Maintaining liquidity a short-term hit to NIMs, but long-term benefit to fees, customer growth: UOB CEO

UOB ’s net interest margins (NIMs) have taken a hit from the bank’s prudent move to protect liquidity. But investors should look beyond NIMs and understand the benefits that liquidity can bring for the bank’s fees business and customer base, said UOB chief executive Wee Ee Cheong.

The bank’s NIM for Q4 2023 declined for a fourth straight quarter to 2.02 per cent. It was 2.09 per cent in Q3, and 2.22 per cent in Q4 2022.

This was due to rising costs in maintaining deposits, coupled with the lack of loan growth, Wee said at a media briefing for the bank’s Q4 results on Thursday (Feb 22).

During its third-quarter results briefing, the bank also noted that its cost of funds remained high as it deployed excess liquidity into high-quality yielding assets.

Wee said that NIMs are a function of how much liquidity a bank wants.

“For us, it’s important to make sure our balance sheet is there – we are focusing on total income. In the short term, you’re sacrificing NIM, but in the long term, this will translate into a bigger customer base and more fees you’re able to generate.”

Wee, who is also deputy chairman at UOB, noted that liquidity was a top concern in 2023, due to the collapse of Silicon Valley Bank in the US. But this concern has tapered off in recent months.

The bank expects NIMs to be somewhat affected in the first two quarters of 2024, before correcting some time in the second half. It is guiding for NIMs to be in the 2 per cent range for the year.

UOB group chief financial officer Lee Wai Fai said that looking ahead, the ability to manage the cost of deposits will be more important than the ability to manage yield, amid declining market demand due to falling interest rates.

“Now the challenge we have is, to sustain NIMs, we have to aggressively manage our deposit base,” Lee said.

He noted that the bank was previously worried about deposit outflow because of liquidity. But now that its book is more stable as its current and savings account (Casa) base has increased, the bank has confidence to take more aggressive action.

The bank’s Casa-to-deposit ratio in December 2023 was up 1.4 basis points (bps) on the year to 48.9 per cent.

The bank is also watching for opportunities to better position itself for the turning interest rate, he added.

Lee noted that interest rate movements are still uncertain today. While the bank has considered extending the duration of its bonds, he noted that the inverse yield curve in Singapore is still returning better returns in the short term.

Record full-year 2023 results 

UOB’s net profit for the fourth quarter rose 21.8 per cent to S$1.4 billion, compared with S$1.2 billion a year earlier, due to higher net fee income and other non-interest income.

This included S$94 million in one-off expenses from its acquisition of Citigroup’s retail portfolio in Malaysia, Indonesia, Thailand and Vietnam.

The earnings missed a S$1.5 billion consensus forecast in a Bloomberg survey of two analysts. If not for the one-off expenses, core net profit of S$1.5 billion would have been in line with projections.

Net fee income was up 17.3 per cent on the year to S$569 million. This was due to “strong growth” in credit card fees amid an enlarged franchise, and a recovery in wealth management fees.

Meanwhile, other non-interest income climbed 53.7 per cent to S$438 million, due to higher customer-related treasury income and strong performance from trading and liquidity management activities.

The gains in non-interest income were partially offset by a 6.1 per cent drop in net interest income, which stood at S$2.4 billion for the quarter.

For the full year, net profit was up 24.9 per cent to a record S$5.7 billion, although it missed the S$6 billion forecast in a Bloomberg consensus survey of five analysts.

Excluding one-off Citigroup integration costs, which stood at S$350 million, core net profit would be S$6.1 billion, up 25.8 per cent on the year.

Annualised earnings per share stood at S$3.34 for FY2023, up from S$2.69 the year before.

UOB’s non-performing loans ratio was stable at 1.5 per cent as at Dec 31, 2023, from 1.6 per cent the same period a year earlier.

Its total credit costs of 25 bps for FY2023 were also within expectations, the bank noted.

UOB’s board has recommended a final dividend of S$0.85 per share for the half-year period. This brings the full-year dividend to S$1.70 per share, representing a payout ratio of about 50 per cent.

The dividend will be paid out on May 9, after books closure on Apr 29. UOB said its scrip dividend scheme will not be applied to the final dividend.

Meanwhile, the bank said it will offer 6,000 junior employees, particularly those who are Class II officers and below, a one-off extra month bonus. Out of these 6,000 staff, 600 are in Singapore.

The move is in line with recent recommendations from Singapore’s National Wages Council to help employees cope with the increased costs of living.

While UOB did not provide an exact figure on how much it would be spending on the bonuses, Lee said this will cost the bank less than S$10 million.

Looking ahead, Wee expects low single-digit loan growth in 2024, which is a downgrade from the mid single-digit loan growth he guided for during the bank’s third-quarter results briefing.

He maintained guidance of a double-digit fee growth, supported by the bank’s credit card business, as well as positive growth in total income. (*See amendment note)

Meanwhile, its core cost-to-income ratio will likely be around 41 to 42 per cent, with one-time costs from the Citigroup acquisition to substantially roll off.

Credit cost should be at the lower end of its 25 to 30 bps guidance, he added.

Wee said: “Global economic outlook remains uncertain in the near term, but South-east Asia continues to be a bright spot.

“We are optimistic about Asean’s potential, driven by improved domestic demand, robust tourism recovery and strong investment flows into the manufacturing sector as companies reconfigure their supply chains.”

Shares of UOB closed 2.5 per cent or S$0.74 lower at S$28.50 on Thursday.

*Amendment note: An earlier version of this story incorrectly stated that the bank was guiding for a double-digit loan growth, when it was guiding for a double-digit fee growth.