UOB Q1 net profit falls 10% to S$906 million; CFO sees improvements ahead

UOB's Q1 net profit may have fallen in the first quarter amid lower trading and investment income but the bank expects improvements in the coming quarters. 

Speaking at a press briefing on Friday (Apr 29) morning, chief financial officer Lee Wai Fai noted that operating profit was lower mainly due to the “accounting asymmetry” impact from hedges and market-driven volatilities affecting trading and investment income. 

“The impact on hedges will be more than offset by increasing net interest income in the coming months,” he said, noting that core business drivers remain strong. The bank also expects higher margins from rising interest rates.

UOB reported on Friday that Q1 net profit fell 10 per cent on year to S$906 million, as total income was impacted by market volatility. Its net profit for the 3 months ended Mar 31, 2022 was also 11 per cent lower quarter on quarter, and fell short of the S$1.037 billion average estimate from 5 analysts polled by Bloomberg. 

Total income for the first quarter fell 5 per cent on year to S$2.4 billion, dragged by lower net fee income and other non-interest income.

Net fee and commission income declined 8 per cent on year to S$572 million largely due to lower wealth management and fund management as the market outlook this year is more subdued, UOB said. 

Other non-interest income fell 70 per cent to S$101 million, compared with S$338 million in Q1 2021, from impact on hedges, resulting in lower non-customer-related trading and investment income.

Lee said this was due to accounting asymmetry on hedges for perpetual capital securities. He noted that long-term rates had risen by more than 200 basis points during the quarter - more than short-term rates, which were up around 40 basis points.

“If we expect short term interest rates to rise faster than the longer term rates in the coming quarters, then our repriced assets will generate significantly higher net interest income than the mark-to-market losses,” he said, adding that he expects trading and investment income to improve in the next 3 quarters.

UOB's net interest income increased 10 per cent on-year to S$1.7 billion. This was thanks to growth in customer loans, which rose 9 per cent on-year to S$320 billion. The bank’s net interest margin (NIM) rose to 1.58 per cent from 1.57 per cent previously. Net interest income was also up 1 per cent when compared to Q4 2021, when NIM stood at 1.56 per cent

“We expect this to continue to increase because most of our books are actually floating rate. So it will be beneficial to us when the short end starts going up and we can reprice our assets more aggressively next few quarters,” Lee said.

The bank had earlier guided that for every 25 basis point rate increase, net interest income will improve by S$150 million on an annualised basis.

There would be a need to raise savings and fixed deposit rates, but not as aggressively as loans rate hikes. “It’s only logical to expect funding cost to go up, especially with inflation.”

“The good news in my retail side, the (current account, savings account) is still growing, and that’s the important part,” he said. The bank is also guiding for mid-to-high single digit loan growth in 2022.

Total allowance fell 11 per cent from Q1 21 on lower general allowances, with total credit costs on loans being 10 basis points lower, UOB said. The bank's non-performing loan ratio remained stable at 1.6 per cent. Lee said UOB believes the impact on future credit costs from non-performing assets will be manageable as the general allowances set aside remain adequate. UOB deputy chairman and chief executive Wee Ee Cheong, who did not attend the earnings call as he was recovering from Covid-19, said in a statement: “Geopolitical tensions and uncertainties on the global growth outlook have led to market volatilities. Despite that, our core business held up well, with quality loans growth, record loan-related fees and better margins."

He added that the bank remains optimistic of the recovery of the region and the longer-term potential of South-east Asia.

UOB shares ended Friday at S$29.99, down 0.5 per cent. This contrasted against DBS and OCBC, which rose 2.8 per cent and 3.6 per cent respectively following their own earnings on Friday.

Alliance Bernstein analyst Kevin Kwek noted that UOB had a surprise hit under trading income, and its credit costs were not “ultra low like peers”. But he added that UOB loan growth was ahead of peers, and the bank is one to watch, considering its cheaper valuation and return on equity upside potential.