Good morning, welcome to UOB's full year 2022 results briefing. I'm Wendy Wan from 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 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. 2022 was a turbulent year. We saw rapid interest rate increases, stubbornly high inflation, and geopolitical tensions. This year, higher prices and interest rates are causing a drag on the global economy. Asia will hold up well with moderate growth. Consumption is coming back, people are traveling again, and China is reopening. Trade and investment flows are ramping up.
These are all positive for ASEAN, as can be seen from our performance across the markets. Our wide and deep regional footprint position us well to seize opportunities across our strategic pillars: connectivity, personalization, and sustainability. 2022 was a milestone year for UOB. We took a bold move in the middle of the pandemic to acquire Citigroup's consumer businesses, 4 markets in one go.
I said before, this deal is a strategic fit that came at the right time. A quality franchise that will accelerate our growth ambitions. A game changer that will scale our business and leave our market position. Indeed, it has proven to be timely, positioning us well as markets reopen. This acquisition was funded with capital buffers that we have set aside over the years, patiently waiting for the right opportunities.
Through this transformational deal, we generated higher risk-adjusted returns and closed the year with strong balance sheets, healthy capital, and liquidity positions. Last November, we completed our acquisitions in Malaysia and Thailand, adding more than 1 million customers to our retail base. We aim to close our acquisition in Indonesia and Vietnam this year. So far, the performance has surpassed our expectations. Business is resilient. We diversify earnings across products and countries while creating significant cross-selling opportunities.
Financials and integration costs are on track. We expect SGD 1 billion additional revenue in 2023. People-wise, the teams are integrating well. We now have about 7 million retail customers, and we should cross 8 million by year-end. We are excited to serve the enlarged customer base with our expanded network and strengthen capabilities.
Moving to our financials. Our last year core net profit rose 18% to a new high of SGD 4.8 billion. If we ex-include the one-off integration costs of the Citi acquisition, net profit was lower at SGD 4.6 billion. The one-off is about SGD 200 million, I think is stamp duty or a one-off we have to pay for the transfer of assets. This is a one-time cost that we have to bear.
Our core business remains strong and with robust net interest income, powered by loan growth and a strong margin expansion of 30 basis points. Fees were hampered by weak market sentiment, but credit card fees grew double digits, driven by strong rebound in regional spending and travel. Asset quality was resilient, with total credit costs and NPL ratio unchanged.
Our balance sheet remains strong, with robust CET1 and liquidity ratios position us well into future expansion opportunities. We are grateful to shareholders for their support in the past year, and we are pleased to announce that the board has recommended a final dividend of SGD 0.75 per ordinary share, bringing dividend payout to SGD 1.35 per share, representing a payout ratio of around 49%. Now, let me share some business highlights. On group retail, our balanced business model with diversified revenue drivers continue to drive good performance.
As mentioned earlier, credit card fee did well, up 25% with the recovery in regional spending and travel. Citi portfolio contributed to the increase last quarter. Wealth management AUM grew 11%. We saw net new money inflows reflecting customer confidence and trust in us. The One Bank approach by our private wealth groups allow us to take care of the holistic needs of our customers as we focus on an advisory-first approach. In January 2023, we saw strong pickup in wealth management activity as market rebounded. We will push for deeper penetration of our customer base and drive greater contributions from the private wealth space. With our enhanced deposit offerings, we attracted 8 times more new-to-bank customers over last year. It also positioned us well to engage these new customers on wealth management.
On the mortgage business or saver, new mortgage sales average around SGD 1 billion a month. Our market share remained firm amid a slowdown in the market due to rising rates. Pipeline is strong, and our credit quality is expected to stay healthy. In terms of customer acquisition through organic means, we acquired more than 800,000 new-to-bank retail customer last year, more than half of them digitally. With both our organic growth and Citi acquisitions, 70% of retail customer base is now digitally enabled, and this will allow us to serve customers more conveniently through various digital channels across the region. We will continue to enhance our all-in-one UOB TMRW app and other digital offerings to provide best-in-class services. This is an important strategy for us. On wholesale banking, it has performed well in 2022. We achieved higher margins from rising rates.
