Good morning, welcome to UOB's first half 2023 results briefing. I'm Wendy Wan from the Group Strategic Communications team, and I will be your MC for today. This morning, we have Mr. Wee Ee Cheong, UOB Deputy Chairman and CEO, and Mr. Lee Wai Fai, our CFO, to present the results. A few house rules before we start. Please keep your questions till after the presentations are done. We would like to remind those in the room with us to put your mobile phones to silent. For those of you on Microsoft Teams, please put yourself on mute for now. Without further ado, I will now pass the time to our CEO. Mr. Wee, please.
Thank you. Good morning. Thank you for joining us today. The global growth outlook continues to be uncertain. External demand has been soft. Concerns about commercial real estate are also spreading from the U.S. to other developed markets. We expect Southeast Asia region to be relatively resilient. Thanks to a more moderate rates environment, while pickup in tourism and demand for services will support growth. The region is also benefiting from supply chain diversification. Companies and individuals are diversifying their asset overseas, including to Singapore, in a flight to quality. I believe UOB is well-positioned to capture some of these flows with our extensive regional footprint. Amid this backdrop, we continue to deliver a commendable set of results after a strong start to the year. Our core net profit for the first half year reached a record SGD 3.1 billion, up 53% year-on-year.
For the second quarter, core net profit rose 35% year-on-year to SGD 1.5 billion. There are general market concerns on asset quality, and we are keeping a close watch. There are no major concerns. We are comfortable with the exposure and credit quality of our commercial real estate portfolio. Most of it is in our home market, Singapore. Our portfolio in developed markets consists of mainly network clients with strong sponsors. Our total credit costs were higher this quarter, largely due to a specific exposure in Thailand, and we don't see any broader systemic concerns. Our guidance remains at 25 basis point for the rest of this year. Our overall loan portfolio remains sound, with healthy provision buffers. We continue to operate from a position of strength, with robust CET1 at 13.6% and liquidity ratios well above regulatory minimum.
With that, we are pleased to announce that the board has recommended an interim dividend of SGD 0.85 per share, representing a payout ratio of 49%. Let me touch on our core business segments. Our retail business benefited from diversified revenue drivers, enhanced scale, and synergies. The Citi integration is progressing well. We are on track to achieve our annualized revenue uplift of around SGD 1 billion from the four ASEAN markets. We completed the integration in Malaysia last week. Our Indonesia acquisition should close by end of this year. Vietnam and Thailand, we target to complete integration next year. We continue to grow our customer base in these markets. We now have more than 7 million retail customers across the region with the right profile. In terms of card spend, we are 2x industry average.
We are doing much more to reach out to our regional customers. We recently launched a regional cards campaign and private bank brand refresh. Our strength in the region now put us in a sweet spot to garner more international collaboration to fulfill the aspiration of our customers. One example is the exclusive early bird access to the Taylor Swift concert in Singapore next year. The Citi portfolio and strong consumer spending has boosted credit card fees, which jumped 51% year-on-year. Total retail deposits also grew strongly, year-on-year, 20%. Wealth management fees were softer due to weaker market sentiments. We saw SGD 12 billion of net new money inflows year-to-date, bringing our total AUM to SGD 165 billion. UOB TMRW is now in four markets: Thailand, Indonesia, Singapore, and Malaysia.
We continue to enhance our UOB TMRW with digital offerings to uplift customer experience across the region. Of the more than 7 million retail customers in the region, more than three-quarters access our service digitally. UOB TMRW is among the top-rated banking apps in Malaysia, positioning us well to serve the incoming Citi customers digitally. Our wholesale business performed well, with a solid set of results and positive loan growth, despite a challenging operating environment. While loans dipped year-on-year, we saw growth quarter-on-quarter. We remain disciplined in our underwriting, focusing on good quality credits. Our strength in connectivity put us in a good position. Cross-border income grew 17% year-on-year, now accounting for 23% of our wholesale banking income. Transaction banking income now accounts for more than half of total wholesale banking income. CASA held up quarter-on-quarter, despite higher interest rates.
