income.
ASEAN’s potential remains bright
The bank’s conviction in the ASEAN strategy was reinforced with the transformational Citigroup acquisition.
Consumer portfolios in Malaysia and Thailand were acquired last November with the integration process underway.
Net customer additions from these two geographies will amount to 1.3 million out of the enlarged customer base of approximately seven million across ASEAN.
Combined with a stronger digital footprint, higher average credit card spending, and an increase in assets under management, the lender’s income mix derived from the ASEAN region experienced an uplift post-acquisition.
Currently, the regional contribution to the total income sits at 29% which is 4% higher than the pre-acquisition number.
Meanwhile, the consumer banking business in Indonesia and Vietnam will come onboard in 2023.
Together, these factors feed into an optimistic outlook for 2023 with an estimated additional revenue of about S$1 billion for UOB.
Management further guided that loan growth should remain positive in the mid-single-digit range for this year coupled with double-digit year on year fee income growth.
Dividend overtakes pre-pandemic levels
UOB declared a final dividend of S$0.75 per share, which is 25% higher than the prior year’s final dividend of S$0.60 per share.
Together with the interim dividend of S$0.60 per share declared in 2Q2022, this takes the trailing 12-month dividend to S$1.35, which is even higher than the total dividend of S$1.30 before the pandemic.
The payout ratio stands at 49% and its trailing dividend yield stood at 4.4%.
Get Smart: Strong tailwinds lie ahead
The record financial performance and final dividend set a high bar for investors’ expectations regarding UOB’s future performance.
With interest rates poised to rise, accompanied by the realisation of its ASEAN strategy, the blue-chip bank is in a good position to continue growing.
2023 is gearing up to be an exciting year for investors who seek even higher dividends from the lender.
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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.