UOB positive on easing interest rates as loan demand picks up in Q2

THE impending ease in global interest rates will likely be beneficial for UOB as it spurs more economic growth and activity in Asia, said UOB deputy chairman and chief executive Wee Ee Cheong.

Even though lower interest rates may mean less interest income, the lender expects it will still gain from the resulting pickup in commercial activities, especially since it has already seen more loan demand in Q2.

“Interest rates coming down is generally good for the economy – you can see that our loan volume has picked up; so I would say it’s positive,” Wee said on Thursday (Aug 1).

UOB group chief financial officer Lee Wai Fai added: “We are more optimistic on the volume, and I think the volume improvement will more than offset any margin decline, which I think will be gradual.”

For the second quarter ended Jun 30, 2024, UOB’s net profit rose 1 per cent to S$1.43 billion, amid double-digit fee income growth and lower credit allowances.

Excluding one-off expenses incurred from acquiring Citigroup’s consumer banking businesses, Q2 net profit would have been S$1.49 billion – down 1 per cent on year, but beating the S$1.47 billion consensus forecast in a Bloomberg survey of three analysts.

Net interest income fell 1 per cent on year, to S$2.4 billion, due to a moderation in net interest margin (NIM).

Q2 NIM of 2.05 per cent was down 7 basis points (bps) on year, but up 3 bps on quarter, as loan margins and funding costs improved.

For the quarter, loans grew 2 per cent on year, as both trade and mortgages drove loan demand.

Loan drawdowns hit its highest level in four quarters, while loan and trade related fees also grew 19 per cent on year in tandem with a pickup in loans and more deals booked.

In particular, Wee noted that mortgage sales volumes are up 42 per cent on quarter.

While the primary market is slow, Wee said the volume is “encouraging” as the bank focuses on the secondary market as well as retaining as many mortgages as possible.

UOB also reported strong fee income growth for the quarter.

Net fee income grew 18 per cent on year to a near historical high of S$618 million, driven by a rebound in loan-related and wealth management fees, as well as double-digit growth in credit card fees.

UOB’s wealth management business delivered its strongest quarter over the past three years, with more conversions from fixed deposits to wealth management products across different product mixes, Wee said.

Assets under management rose 10 per cent on year to S$182 billion.

The wealth management business is a “very competitive space”, but Wee expects the bank can leverage its network to cross-sell to customers across segments and regions.

He noted that the bank is also looking at opportunities in North Asia, where “real wealth” is coming from, although it will have to depend more on relationship managers as it has fewer franchises there.

Meanwhile, other non-interest income was down 21 per cent to S$457 million, as swap gains and valuation on investments fell, even as customer-related treasury income strengthened.

Non-customer treasury income had eased from the all-time high in the previous quarter.

The bank’s non-performing loans ratio was 1.5 per cent, down 0.1 percentage point from the same period a year earlier.

Total allowances fell by 26 per cent to S$395 million for the half year. The bank attributed this to lower specific and general allowances made as asset quality stabilised.

Wee said asset quality remains resilient, while the bank’s balance sheet remains strong with healthy levels of capital and funding.

One-time costs from the Citigroup acquisition will also likely be reduced substantially as the bank moves towards integration in Vietnam next year, he added.

Moving into the second half of 2024, Wee said the bank is “cautiously optimistic and will stay vigilant and disciplined”.

He noted uncertainties, particularly with upcoming elections in the US and economic challenges in China and Thailand, but remains “confident in our ability to navigate them with our prudent approach”.

The lender is maintaining its 2024 outlook for low single-digit loan growth, double-digit fee growth and positive growth in total income.

Cost-to-income ratio will likely be at 41 to 42 per cent on cost discipline, while credit costs should be at the lower end of 25 to 30 bps.

As interest rates come down, Wee also expects the bank’s NIM for 2024 will likely stabilise at current levels.

Lee added that the bank is watching the decline in the rates, but expects it will be able to manage it well, especially as the lender had been “very proactive” in managing fixed deposit rates ahead of the cycle.