We more than offset the softer loan growth. We expect a stronger pickup in loans from the second half. It is showing results. Our cross-border income rose 12%, accounting for about one-third of our wholesale banking income. Transaction banking business expanded significantly, contributing 35% to wholesale banking income. Our regional cash management platform, UOB Infinity, has helped our customer manage their businesses more efficiently.
As a result, our wholesale banking average CASA balances grew 9% with digital transactions surging 13%. With our regional footprint, local expertise, and sector-specific capabilities, we are well-placed to connect our customers to opportunities across ASEAN. Beyond cash and trade, we have also been investing in our global market business. Our treasury income, customer flow income grew 20% last year.
On sustainability, we continue to work closely with our customers to assist them with their transition journeys in a just and orderly manner, balancing growth with responsibility. It is more than just headline numbers. Creating meaningful value is part of our corporate purpose. That is why we launched the first Sustainability Impact Awards together with The Business Times, to celebrate companies and individuals who have make a positive impact on the environment and society.
We hope to encourage more to join us on this journey. In the coming months, we expect rising rates to continue to support our net interest income and for asset quality to stay resilient. For this year, we expect mid-single digit loan growth with a focus on high-quality customer. Margin to stay high at around 2.2%.
Fees to grow double-digit as we come off from a low base led by cards and wealth management businesses. Cost-to-income ratio at 43%-44% and trending below 42% by 2024. Credit costs at 20 to 25 basis points. I thank my colleagues for their teamwork and dedications. Thank you, too, for your support. I move over to Wai Fai to elaborate on our financial. Thank you.
Good morning. Good to see everybody here again. Let me go into the financial details. Our full year core profit increased 18% to a record of SGD 4.8 billion. As CEO mentioned, we have just completed the acquisition of Citi's Malaysia and Thailand consumer business in November last year. Core profit exclude the one-off expense, as he explained. Including it, our net profit would be SGD 4.6 billion and SGD 1.2 billion for the quarter. This SGD 200 million over of one-off expense, like Ee Cheong said, probably SGD 180 million of it is to stamp duties. It's a one-off cost that will not be recurring. Okay? It's something that we need to pay, and we pay for it. The revenue part is only two months.
For the rest of it, I think it's mainly the TSA cost, the transitional support cost, plus some of the things that we are doing during integration. This is well within what we have put in during our business case when we did the acquisition. Back to our own core earnings. I think the strong core earnings was driven by NII, which registered another quarter of double-digit growth.
Net interest margin expanded 27 basis points to 2.22%. While loans related and wealth fee stayed soft this quarter on the weak market sentiment, credit card fees surged this quarter, boosted by the higher consumer spending and partly the inclusion of the Citi portfolio. Asset quality remained resilient with NPR ratios at 1.6%. Total credit cost on loans, sorry, was stable at 20 basis points.
We have actually increased the specific allowance on a few classified accounts this year. We have cushioned that impact with the write-back of some preemptive general allowances that we had set aside earlier. With the rising interest rate, we focus our effort to grow selectively. Our loans book was flat for the quarter and a 5% growth year-on-year on a constant currency basis. Post-acquisition of Citi, Thailand and Malaysia remain well capitalized with a healthy CET1 of 13.3%. Our board has proposed a final dividend of SGD 0.75 per share, a 25% increase over the interim of SGD 0.60. I think following CEO's comment on Citi, let me share some more insights with you.
Based on the two months, and actually by now, three over months, of managing the Citi portfolio, we are witnessing good traction in the performance that actually exceeded our expectation. I think NIM was boosted by the 10 basis points. Card fees went up 20% to record high. Operating costs was well under control at a reasonable level of the mid-40% range. Asset quality was well managed and within our expectation.
