Delayed rate cuts may boost the lender&rsquo s net interest margin

 

UOB chief executive Wee Ee Cheong is &ldquo cautiously optimistic&rdquo on the bank&rsquo s outlook for 2024 given the growth potential in South-east Asia, even as higher-for-longer interest rates and a stronger US dollar may weigh on demand.

 

Delayed rate cuts may boost the lender&rsquo s net interest margin (NIM), in particular, although Wee reiterated that the bank is focused on balancing earnings growth with long-term stability.

 

&ldquo We are all budgeting for slightly higher. But again, the market is very uncertain&hellip so we are cautious,&rdquo said Wee at a media briefing for the bank&rsquo s first-quarter results on Wednesday (May 8).

 

UOB&rsquo s Q1 net profit fell 1.6 per cent on the year to S$1.49 billion, beating the mean estimate of S$1.43 billion from three analysts polled by LSEG.

 

Excluding one-off expenses incurred in the acquisition of Citigroup&rsquo s consumer banking businesses, the bank&rsquo s net profit would have been 0.7 per cent lower at S$1.57 billion from S$1.58 billion.

 

Total income remained relatively flat year on year at S$3.52 billion, as a drop in net interest income was offset by gains in net fee income and other non-interest income.

 

Net interest income fell 2 per cent to S$2.36 billion as NIM dropped to 2.02 per cent, from 2.14 per cent a year earlier.

 

But quarter on quarter, NIM was unchanged, as active management of excess liquidity had buffered lower loans margins.

 

While loan margins were weighed down by competition for good quality credit and higher cost of funding, UOB&rsquo s NIMs held up stronger than expected due to the higher-for-longer interest rates, said group chief financial officer Lee Wai Fai.

 

Lee expects some positive upside in the short term &ndash the bank has cut rates on its deposits, which should flow through in the second and third quarters.

 

He noted that higher-for-longer rates are resulting in a stronger US dollar, which would weigh on currencies in the Asean region.

 

He is also cautious on when its customers will be comfortable with the rate position given muted volume.

 

But there is likely enough activity in South-east Asia from supply-chain shifts and tourism to boost growth in the region, he said.

 

Lee was slightly more optimistic on margins and expects that the bank can keep NIMs above 2 per cent for the rest of the year.

 

Meanwhile, net fee income was up 5.1 per cent to S$580 million from S$552 million, buoyed by a stronger showing in loan-related fees and the wealth segment.

 

Assets under management rose 11 per cent on the year to S$179 billion, while credit card fees rose 11 per cent on the year, although it normalised from a seasonal high in the last quarter.

 

Other non-interest income was 3.2 per cent higher at S$581 million.

 

This was due to higher trading and investment income, following record customer-related treasury income from increased retail bond sales and strong hedging demands.

 

Trading and liquidity management activities also registered a &ldquo robust performance&rdquo , the bank said.

 

Total allowances fell by 5.2 per cent to S$186 million for the quarter, following a 3.8 per cent drop in specific allowance on loans to S$158 million. General allowance, meanwhile, remained unchanged at S$28 million.

 

Total credit costs stood at 23 basis points (bps) for the quarter, down from 25 bps in the same period last year.

 

The bank&rsquo s non-performing loans ratio was 1.5 per cent, down from 1.6 per cent the same period last year. Non-performing assets coverage stood at 99 per cent, or 204 per cent after accounting for collateral.

 

The results translate to an annualised earnings per share of S$3.50 for the quarter, down slightly from S$3.54 recorded in Q1 2023.

 

Return on equity, excluding one-off expenses, stood at 14 per cent, down 0.9 percentage point on the year but up 0.2 percentage point on the quarter.

 

UOB is maintaining its 2024 guidance of positive growth in total income, amid a low single-digit loan growth and double-digit fee growth.

 

It also maintained expectations of a core cost-to-income ratio of around 41 to 42 per cent, and credit costs at the lower end of 25 to 30 bps.