We are seeing good new client acquisition in supply chain verticals as we roll out our Financial Supply Chain Management platform to the regional countries. The microeconomic environment for the rest of the year could remain challenging, but our balance sheet remains strong to weather volatilities and to seize the right opportunities as they come. Investing across our franchise remains a key priority, so that we deliver stable and balanced growth through market cycles. Our guidance for this year, low-to-mid-single-digit loan growth, with a focus on high-quality customers. Margin to remain stable at current level. In fact, last night, as you heard the announcement, I think margin could potentially actually niche a bit higher. We expect high-single-digit fee growth. Discipline cost management.
As we complete the Citi integration in the remaining market, we expect the one-time cost to substantially roll off by end of the year. Credit costs at around 25 basis points for the rest of this year. I thank my colleagues for their teamwork and dedication. Thank you for your support. Now, Wai Fai, can you take over to elaborate on our financials? Thank you.
Thank you, Ee Cheong. Good morning, everyone. Nice to see you all so early. Okay. On the results itself, we recorded another strong quarter of core net profit at SGD 1.5 billion, and ROE of 14.1%. Against the same quarter last year, core profit was 35% higher. Of course, if we included the one-off cost relating to the Citi integration, net profit would have been SGD 1.4 billion. Net interest income increased this quarter, contributed by a longer day count. Net interest margin moderated by 2 basis points, as excess liquidity was deployed to lower-yielding, high-quality assets. Fees income is quarter-on-quarter, as loans-related and wealth fees stayed soft on weak market sentiment. Trading and investment income registered another record quarter, backed by customer flows, as well as continued strong performance in trading and liquidity management activities.
Cost-to-income ratio, excluding the one-off Citi, was unchanged at 40.9% from disciplined spending. Asset quality stayed resilient, with NPL ratio at 1.6%. While specific allowance increased due to the one major corporate account in Thailand that Ee Cheong mentioned, we have also set aside more preemptive general allowance this quarter, resulting in total credit costs rising slightly to 30 basis points. Our capital and liquidity position remain healthy, with CET1 at 13.6% and NSFR at 121% respectively. For the businesses, year-on-year retail operating profits surged due to enlarged franchise with the inclusion of Citi. Deposits also grew along with the wider interest margins, while credit cards and wealth management activities picked up from a year ago. Wholesale saw double-digit growth from last year, led by margin expansion and strong customer-related treasury income.
while cushion the softer lending activities this year. Global market captured trading opportunities amidst the market volatility and was impacted by the steeper cost of funding. Our retail customer base continued to expand post the Citi consolidation. Collectively, we have now about 7.3 million customers in the region, of which 78% are digitally enabled. I think we'll cross 8 billion by end of the year when Indonesia get integrated into our network. In the first half of the year, we saw a 47% increase of new-to-bank customers compared to the same period last year. Of this, 56% were acquired digitally, which points to the power of the UOB TMRW franchise and the platform that we actually put in. We further grew our multi-market partnerships to cater for our customers' growing lifestyle needs. We now have 45 strategic and co-brand partnerships across multi-markets.
I think the Taylor Swift show, which Ee Cheong highlighted, this is one of the results of our strong regional customer base and the strategic partnerships. Net credit card fees displayed a solid 51% growth compared to the same period last year, with Citi contributing almost a quarter of this. We see sustained customer spending within the region. Our assets under management increased 19% from a year ago, mostly from the net new money inflows that Ee Cheong mentioned. We hope to deploy most of this or more of this into wealth management products in the coming quarters, when market sentiments improve. Our omni-channel strategy continue to serve customers, has proven to be highly effective. Omni-channel customers contribute 2 times higher average revenue generation compared to the rest of our customers, due to the multiple product holdings and the more frequent transactions.
Our wholesale business showed steady results despite an uncertain environment. It continued to focus in providing business connectivity across the region. Cross-border income grew 17%, and the number of suppliers and distributors within our Financial Supply Chain Management rose 35% year-on-year. Our Global Financial Institutions Group income rose 25%, while income outside of real estate, hospitality, and financial institution sectors rose 28%. This shows the diversification, in fact, of our supply chain, when we wanted to move into areas that are more relevant to the regional customer base. Across the region, our cash management platform is seeing significant growth in transaction volume and cashless payments. As for the detail of the results, I think I let you read it on your own, and let me go through the key financials at the NIM side. Okay?