Like Ee Cheong said, Citi will give us an immediate SGD 1 billion incremental income uplift this year and strengthen our retail value proposition in the region. With the larger customer base, better product offerings, more cross-sell opportunities, and the opening up of the regional economies post-COVID, we actually expect to exceed our original target set for 2026.
If you look on the right-hand side, this was what we promised shareholders when we did the deal. I think at all indicators, we're likely going to exceed those targets that we set. We managed the capital concern arising from the acquisition to close the year with CET1 at 13.3%. I think this allows us to keep to our 50% payout ratio guidance without the need of a capital core.
The acquisition has proven to be a well-timed investment that greatly complements our ASEAN strategy. We are confident that of the ROE uplift that will bring us above our promised target. A few more observations. The inclusion of Citi Malaysia and Thailand added 1.3 million customers to our retail base. This brings our total customer base to 7 million. This is just the two countries itself.
By year-end this year, when we include Indonesia and Vietnam to pass some of our own organic, this number, 7 million, will way past the 8 million that Ee Cheong mentioned earlier. The number of common customers in Citi and the UOB base is actually slightly higher than my original estimate when I did the business case. However, the contribution from this group of common customers remains strong.
Basically, this implies that both our UOB and Citi value proposition complements and resonate with this group. We actually do not expect any revenue attrition. More than 80% of these customers from Citi are actually digitally engaged, owning either a mobile or internet banking. This has largely boosted our overall digital penetration rates. Citi customers was also active card spenders, with average card billings per customer at 2 times higher than the industry.
We also acquired a strong wealth franchise that contributed 20% more to AUM in Malaysia and Thailand. We continue to see healthy customer, AUM card billing growth across both the UOB and ex-Citi on the enlarged customer base. Those statistics actually are in fact accelerating in January, February as we talk. This indicates that our cross-sell efforts are actually gaining good traction.
With the enlarged regional consumer banking franchise, the ASEAN 4 income contribution to the group has increased from 25% to close to 30%. On retail itself, with the scaled up retail franchise, we now have collectively, like I said, close to 7 million retail customers, of which both the combined Citi and UOB, they are now 70% digitally engaged. Organically, like Ee Cheong said, we ourselves have grown 800,000 customers through the year, with 55% coming through our digital channels.
We partner with like-minded ecosystem partners that supported our franchise growth. Today, we have 30 strategic and co-brand partnership across multiple market. That's the important part, because this acquisition allows me to look at co-branding into a multi-market approach, rather than a single market approach. In addition to more than the 1,000 in-country partnerships.
With the acquisition of Citi, we will target further growth in this multi-market penetration, 'cause that's the beauty of our franchise. Leveraging our enlarged regional customer franchise to drive customer engagement and lifetime value. Net credit card fees, like Ee Cheong said, saw a robust 25% year-on-year growth. We expect credit card fees to remain elevated this year as regional spending continue to surpass pre-COVID level. Now we expect it to even higher, boosted by the China reopening.
Despite weak market sentiments, our asset under management increased 11% from a year ago to SGD 154 million. Net money inflows continue to outpace the valuation decline last year, as customer gravitated to relatively safer asset class given the turbulent market. We expect wealth management fees to recover strongly in 2023 because of a lower base. Our omni-channel strategy continued to show good customer traction.
I think statistically, these customers are highly engaged with three times higher average revenue generation compared to the traditional customers due to the multiple product holdings and more frequent transactions. On the wholesale side, they actually showed a good performance last year, despite a challenging fourth quarter. Looking ahead, we see cross-border opportunities as economies reopen and companies diversify their supply chain. We stand ready to capture these flows with our broad ASEAN franchise and strong product capabilities.
Our aim, like Ee Cheong said, is to be the number one cross-border trade bank in ASEAN. Cross-border income grew 12%, and the number of suppliers and distributors, and that's important, within our financial supply chain actually rose 29% last year. Leveraging on our sector-specific insights and solutions, our global Financial Institutions Group rose 25%, while income from retail and hospitality sectors, these are more the traditional areas, actually rose 21%.
