Investors have been waiting with bated breath for the earnings from the three local banks to get an indication of how the economy is faring.
Banks are known for being proxies to the real economy as they lend to a wide variety of individuals and corporations.
The first to announce its fiscal 2023 first quarter (1Q 2023) business update is United Overseas Bank Ltd (SGX: U11), or UOB.
The blue-chip bank did not disappoint.
Core net profit rose to a new record high of S$1.6 billion as the lender witnessed growth across its wholesale, global markets, and retail divisions.
Loan growth remained anaemic but this weakness was offset by a significantly higher net interest margin.
Here are five highlights from UOB’s latest 1Q 2023 business update.
1. A stellar financial performance
UOB reported a net interest income of S$2.4 billion for 1Q 2023, up 43% year on year as higher interest rates lifted its net interest margin (NIM).
Fee income, however, dipped slightly by 4% year on year to S$552 million.
Despite this slight decline, total income for the bank surged 49% year on year to S$3.5 billion as other non-interest income leapt more than five-fold year on year to S$563 million.
With operating expenses rising just 36% year on year, operating profit ended up soaring 60% year on year to S$2.1 billion.
Net profit before integration and one-off expenses clocked in at S$1.6 billion, a record high and 74% above the prior year’s S$906 million.
2. Negative loan growth with moderating NIM
The lender saw loan growth turn negative on a quarter-on-quarter and year-on-year basis as corporates reduced their borrowings.
Gross customer loans fell by 1% year on year from S$320 billion in 1Q 2022 to S$316 billion in the current quarter.
UOB announced that loans did grow by 1% year on year on a constant currency basis after factoring in a 9% uplift in the countries of Malaysia, Thailand, Indonesia, and Vietnam resulting from its Citigroup (NYSE: C) acquisition.
Building and construction and housing loans made up the bulk of loans, taking up 51% of UOB’s total loan book as of 31 March 2023.
NIM stood at 2.14% for 1Q 2023, up 0.56 percentage points from 1.58% in 1Q 2022.
However, on a quarter-on-quarter basis, NIM fell by 0.08 percentage points from 4Q 2022’s 2.22%.
The reason for the dip was that UOB could not lend out all the deposits it received.
The bank also saw its funding cost increase as it needed to dole out higher deposit rates to attract customers to deposit money in their accounts.
3. Fee income dipped slightly
On the fee income side, UOB saw three out of four categories of non-interest income decline year on year.
Credit card fees were the bright spot as income nearly doubled year on year from S$42 million to S$81 million.
However, wealth and loan-related fees both dipped year on year, resulting in total fee income coming in at S$552 million, slightly lower than the previous year’s S$572 million.
4. Higher AUM along with a surge in trading and investment income
Assets under management (AUM) for the bank continued its upward climb, rising 14% year on year to S$160 billion.
60% of this AUM is from overseas customers and UOB is working hard to scale its TMRW app across ASEAN to acquire more customers at lower cost.
Of the more than 225,000 new customers acquired in 1Q 2023, close to six out of 10 were digitally onboarded.
Trading and investment income saw a more than 10-fold year on year surge to S$474 million, driven by customer-related treasury income along with demand for hedging activities.
5. Good expense control and stable NPL ratio
With the strong surge in total income, UOB’s cost-to-income ratio has fallen to just 40.9% for 1Q 2023.
This level was significantly lower than the 44.8% registered in 1Q 2022 and also lower than the previous quarter’s 42.6%.
The non-performing loans (NPL) ratio remained stable at 1.6%.
Get Smart: Higher rates may affect loan growth
CEO Wee Ee Cheong remains sanguine on 2023’s outlook.
UOB expects mid-single-digit year on year loan growth and for NIM to maintain at current levels.
However, higher interest rates could continue to dampen loan demand so this is an area to watch for in UOB’s future earnings releases.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.