I think there's a lot of interest on NIM, especially after this morning's Fed announcement. Net interest income rose 1% quarter-on-quarter, like I said, contributed by a longer deal account. Cost of funds pressure has eased, as the marginal cost of repricing of fixed deposit has declined. Interbank securities margin sustained at 1.1%, as excess liquidity was proactively managed and deployed into higher quality assets. As a result, you'll notice that our loans NIM actually improved, and because of some of this excess funds deployment, the overall NIM narrowed to 2.12% this quarter. Actually, that is improving NIM. Our exit NIM is actually at 2.14%. I think we are hopeful with the announcement by the Fed, we will watch where margins would be.
We actually expect margin to stabilize in the short term with the Fed hike, maybe with some upward biasness. Fee income softened this quarter. Loans and trade-related fees declined due to slower lending activities. Recovery of wealth fees was hampered as investor sentiment remained cautious following the U.S. banking crisis in the early part of this year. There was some one-off adjustment to cut fees expenses last quarter, as we rebased our partnership schemes following the enlarged retail portfolio. That's the other advantage when you have scale. Excluding this, cut fees continue with growth momentum since the inclusion of Citi from the fourth quarter of last year. Trading and investment registered another record quarter. Customer-related treasury income held up, setting a new high last quarter, supported by demand for hedging activities.
Trading and liquidity management activities saw another quarter of strong performance, as we proactively managed excess funds to optimize our return amidst the market volatility. cost-to-income ratio was unchanged at 40.9% this quarter, supported by strong income growth, as well as continued disciplined spending. Including the one-off Citi, the cost-to-income ratio would be 44.1%. We expect the one-off cost to be significantly lower next year after the completion of the operational merger of Malaysia, which we have just completed, and Indonesia by the end of this year, and Thailand in the first quarter of next year. By next year, my three key big markets will have completed my operation integration. As a result the one-off cost will come down significantly.
The overall asset quality of our loans portfolio remain resilient, with NPL ratios unchanged at 1.6% from last quarter. The new NPL formation included the one unexpected major corporate accounts in Thailand. All non-performing accounts has been adequately provided for. Specific allowance increased this quarter, mainly from that single corporate exposure in Thailand. However, we continue to set aside general allowance this quarter on prudence, bringing total credit costs to 30 basis points. Again, if you think about it, if you exclude that one-off, total credit cost would be a normalized 25 basis points, even for this quarter, as there is no indication on broader systemic concerns. The total group allowance was SGD 5.1 billion, of which I think if you look at it, the bulk was in general allowance or GP, as we commonly talk.
More important, the general allowance coverage on performing loans stayed significantly higher at 1%. We believe our prudent provision reserves will be adequate to cushion us against any potential downside risk from credit migration. Core operating profit for the first half of 2023 surged to a new high, with growth seen across all market. ASEAN 4 performance, of course, was boosted by the Citi portfolio in Malaysia, Thailand, and Vietnam. Indonesia only come in later part of the year. The North Asia itself benefited from recovery of some benchmark rate, especially in Hong Kong. For the first half of the year, loans demand was moderate due to the uncertain macro environment. However, loans growth momentum was slightly better in the second quarter, increasing by 1% from the first quarter.
We are hopeful of a stronger second half, though that is highly dependent on the recovery of China and the stability of the interest rate outlook. We maintain our focus on good quality credits in view of the uncertainties ahead. We continue to see strong inflows of funds. Customer deposits grew 1% quarter-on-quarter, alongside the loans growth. CASA to total deposit ratio remains stable at 47.6. I think more important is that the absolute CASA level has stabilized quarter-on-quarter, and in fact, it has actually grown slightly year-on-year, after four quarters of decline last year. I think everybody remembered the challenge that banks faced, of funds moving to FD. I mean, that shows that our focus in offering the best value to our customers, focusing on the CASA trend going forward, is showing results.
Our funding and liquidity position stayed robust, with LCR at 167, NSFR has at 121. I think these are all well above regulatory ratios. Our CET1 was steady at 13.6%, backed by strong earnings and efficiency, and efficient RWA management. I think in appreciation of the support from our shareholders, the board has recommended an interim dividend of SGD 0.85 per share in view of the stronger earnings. I think this is 42%, if you see, higher than the first half of 2022 dividend of SGD 0.60 per share. I think we are committed to a consistent and sustainable returns to shareholders. I think we appreciate shareholders that stick to us when we did the Citi purchase, some of those are actually showing results.