Across the region, our cash management platform is driving higher digital adoption by our corporate customers with significant growth in transactions, volumes, and cashless payments. This is one of the key factor that helped me stabilize my CASA for wholesale, okay? Generating the stability of funding. On the business by segment, I think we have summarized this earlier. Retail operating profit benefited from the strong deposit growth and the higher margin.
With the add-on of Citi Malaysia and Thailand, coupled with the stronger credit card activities, card fees rose to record level. Wholesale, like we said, did well and saw double-digit growth last year, led by margin expansion as well as customer-related treasury income. Global market was impacted a lot by the steeper funding costs, which more than offset the higher yields from the securities. On the geography side, we continue to see very strong momentum in Singapore and ASEAN.
I think Singapore showed strong growth from margin expansion. For Thailand itself, we saw the same momentum. Actually, margin in there surged 99 basis points for the quarter, mainly because of Citi, okay? As you know that we took in a very big port of unsecured, that actually has very high margins that actually help our business.
Malaysia showed a lower operating profit for the quarter, mainly because we were increasing our IT costs to support the new enlarged franchise. Malaysia is the first that will be going into what we call the Operational Day one next year, it actually sets the pace for me to look at the regional platform for the other three countries that come in later.
I think at the group level, I have summarized the financial performance. I will leave this for your own reading. I'll go straight to some of the key drivers in the next few slides. First, margins. On the back of rising interest rate, net interest income registered another quarter of double-digit growth. NIM expanded by a strong 27 basis points to reach 2.22% for the fourth quarter.
I think this was partly contributed by Citi. Just to be transparent, Citi added 8 basis points to this, to this increase. We expect the sharp surge in NIM to ease in the coming quarter. I think we could debate where Fed funds will be. We can take that offline. We think that the cost of funding will slowly catch up. We are confident, like Ee Cheong said, to close next year at current level, okay? Basically, what it means is that NIM might go up a bit in the first half before they moderate down, because we do not expect Fed to be cutting rates. Okay? The question is, where will it be top-ish? We don't expect them to cut rate this year.
On a full year basis, NIM grew 31% year-on-year, boosted by the NIM uplift as well as the 3% loans growth. On the fee side, though it's weaker, there are few bright spot. I think cards fees hit record high, recording the 35% growth quarter-on-quarter and the 25% year-on-year. We saw very strong card activities from consumer spending as travelers surge across the region. You can imagine that this only happened the last quarter last year.
The potential of that number for this year will be tremendous. The inclusion of Citi's retail business further boosted our cards fees to record level. On the other hand, wealth and fund management fees slowed as investors' sentiment remained cautious alongside the market volatility. Loans-related fees in the last two quarters moderated from some exceptionally high first half performance, while wealth momentum remains soft.
As explained previously, this decline in fees was more than compensated by our NII expansion. On the other part of the income, customer-related treasury income, like Ee Cheong said, rose to a new high with year-on-year growth of 20% as customers seek hedging opportunities amid market volatility. This basically shows the investment that we did when we look at what customer needs. In market volatility, this was one area that we have the solution to help them hedge their risk. On the other hand, the non-customer trading investment income suffered a little bit from the volatile market valuations. This basically really would be my long-term portfolio and part of the equity holdings that I have.
On the expense side, the core expense, excluding the one-off relating to the Citi acquisition, grew 16% year-on-year as we continue to invest in our people and technology to build for the people for the future. This was outpaced by the strong income growth and cost to income actually improved to 43.3% this year. Like Ee Cheong guided, we will bring this down to maybe closer to 42% by next year. Overall asset quality of our loans portfolio remained resilient. NPL formation was higher this quarter from a few well-secured corporate accounts. This were well within management expectation, and we have adequately set aside provisions for them. NPL ratios rose marginally to 1.6% with the inclusion of the Citi's impact loans.
