UOB Eyes Capital Management Opportunities Amid Strong Q3 Performance
UOB is actively exploring ways to make the most of its excess capital, with Chief Executive Officer Wee Ee Cheong expressing hopes that the bank will be able to fully leverage the capital by the end of this year.
At a briefing on Friday (Nov 8) following the release of UOB’s third-quarter 2023 results, Wee confirmed that the bank has accumulated between S$2 billion and S$2.5 billion in excess capital due to changes under the Basel IV reforms. The bank is now considering a range of options for utilizing this surplus, including reinvesting in growth opportunities or returning the funds to shareholders via measures like share buybacks or increased dividends.
“We’re looking at all options,” said UOB’s Chief Financial Officer Lee Wai Fai. “If we can’t utilize the capital for growth, we will explore ways to return it to our shareholders.”
The bank’s Common Equity Tier-1 (CET-1) ratio has improved significantly, rising to 15.5% at the end of September 2024, up from 13.4% at the end of June, following the Basel IV implementation. On a fully loaded basis, the CET-1 ratio stands at 15.2%. While Lee pointed out that UOB has historically been comfortable with a CET-1 ratio in the 13.5% to 14% range, he added that the bank will need to balance the views of its broad shareholder base before making any decisions on capital distribution.
“We are in a good position to talk, but it is still premature to make any firm decisions,” Wee noted, hinting that discussions are ongoing.
Strong Q3 Performance
UOB also reported a 16% year-on-year increase in net profit for Q3 2023, reaching S$1.61 billion, up from S$1.38 billion in the same period last year. The result exceeded analysts’ expectations, with the consensus forecast pegging the figure at S$1.51 billion.
This robust performance was driven by record highs in net fee income, as well as strong trading and investment income. The bank also benefited from a healthy loan book across the ASEAN region, with strong demand across various sectors and geographies. This momentum is partly attributed to ASEAN’s role as a global trade hub, which has spurred opportunities for trade financing, particularly linked to the region’s growing digital economy.
“We continue to see strong momentum across ASEAN, with healthy demand from both the consumer and corporate sectors,” said Wee. “This has been a key driver of loan growth, and we are optimistic about the outlook for the region.”
In addition to the strong loan growth, net fee income in Q3 rose 7% year-on-year to a record S$630 million, primarily driven by wealth management fees. The bank also reported a 9% year-on-year increase in assets under management, reaching S$185 billion, with net new money inflows of approximately S$4 billion during the quarter.
Lee pointed out that much of the growth in assets was in the consumer space, particularly in ASEAN markets, with less focus on private banking. “The consumer segment in our ASEAN franchise remains very strong,” he added. “This is a testament to the success of our cross-selling efforts in the region.”
Meanwhile, trading and investment income surged by 82% year-on-year to S$709 million, pushing total non-interest income up by 70% to S$744 million. This was attributed to strong performance in treasury income and “exceptional” results from trading and liquidity management activities.
Net interest income for the quarter saw a modest increase of 1%, rising to S$2.46 billion from S$2.43 billion a year earlier, with a net interest margin (NIM) of 2.05%. While NIM decreased slightly by four basis points from the previous year, it remained stable compared to the previous quarter, thanks to proactive management of deposit costs.
Resilient Asset Quality
Despite the strong results, UOB remains cautious about potential market volatility. The bank noted that the US elections and movement in the US 10-year Treasury yields will need to be monitored closely. While the bank has reduced its sensitivity to rate movements in anticipation of possible rate cuts, it is still positioned to benefit should the cuts be less aggressive than expected.
Gross customer loans grew by 5% year-on-year to S$334 billion in Q3, driven by broad-based growth in both wholesale loans and mortgages. As for asset quality, UOB’s non-performing loan (NPL) ratio remained stable at 1.5%. While there was some increase in individual non-performing assets, particularly from UOB’s retail operations in Thailand, recoveries and write-offs helped offset these concerns. The bank noted that delinquencies in its unsecured book in Thailand have peaked and are now normalizing.
Looking Ahead
Looking to the future, Wee is optimistic about UOB’s prospects for 2025, forecasting higher total income driven by loan growth in the high single digits, as well as double-digit fee growth, particularly from cards, wealth management, and trade-related fees. The bank is targeting a cost-to-income ratio between 41% and 42%, and expects total credit costs to remain between 25 and 30 basis points.
“We remain focused on ASEAN, where we see resilience despite global uncertainties,” said Wee. “Our regional strategy continues to deliver strong results, and we are optimistic about the momentum going into 2025.”
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