With this, I conclude my presentation, and I pass it back to Ee Cheong before we start the Q&A.
I think, before I open up for the Q&A, let me just highlight a few points just to make your focus on what the philosophy going forward for UOB. We believe the uncertainty ahead, as I articulated in my speech, we cannot control the external environment. What we can control is at UOB level, we have been investing and building for the future. For example, the wholesale banking, we have spent $800 million over the past eight years to build capabilities, regional payments, trade, and cash platforms. As you can see the result, these are all double-digit growth, which we are now powering our connectivity business. Everyone can talk about connectivity, without infrastructure, difficult. We've gone through that journey for the last eight years.
The cross-border income and transaction banking income, a lot depending on the economic activity, but we have the capacity to grow. Now, in retail, we have invested in organic and inorganic growth. With our Citi acquisitions, in fact, we actually accelerated our technology platform to cater for the Citibank customers. You can see the Malaysian operation is already operationally merged with the bank. The next few countries, given our standardizations, I don't foresee any problem, get it done. Our customer base has actually grown beyond 7 million. Initially, when we acquired Citibank, we actually put 10% attritions customer base. Now, actually, the customer base actually grown more than that. You look at the Taylor Swift, I'm sure is known. Our credit card applications grown 45%. Our debit cards application grew 131%.
People want to get our credit card to apply for the concert. All these things, it demonstrate the power of big customer base. We have not only just Singapore, in the region. There is, in fact, actually much more to harness with our bigger customer base, our digital tomorrow platform, data infrastructure, AI, and more, so we are continuing to cross-sell. All these things happened because we started a decade ago. We standardized our regional IT platform, and now we are reaping the benefits. All of you here for me, for a long time, I think you'll be believe in long term. We continue to invest. You look at the integration with Citibank Malaysia is smooth because of the standardization, and that will cut across the four markets that we are in.
Our multi-year investment have boosted our capacity to grow in the medium term, and that will serve us well in this challenging time in the near future. I'm happy to take a question.
Thank you, Mr. Wee. We are now move on to the Q&A. For those present here, if you would like to ask a question, please raise your hand and wait for my cue. For those who dial in, please use the Raise Hand function to indicate that you would like to ask a question. Please wait for my cue and turn on your camera before asking your question. Kindly introduce yourself before asking your question. We'll start off with those in the room with us. First question, please, from Bloomberg.
Hi. Congratulations, UOB, for this very good set and also share price jump at the beginning.
I didn't look at it. Let me check.
Quite visibly. I have some questions. The first one, could you please share the NIM outlook for the year? Is it going to stay at the exit number of 2.14%? Second question, could you give more colors about the Thai corporate account? At least what business that is in?
Yeah.
The third one, colors on the inflows of SGD 12 billion. Fourth one, how much are you spending on AI for your banking, the investment in AI? Last one, could you please also partner pre-sale for Coldplay?
Partner pre-sale for Coldplay. Too late.
Next year, maybe.
Okay. Why don't you take some of this?
Maybe I'll start with the financials. The first question is on NIM and where we are. Like I said, my exit NIM in June is around 2.14%. You can see that the pressure on costs, okay, has actually come down a fair bit. I think those of you that follow us in Singapore, we were the very aggressive leading the FD hikes. We are also very aggressive leading the FD rate decline. We are also watching the reaction of the market because we have to stay relevant to competitors as well, and we think that there will be a floor to that. The good news is that the replacement cost of FDs today is lower than what we took in last year, okay?
Mainly because there's a disconnect between the Fed rate hikes and the strength of the Singapore economy because of the flow of the flight to quality. There's a lot of excess funds in Singapore. As a result, we can be very competitive in pricing, especially the Sing dollars cost of funds. That helps our margin, okay? I showed in that foil in there, our loans margin actually went up, even for the quarter. The overall margin was because of the excess funds that we placed, and we took the opportunity and we took the decision to continue to garner this because we are still having pretty positive carry to the interbank. In the short term itself, we are still getting MAS placements at 4%, okay?