Total credit costs increased from 16 to 21 basis points this quarter, mainly from specific allowances as we revised the valuation of our security of the existing NPLs to reflect the near-term uncertainty. We took our price down to reflect some of the illiquidity that we think that we will go through. This actually strengthens my coverage. This was cushioned by unwinding general allowances earlier provided for, and total credit costs remained stable at 20 basis points for the year. The group total allowances was SGD 5 billion, of which SGD 3.2 billion was general allowances. NPA coverage was at 98% or 207% after taking collateral into account. Another ratio which we call performing loans coverage at 0.9%, I think these are all very healthy and adequate.
We are very confident that our general allowances will be sufficient to cushion any anticipated slowdown or credit loss from our portfolio. I think loans growth momentum sustained well, increasing by 5% year-on-year on constant currency basis. The inclusion of Citi franchise lifted the ASEAN book by 11% for the quarter, around SGD 8 billion. I think customers actually have been more cautious in the last quarter in view of the rising interest rate. Some of them look at their projects and they think that with the rising interest rate, they might not be viable. Many of them are actually not committing yet. We remain committed to support our customers in their pursuit of business needs and trading opportunities where needed. You know businessmen, at some point, they will realize that the high interest rate is for real.
Based on that, there will be viable projects that we think, okay, will come back next year. With rising interest costs in the wholesale market, we maintain our focus on customer deposits as our major source of stable funding. Customer deposits grew steadily at 5% from a year ago. The increase was mainly in FD, okay, in Singapore, in the retail space, of course. As you know, we started the FD campaign ahead of the industry, as this allowed us to capture the volume at lower rate despite some of the refinancing that happened. The average cost of outstanding FD in Singapore actually is significantly lower than the current rate should we go to the market. CASA was definitely affected. Actually we focus our strategy on strong CASA acquisition and also to look at how we can increase digitization to understand their needs.
The 16% new to bank customers arising from our FD campaign, okay, this is not just losing money outflow. It was positive for us. Open a CASA account. I think we have since focused on strategic initiative to grow the right type of CASA, through our One Account value proposition, and some of you have written on it before, especially in November when we launched the revamp of our One Account, salary credit, GIRO, PayNow transactions. I think we are quite hopeful that with this we will stabilize some of the sharp drop in the CASA. When the FDs are due for refinancing, we are able to cross-sell into them, like Yee-Chong said.
Our liquidity position remains strong with the quarter's LCR at 147% and NSFR at 116%, both well above the minimum regulatory requirements. I think we ended the year with a healthy CET1 at 13.3%. We have mentioned previously that the Citi acquisition will bring our CET1 by 70 basis points. I think there are much worries that will this affect my dividend paying capacity, et cetera. I think, you think about it, we have already completed Malaysia and Thailand. These two are probably the biggest portfolio. Probably of that 70 basis points , I've already taken 50%-60% to my book.
With the strong earnings and the efficient RWA management, we are managed to keep it above 13%, something which I thought that I can only do end of this year, we did it last year. This was, like I said, post the Citi acquisition, the two big markets. I think we are really quite confident that we are able now to compete head-on and look at our growth long-term strategy.
I think in appreciation of the support from our shareholders, the board is recommending a final dividend of SGD 0.75 per share in view of our strong earnings. I think this translates to a payout ratio of around 49%. I think with that, I conclude my presentation. I'll pass it back to Wendy.
Thank you, Mr. Lee. We'll 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 on Microsoft Teams, 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 will start off with those in the room with us. First question, please.
Yes.
Can we have the first question from Bloomberg?
Hi. I wanted to check about a few questions. Three, actually. First is, I can see that, you know, the market has reacted little bit negatively after the results. I wanted to understand first if you have any comment on that. What will be your focus really for driving profit in 2023, the key focus area, maybe the first three or top three? My second question is that what is the reason that you are seeing a higher credit cost in 2023? The third is, how do you think the overall China reopening will be helping and will be a tailwind for your business this year? Thank you.
