Takeaways from UOB 3Q results: Resilience still the story, but risks remain

Broad overview

The United Overseas Bank (UOB)’s 3Q net revenue or total income increased 8% year-on-year to $3.54 billion from previous $3.46 billion, but net profit is lower than estimates at $1.38 billion, where analyst estimates were expecting an increase to $1.46 billion.

This marked a 1% drop in net profit from a year earlier, which is its first year-on-year decline since 1Q 2022. Apart from one-off integration expenses for its Citigroup’s acquisition, there is also a further build-up in loan losses allowances in 3Q ($235 million), more than double its previous year ($104 million) and a follow-through from the build-up in 2Q 2023 ($365 million).

This reflects some increased caution around prevailing economic risks, in line with the CEO’s comments that the macroeconomic environment could remain bumpy but nevertheless, management followed up with some reassurances that the outlook for the ASEAN region may be more resilient.

Some resilience in net interest, fee income

For the reported quarter, UOB’s net interest income continued to hold up with a 9% growth from a year ago, with the expected trend remains that of a gradual moderation in its net interest margin since its peak of 2.22% in Q4 2022. The latest quarter’s net interest margin stands at 2.09%, down from the previous 2.12%. Still-elevated benchmark lending rates and additional repricing of loans may provide some cushioning effect, although the strong year-on-year comparison over the past year may be harder to sustain moving forward.

Its net fee income surprised with a 14% year-on-year growth to $591 million as well – its highest since 1Q 2021. Notably, the doubling of credit card fees to a record high ($104 million) may potentially reflect some Taylor Swift effect, given the huge demand for sign-ups in UOB credit cards back in July. Travel momentum has been largely intact as well, alongside strong investment flows in the region supporting wealth management fees.

The double-digit fee growth projection for its 2024 outlook looks promising, given that net fee income has been delivering year-on-year contraction for the bulk of last year, so some recovery into 2024 seems to be the takeaway.

Risks to continue revolving subdued lending conditions, upside risks to loan losses allowances

The risks continue to revolve around subdued loan growth, which is in line with the softer Singapore lending data seen in July and August. The trend may likely drag for longer, given that businesses remain cautious on growth expansion plans amid current uncertain environment, while there are some signs of buyers’ fatigue in the property sector following three rounds of property cooling measures and higher interest rates.

The management also seems to be laying the groundwork for further build-up in loan losses allowances, guiding for an increase in credit costs next year. Economic risks in China may remain one to watch, particularly in the property sector with more debt defaults likely to emerge. While direct impact to UOB may be limited, given that loans to real estate developers ($2.8 billion) stand at 1% of overall group loans, the knock-on impact on regional growth conditions could be more significant with the dependence on Chinese consumer demand.

Valuation/Dividend

Based on a price-to-book basis, UOB seems to be the cheapest out of all three local banks. Its dividend yield also stands at 5.8% which may be attractive to some, if one is willing to weather the prevailing economic risks over the longer term. Compared to DBS’ dividend yield at 5.1% and OCBC at 6.2%, UOB may offer somewhat of a middle-ground, which has some growth catalysts from its Citigroup acquisition while offering a decent payout.

Technical Analysis

UOB’s share price has been struggling for upside lately, with its moving average convergence/divergence (MACD) heading into negative territory, while its relative strength index (RSI) falls further below the 50 level on the daily chart. The negative reaction in share price to today’s results marked a breakdown of its S$27.70 support level, which has supported prices on at least three previous occasions. On the broader scale, a descending triangle pattern seems to be in place, with further downside potentially leaving the S$26.07 level at the triangle base on watch for support.