Which is a reflection, if you do Treasury bills, you're still 3/4%. We are not negative in there. Of course, we saw the U.S. after yesterday's rate hike of the two years coming down. The two years was a very sharp inverse yield curve in the U.S. market, and some of this with the expectation and with the Fed guiding some of those, that they think that the short end will come down a little bit, and we'll look at this. We are comfortable that we are relevant, and we'll redeploy some of these funds. On a technical basis, if the Fed increased rates itself, my loans yield will have that big lift, okay? We are hopeful that we can stay above the 2.14.
Like I said, we will have to manage where it is. We are having a more positive outlook in NIM, going forward, especially after this morning's Fed announcement. What's your second question?
Second question about. Thailand account.
Oh, Thailand.
Thailand. Which sector?
It's in the manufacturing sector. Actually, I think you know. You follow Thailand closer than me. I think you know. It's in the manufacturing sector. Unfortunately, it's an account that was hit by fraud, and we decided to take the prudent stand. In fact, we provided 100% of it, okay? That if there is any recovery, it will be upside to us. We took the prudent stand of providing, but we are confident we'll get something back. That we just want to get rid of it, that doesn't affect my balance sheet and my results going forward. I've fully provided for it, then we'll see where the court order goes. Like I say, I've isolated the negative downside to our results. You had a question on the-
Inflow of the AUM.
Oh, you want me to take that?
Yeah, it's okay.
This, mainly, like I said, it spreads, right, over, especially in the PB space. I think the focus of some of the family offices, we are getting some of the money coming in, they are also having a new breed of the RMs in there, getting some new customers that are actually more active, placing with us. It's actually quite a, quite a good spread because of the refocus of our private bank. We got in new RMs and all, we actually had a new focus in there. We are confident, although we are behind the market, that we will have a catch-up, at least it will contribute in the next phase of growth we are looking from private bank.
I think from the high net worth, the margins, I believe, has taken us so far. Private bank will add to that for us going forward. You have the other question on?
Not only just the private bank.
Wealth. Continue.
Wealth sector.
Okay.
Privilege Banking, the Privilege Reserve.
Very good. Thank you. Spending on AI, please.
Actually, spending on AI is a misnomer, okay? In the sense that, we have been spending on digital, looking at models, using interpretation, and today they're calling out the word AI. Mainly because of the generative AI that is actually catching the market by storm. Our view of that is that it's still at the experimental stage. We are experimenting it, but we are not comfortable with the open platform. We are hoping for somebody, maybe Google or what, to bring it into a private platform, which we are actually working with them. The investments that we go in, we will be a bit more comfortable. Don't forget, using of AI and all, is very sexy, but we have to make sure that our customers, especially the ethics, the ethical use of data, okay, becomes very challenging.
We are putting our arms around that in the government space. Meanwhile, we are using it for experimentation that are non-customer related. Okay? Those, I think they can do very well. They can write my CFO speech without us doing it. Those things they can do very well, but relating to customers itself is a very controlled environment, mainly because, like I said, it's still at the infant stage, and the governance around it is not very clear. MAS and all are working on that to make sure that we stay in line. I think we are leading the one of the committees with MAS to explore use of AI and the governance around it, especially on the ethical use of data. It's a big concern rather than where it can be.
Like I say, AI and previously, we talked models, okay? We're already using those interpretive models, predictive models to some extent. Your last question, sorry.
Coldplay presale, next round.
Good job.
I think specifically, I have no idea. I think the marketing agents, the people who are introducing all these lifestyle products, are actually looking at us as a very attractive partners, right? Given our base. If you can see the breakdown of Taylor Swift, right, not only just Singapore. The application came strongly from Malaysia, Vietnam, Thailand, people cannot get ticket, right? Six shows, people cannot get ticket. That is a power of the base, right? I'm sure with this, people will continue to look at UOB to see how we can further... Right? Taylor Swift is a little bit unusual, right? Unusual. This is a good start for the bank.
Hi. Congrats on the good results and the Taylor Swift boost to credit cards. I have two questions. The first on your forecast for fee income growth. Notice that you downgraded it from double-digit growth previously to now high single-digit. Could you give more color on why the forecast has been downgraded.
Oh, that is for the fees, right?
