PETALING JAYA: United Overseas Bank (UOB), Singapore’s third-largest bank by market capitalisation, is expected to benefit from the recovery in South-East Asia with its gross loans projected to grow by “mid to high single digit” in 2022.
UOB Kay Hian Research analyst Jonathan Koh said UOB was positioned to serve customers and facilitate trade and investments between Asean countries and China.
“Asean countries benefit from the ongoing disruption to the global supply chain.
“UOB is making good progress in its digital initiatives.
“It acquired 140,000 customers across the region digitally through UOB TMRW in the first quarter of 2022 (1Q22), of which 80% are new to UOB,” he said in a note.
UOB has a presence in 19 countries globally, including markets in Asean, namely, Malaysia, Thailand, Brunei, the Philippines, Indonesia, Vietnam and Myanmar.
With the proposed acquisition of Citigroup’s consumer banking business, UOB will gain a stronger exposure in Indonesia, Malaysia, Thailand and Vietnam.
The deal will also double the retail customers of UOB to about 5.3 million in these four countries.
While he remained cautiously optimistic, Koh said that cross-border transactions and a pick-up in Asean countries will help to improve UOB’s loan growth this year,
Currently, UOB’s loan growth is dominated by large corporate customers acquiring assets in developed markets.
“The recovery within Asean has just started and the reopening will lead to increased spending.
“Working capital accounted for 60% of loan demand from Asean countries and management anticipates an increased drawdown in the second half of 2022.
“On the consumer banking front, management sees higher demand for residential mortgages due to a pick-up in transaction volume in the secondary market.
“The reopening of Asean countries will also lead to an increase in spending on credit cards and growth in unsecured personal loans,” he added.
Meanwhile, he noted that fee income is expected to grow at a single-digit rate, supported by cross-border transactions and sector solutions for wholesale banking.
UOB is expected to continue exercising discipline to control expenses in order to keep its cost-to-income ratio stable at about 45%.
“The non-performing loan (NPL) ratio is expected to inch higher but stay below 2%.
“Management has guided credit costs at 20 basis points (bps) to 25bps for 2022 (2021: 20bps).
“The return on equity is expected to be above 10%,” he said.
Koh pointed out that the UOB management was cautiously monitoring exposure to vulnerable companies.
This is considering the secondary impact from the Russia-Ukraine war, which the management is “concerned about”, and the impact on the Chinese economy following its lockdowns,
According to Koh, UOB has conservatively slowed down loan growth in mainland China.
“Currently, asset quality for mainland China is benign with an NPL ratio of 0.3%.
“Management is also monitoring downstream players in the oil and gas supply chain and companies affected by weakness of their local currencies against the US dollar,” he said.
With regard to the acquisition of Citigroup’s consumer banking business, Koh said there was good progress in the deal.
UOB’s management expects regulatory approval for Thailand by end-2022.
The acquisition of Citigroup’s consumer banking businesses in Indonesia, Malaysia and Vietnam is expected to be completed in 2023.
“Citigroup’s consumer banking businesses in Indonesia, Malaysia, Thailand and Vietnam have the right strategic fit for UOB.
“The acquisition doubles UOB’s retail customer base across the four markets, accelerating growth and deepening UOB’s regional franchise within Asean,” he added.
With the acquisition, UOB’s Common Equity Tier 1 is expected to reduce by 0.7 percentage points to 12.8%.
Commenting on UOB’s performance in 1Q22, Koh said the banking group reported a net profit of S$906mil (RM2.84bil).
This compared to a consensus estimate of S$1.03bil (RM3.22bil).
It is noteworthy that UOB’s net profit in 1Q22 fell by 10% year-on-year (y-o-y) and 11% quarter-on-quarter (q-o-q).
Koh said UOB was affected by a one-off negative impact from structural hedges.
Its market-sensitive revenue streams are also affected by heightened risk aversion.
However, the banking group has exercised discipline on discretionary spending.
Further, its asset quality was relatively stable, he added.
“New NPL formation was S$462mil (RM1.45bil) and the NPL balance increased 4% q-o–q in 1Q22, although the NPL ratio was unchanged at 1.6%.
“Total provisions dropped 11% y-o-y to S$178mil (RM558.95mil),” he said.