Okay. Let me just answer you. I mean, maybe my CFO can supplement. You mentioned about market. We view it as a mixed feeling. The market don't understand. You understand better than ourselves. You talk to us directly, right? This is why we need to close the perception. I think if you look at exclude the one-time cost, the organic growth at SGD 4.8 billion actually is very healthy.
By this year, all the one-time costs should be able to diminish. By next year, I think the earning potential is there. I would think the outlook is quite positive. You talk about the growth engine. Basically two fronts. One is retail. With the Citi acquisitions, that will give us tremendous opportunities, right? To grow.
We added 1 million customer. That is one thing. You can see the credit card spending is good, economy is recovering, immediately we get the customer base we want. Initially, when we acquired the Citibank customer, we are concerned that Citibank customer may move to other banks. To our surprise, actually they continue to stay with us, right?
Thailand and Malaysia is our two biggest market, and you can see the momentum is picking up. Secondly, with that, we have a significant untapped potential for the wealth management business, right? Given the customer base we have. We are continuing to deepen that. If you heard our story last year, we have reorganized, and renew our team and built capabilities for our private wealth. All these things will be able to progressing quite well.
Bear in mind, all these customer are in the region. Singapore also have the benefit of getting family offices to come in. The region is there for us. We have all the footprints. We have a double engine for us to grow. That is two-part, Citi acquisition, wealth management.
Second part is the wholesale partner. The connectivity, I believe, is getting a lot of traction. We are the first bank to do the FDI, foreign direct investment. You can see the growth is actually much better than pre-COVID now, right? That is one area and we continue to invest our cash management, our transaction banking, our trade transaction is actually double-digit growth. If the market continue to open up, that, yeah, that these are the few areas that we will continue to.
To penetrate. In fact, we are adding more capacity, the regional cash management system in 10 cities. Right now it's Hong Kong and Singapore, and we continue to roll out 10 more city within ASEAN for the next few months. These are all capability for us to attract our customer, because it's important. We are competing with the domestic bank in the respective country.
We have to be smarter. We have to use technology, okay? That we are able to reduce our cost of funds in order for us to compete. Deposit is important. Without deposit, I cannot grow. Okay? Now that I have a base, Citibank portfolio is cards and unsecured, and if UOB we have this deposit as well as secure. The combination of both, I think will give us a tremendous opportunity. What is your third question on NPL?
What is the reason you're expecting credit cost to rise in 2023?
You know, credit cost is, we are always targeting about 15%- 20%, right? Basis point credit costs. The actual running is maybe less, but this is just for budgeting purposes. Our running cost is actually quite decent. Citi portfolio is actually quite good.
Is it also related to the higher interest rates that you are apprehending?
Not so much.
Okay.
If you look at the main bulk of our exposure is still in Singapore, right? Consumer business in Singapore, you look at mortgage, that is the main concern about the mortgage.
Right.
With the rising interest rate. If I can recall, 70%-80% of our mortgage portfolio is owner occupying, okay? If you look at the employment situation, if you look at the repayment is actually we have factored in when we do the loan. We factor the interest rate is at 4%-5%. There is no hardly any stress factor. I think it's manageable.
Okay.
Yeah.
Thank you.
Wai Fai , you want it?
The three questions, why market reacted? I don't know. Actually, I don't know. A lot of people buy on expectation and sell on confirmation. I hope that's the case. They're not selling on disappointment. I suspect that's what. Maybe they're a little bit disappointed with the loans growth and like E Cheong said, yes, we understand the fourth quarter was a bit weaker, but we expect that to pick up, especially in the region.
I think there are concerns whether the recession in Europe and maybe a mild one in the U.S. will bring us down. If you really look at the Southeast Asia economy itself, actually we are still seeing growth. Okay? There's worry about interest rate hiking and will it translate into credit problem, which was your last question. We don't see that happening.