Yeah, your outlook for the fees.
Well, especially the credit card fees is okay. You can see the growth is quite good. The wealth fee, I think, given the market uncertainties and given our philosophy of not product push our customers, so you can see the AUM actually stay with us, which is a good thing. We can use the money to fund our loans and deposit. If they don't invest in products, right, your wealth fee will come down. As a long-term player, I'm happy with it because market is uncertain. The last thing I want is my customer going invest and they lose money, okay? It is still a very uncertain market. Yes, the AUM gone up, the fee gone down, but as far as the bank is concerned, we continue to capture our customer.
Second question on digital banks. Are you worried because the two digital banks have been raised their deposit caps, and they don't have some of the requirements that UOB's savings account and other accounts have? What's your outlook for UOB?
I welcome all this competition. We have grown, we will continue to grow. I think competition is healthy. We are always watchful of what our competitors are doing. So far, I think we are able to manage it.
Thank you, ST. Next question from Forbes.
Hi, congratulations on the results. Just looking at the customer numbers, I think around end March, in the first quarter, you reported about 7 million customers. Now, you're reporting 7.3 million. Does that mean you added 300 million customers just in the second quarter alone? 300,000, rather.
Yes. most of those are the organic growth-
Mm.
... because the impact on, Malaysia, Thailand-
Mm.
... was already taken in last year.
Mm.
I think, Of course, we have Vietnam. Vietnam is small base.
Yeah, comfortably.
Most of those, like Ee Cheong, we are quite comfortable that we are actually seeing increase of-
Mm.
... both the Citi and the UOB customer base.
Mm.
Okay? Which shows that they are, at least the Citi customers, are welcoming us. They're not dropping off. At the same time, the value proposition that we have on this enlarged partnership platform and our product offerings are also attracting new customers.
Yeah.
Yes, most of those are organic growth.
Of the 300,000, how many can be attributed to the Taylor Swift? 50?
I think Taylor Swift, the applications, a lot of people apply.
Mm.
Some of them may not be able to get it because the back room is not able to support that, okay.
Mm.
I don't have the specific number, but you can see the application is quite overwhelming. Ultimately, it's better to have a bird in hand-
Mm.
... than two in the bushes, right? The fact is, they are applying for credit cards. They see the potential of owning a UOB credit card, not just Taylor Swift, it will be something else, right? Hopefully then, we can take this opportunity to cross-sell.
Actually, the impact is not as big as many of you think, mainly because of the limited time, okay?
Yeah.
If it's a few hundred thousand, my branches people will die. That's why it's both a combination between debit and credit card. Not only credit card, like places like Vietnam, where people's income level are not so high, the debit card search was extreme. I think it's a combination. This is just one revenue for acquisition. More important is, after Taylor Swift, make sure they stay. I think that is what is more important for us.
Yeah. You got to understand, outside of Singapore, there's still a lot of work to be done. We are competing with a lot of, all the big domestic bank. This Taylor Swift has really give us a big, big advantage, okay? The whole regional consumer, right, now they say, "Hey, UOB.
In that regard, are you looking at the, follow-up question, other Southeast Asian markets? Like, for instance, noticeably, you left out the Philippines when you acquired the bank. It went to Union Bank of the Philippines. Do you have plans to deepen your-
I think. Well, we are always on the lookout. I think at the moment, I think we just integrate Malaysia.
Mm.
I think we still have a handful of challenges.
Mm.
To make sure that we integrate well. The amount of money that we pay, we want to make sure it's profitable to start off. This four market is actually quite handful for us already. Right.
Thank you, John. Can we have the next question from Goola?
Hi, thanks. Yeah, congratulations on the very good results and of course, on the dividend increase. I have three questions, okay. The first one is, okay, for the Citi customers that you've onboarded, are they on tomorrow, UOB TMRW? Have you managed to cross-sell other products, such as deposits, et cetera? Because a lot of them were the unsecured, so just wondered whether they're buying other products. Then, can I just ask on the Chinese property exposure, this is specific question: Does this include, like, the REITs and the property trusts as well in your, I think, SGD 2 billion or something?
SGD 2.8.
SGD 2.8 billion. Yeah, that's right. The rest is, of course, on the, you know, when Basel IV is coming in this month or next month or very soon.
