Banks are the pillar of a nation’s economy, and United Overseas Bank Ltd (SGX: U11), or UOB, became the first local bank to report its earnings for the second quarter (2Q2022) and the first half of 2022 (1H2022).
All in all, the lender reported a respectable set of numbers against the backdrop of high inflation and a potential recession.
Investors are also starting to see the effects of rising interest rates flowing through to the bank’s top and bottom lines.
Here are five highlights from UOB’s latest earnings report card.
1. A better second quarter
UOB’s 2Q2022 saw total income rise 12% year on year to S$2.7 billion.
The boost was contributed by higher net interest income, which rose 18% year on year to S$1.86 billion but was offset by a slight 3% year on year dip in fee income to S$567 million.
Total expenses rose in tandem with income, resulting in operating profit increasing by 12% year on year to S$1.5 billion.
UOB took on lower impairment charges for the quarter but also saw lower contributions from its associates and joint ventures.
Net profit came in 11% higher year on year at S$1.1 billion.
This strong showing helped to pull up its 1H2022 numbers after its first-quarter earnings saw a 10% year on year dip in net profit.
For 1H2022, total income edged up 3% year on year to S$3.5 billion while net profit remained flat year on year at S$2 billion.
2. Double boost for net interest income
Net interest income received a double boost this quarter from rising interest rates and healthy broad-based loan growth.
Net interest margin (NIM) rose to 1.67% for the quarter, up 0.11 percentage points from the 1.56% logged in the second quarter of 2021.
For 1H2022, NIM stood at 1.63%, 0.07 percentage points above 1H2021’s 1.56%.
Coupled with an 8% year on year increase in UOB’s loan book to S$322 billion as of 30 June 2022, net interest income saw a 14% year on year jump for 1H2022 to S$3.5 billion.
Business momentum remained healthy and CEO Wee Ee Cheong remains confident of ASEAN’s long-term potential, projecting a mid-single-digit year on year loan growth for FY2022.
3. Some fee income categories hitting a new high
Total fee income dipped slightly from S$581 million in 2Q2021 to S$567 million in 2Q2022.
Certain categories of fees hit a record high.
Loan-related fees hit a quarterly high of S$283 million, up 9.7% year on year, as UOB supported and advised customers on loan options.
Credit card fees also rose sharply by 44% year on year to hit a new high of S$59 million as consumer spending shot up as borders were reopened and air travel resumed.
These two categories of fees were offset by a dip in wealth management fees as market sentiment was dented during the quarter.
Assets under management for the bank stood at S$138 billion as of end-June 2022.
4. Non-performing loans crept up
The bank’s non-performing loans (NPL) ratio saw a slight increase from 1.5% a year ago to 1.7%.
UOB reported a large new NPL that edged this ratio higher.
It disclosed that this loan belonged to a major corporate account, thus bumping up total new non-performing assets to S$661 million for 2Q2022 versus S$360 million a year ago.
At the same time, there is news that distressed Chinese developer Shimao Group (SEHK: 0813) was sued by UOB as it breached certain loan and security agreements.
Shimao is one of many Chinese property developers that are facing a liquidity crisis as the Chinese government clamps down on excessive borrowing and housing speculation.
5. Dividend kept constant
UOB declared an interim dividend of S$0.60 per share, unchanged from a year ago.
The bank is paying out half of its net profit and its trailing 12-month dividend stood at S$1.20, giving its shares a trailing dividend yield of 4.2%.
Get Smart: Watching out for Hong Kong and China
While UOB reported a decent set of earnings for 2Q2022, one area to watch for is the bank’s China and Hong Kong exposure.
There are reports of homeowners in China are refusing to service their mortgages as developers have yet to complete their properties.
Without much-needed cash flow, these developers are now turning to their bankers to help bail them out of a difficult situation.
As much as two trillion RMB of loans may be at risk, and if any major defaults occur among the developers, it could lead to higher provisions and more bad loans for the banks.
Greater China makes up 16% of the bank’s loan book, but its Hong Kong SAR exposure is already reporting a 2.1% NPL ratio.
Investors will do well to watch for further signs of stress that may negatively impact UOB.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.