Next year.
Next year.
Through next year.
Through next year. Okay, great. There are some different risk weights on different types of loans. I'm just wondering, will you maintain your current loan sorts of profile, or will there be any changes? Because there seem to more weights on things like mortgages, which are secured, and less on other things. How would that affect your outlook for I mean, the customers you onboard? F uture?
Okay, I think Ee Cheong can elaborate. Probably first is your question on the Citi portfolio. You are right, because Citi is strong in unsecured. We are probably strong in secured and wealth. There is a huge opportunities that we can cross-sell in, and how much of those are digitally acquired? The Citibank's portfolio of digital penetration is slightly higher than UOB, so these people are quite digitally savvy. We will get able to do that on after operational Day 1. Mainly because if I want to go into the wealth and deposits, they need some of them, they need some of the only channels that we have.
By end of this year, I think Malaysia was where we saw a huge uptake after the Day 1. This is where we think that we can work on the potentials. Technically, when we look at some of those on both sides itself, we have also been introducing Citi products into UOB before the operational merger. Some of those are also customers are benefiting from them. But they will get the full impact only after operational merger. Malaysia has just done that. We will look at Indonesia by end of this year and Thailand by early next year. Meanwhile, on their own, they are not dropping off. In fact, it shows their confidence. They are also, both the Citi and the UOB, even customers base are actually increasing.
Was very surprising to us, because we thought the Citi customer base would drop off, but it actually stayed and increased. They show their confidence on UOB. That is probably the question that you have. I can repeat the last question I remember that you have on Basel. Basel IV comes into effect June, but it has a five-year transitional period. Under the new Basel proposal, there are certain industry asset classes that are different. The most obvious is what you highlighted on mortgage. Okay, mortgage has a very generous RWA treatment, which a lot of people estimate that depending on where you are, if you move it the base of 25 RWA to where the 15, 16, there will be capital implication. We have actually factored in.
Of course, you can look at the impact, who is the biggest hitter, because a lot of people use a 25 basis points as a guide of RWA. SME actually has more favorable treatment, because I think most of them realize that after the crisis and all, some of the SMEs are actually not as bad, okay? Where previously they were very punitive, okay, on the first phase, and also to encourage economic activities. Some of the bigger boys, like FI and Funds, they actually brought it up. That means they think that they are a little bit more punitive. Previously, they were too generous and all.
Overall, we are actually repositioning our business, but we are actually positioning not immediately, but because we have a five years transition, and the business people already have the implication of both. Plus, the important thing is, can you reprice upwards? I think that is the challenge to the market, and if you are the first in the market, nobody follows. At the same time, you have to be careful, okay, that in five years' time, you'll be caught with higher RWA if you are not. That is a balance that we have.
Mm-hmm.
We have a system in place. We are working through the business line, looking at where the possibility are. What's your second question?
Chinese property exposure.
We talk about the Chinese property exposure, of course, of the SGD 10 billion that we have in China, these are, a lot of these are real estate with manufacturing in China. We don't do risks, okay? A lot of these are completed projects. In fact, most of them are completed projects, and they are quite healthy, okay? In the sense that when we look at the LTVs, et cetera, so we don't fund risks, onshore of the SGD 2.8.
Some of them are actually our franchise, you know, from Singapore.
Oh.
So like-
Like the Vietnamese guys, the Singapore goes there.
Yeah, we do have a portfolio, people like the GICs and all that.
Oh.
Some of the Chinese big MNCs investing in China, which is the strong founder that we are comfortable with. We are quite comfortable with the China exposure. There was a lot of concerns, obviously, on China weakness, et cetera, that's moved from the consumer side now to the manufacturing side. Like I said, we have been monitoring that. We brought that down slightly. The last time we disclosed this was SGD 3 billion, we brought that down to SGD 2.8 billion. We are not growing that, but we are monitoring it very closely. So far, it looks okay.
Thank you. Goola from DH, any question? Okay, from Bloomberg.
Hi. Morning. Dexter from Bloomberg here. I just wanted to ask, you mentioned in your remarks just now that you're concerned about commercial real estate. I try to clarify how wide do you think-
He's not concerned, he's trying to address the market's concern.
I'm just curious, what are your sense of it? How, why do you wide spread? On Singapore real estate markets, what do you think of it so far? Especially, it's still quite heated, even though cooled down a bit slight.
Well, I think Singapore is a little bit unique. I think given our, the flow of funds coming to Singapore, right. Given the geopolitical Singapore seems to be the magnet of attracting people to come, and the liquidity will help. Actually, if you look at the office space and all these things, I think it's still very good and manageable. Outside of the Singapore, I think the concern more on the U.S., okay. Our, our position is very, very small, and these are good sponsor, and it's very well collateralized. The loan to, market value is actually about 50%, so we are not really concerned about that.
A follow-up. On terms of China's recovery, obviously been slowing, like, do you guys see it slowing even further, or do you see more stimulus coming in a sense? One final thing I have is that just so you talk a lot about AUM coming in. There's been quite a bit of concern on MAS front and site about money laundering and things like that. Do you all have find more difficulty in kind of like, in terms of timeframe of getting approvals and doing a lot of due diligence on these loans and things like that?
Well, this is part and parcel of banking, right? We have to make sure that we do the right thing to admit the right customer profile. I think this is, in a way, business as usual, okay? China, yes, short term, I think there is some short-term volatility. I still believe China, you look at the debt level of the country, I think they will continue to grow. Short term, yes, I believe there is some hiccup here and there, the consumer spending, the confident. In the long term, medium term, I'm still very confident of China.
Thank you.
Thank you, Dexter. Any other questions from the floor? Diane.
Sorry, can I just ask on the, if because you're expecting a total credit cost of 25 basis points by the end of the year. Are you expecting the credit cost to come off in the second half? It's now totally 30 basis points.
Yeah. Mm-hmm, the total is not 30. Only my second quarter was 30, my first quarter was 35.
Oh, okay.
You can average it down.
Okay.
No, I think what we are saying is that the way that we are guiding it, the next two quarters will be back to normal.
Yeah.
Okay? If we are trying to manage it downward, of course, what we are saying is that the next two quarters will not be at 30. It was only a unique situation in the second quarter.
Mm-hmm.
We are moderating down and sticking to our guidance, for the next two quarters. The full year, if you think about it mathematically, it could be 26, 27.
Mm-hmm.
Okay? When you average out. Like I said, that's the guidance, but we obviously will be managing and hopefully, do better.
Mm-hmm.
As we talk.
The management overlays, have you kept them as they were last year, in the first quarter, or?
I think when you look at my total GP level, I think come down.
Mm-hmm. Mm-hmm.
Yeah, I mean, that shows you that I do have a lot of strength in there. In fact, we went up from the 2.9 something to the 3.1. That's probably where we are.
Mm-hmm.
The management overlay, we continue to take a look. Some of it, we are actually passing it back to the business, okay? In the sense that if you think about. Because our view is that with the high interest rate, okay, and the Fed itself says that interest rate is back to 22 years ago, the high.
Mm-hmm.
Under those environment, the credit costs will be very different, okay, going forward from what we used to look at. That's how we are positioning ourselves, and we felt that if you really look at historically, we were around 28% credit costs over the last 10, 15 years, but we are actually with some of the credits that we are bringing it down and with the diversification. So what we are trying to tell the market is that we are coming to position ourselves for the long term, and the market expectation-
Mm-hmm.
... of how credits will perform will be different from a higher interest rate. Now the talk is higher for longer, right?
Mm-hmm.
I think that's the talk in the market. That's, that's probably where we are, and we think that it will be around that 25 basis point that we talk about.
Does AI or anything help in modeling or this generative AI? Is there any help in modeling or?
Not in credit yet.
Mm-hmm.
Yeah, because, I think in behavior, yes. In credit, there are tools in there, but credit risk sometimes there is a lot of human interpretation. As is, we don't trust our-
Yeah.
... credit score.
They cannot take over us. They need us.
Okay.
Credit, I don't think so. Not yet.
Okay.
I think.
Okay.
Okay.
Just checking if there are any questions online? If not, I think we can take one last question from the floor. Anyone else? No. It seems like our Taylor Swift is doing very well. And has been the talk of the town. Yeah. Okay. Meanwhile, please continue to hold our card-
Thank you.
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