Okay.
We always say is that one of the things about credit is not where actual interest rate is, it's whether there is a credit environment that business people find that banks will fund them and whether they can get that return. With the improved economic activities in the region.
I was already hinting that today, yes, they think the interest rate go up, they hold back on some of their projects, but once they come to term, the interest rate will stay higher and maybe longer, they'll be viable project because you see the economy coming back to Southeast Asia. You see the supply chain shift. I won't comment on the geopolitical thing, but some of them are shifting some of the supply chains to Southeast Asia. In the domestic market, retail are doing well. Retail are doing well.
If you look at confidence in Singapore, okay, we know that... I mean, you just look at where COE is, you look at property prices, I think we are all very healthy. You look at opening up and look at the employment situation, I think we are pretty healthy. We don't think that there will be a deep recessions that will happen in Southeast Asia because of the economic activities. I think the market will have to start trying to understand some of this and probably better digest it.
You look at last year actually is quite uncertain given the geopolitical risk. The fact is the loan growth is not robust, partly because we are selective and partly also because if you are a quality good customer, you want to pay down your loans, right? The last thing you want is you cannot pay down.
Yeah.
Okay? The fact is they are paying down means they have the capacity, right?
Mm-hmm.
Look at the situation and we think that second half of this year, the loan may pick up again. If they think that the cost of fund is something that they have no choice, this is the way of life, then they will start to borrow and if the demand is picking up. I'm not overly concerned about the loan growth.
Also, will this loan growth that you're expecting, will a part of it also be the China reopening? How do you think that will help you in your business expectations for this year?
Well, it's a bonus. China is reopening up. I think the tourists will start to come in. For me, I think that is a potential that we all can talk about it. I think immediately what is real for us is the acquisition of Citibank. The customer is already with us. This is where I think I have to work on it.
Okay.
The potential of opening up, yes, is a good factor to have, but how real it is, we don't know.
Yeah.
Okay.
There's always a pent-up demand, right? After three years of closure. Obviously it's like a dam, right? Suddenly open up, there'll be a gush. Will it start or after a while you'll reach a certain level? I think that's where immediately that's definitely positive for us, because tourism will definitely increase.
Look at the regional countries like Thailand, Malaysia and Indonesia to some extent less, they all depend on tourism. Even Singapore, tourism. The retail side will be well supported. Whether that will also allow investments to come out because they opened up, allowing businessmen to start traveling. Because if you can't travel, you won't do investments, right? You don't do big money. Whether that will help the FDIs part that we talked about. Those...
Yeah, the other question, Ee Cheong, I just want to handle the credit cost question. We are not looking at increased credit costs. We are guiding 20-25 as usual. We close at 20, and I think we'll maintain around the end. Should something happen, we might go to 25, but I think the operating base case is 20. I do have enough general provisions, like Gula was asking me, if I need to take some of those write-backs, because I'm more than adequately provided.
Thank you, Mr. Lee. Next question from Gula.
Hi. Thanks Mr. Wee and Wai Fai. I've just got a question. I just wondered whether we could look back a little bit on your FDI advisory and what sort of... What businesses it's doing, encouraging and so on. Because you haven't spoken about that this year because maybe of Citi, etcetera. That's 1 question. Then, can I... Do you want me to go 1 by 1 or?
Okay. Why don't you finish your question?
Okay. Okay, that's the first question. I think, cost of funds, I mean, there's some concern among some of the analysts about cost of funds. I mean, you say 2.2% NIM for this coming year, are you expecting. What's the outlook for that? Is it a higher yield on your assets in the first half and then sort of, they plateau? I mean, the interest rates plateau, you have higher cost of funds in the second half. The other question on cost of funds, you had a ATI, additional tier one, quite a high price. Perhaps you could explain the rationale for that, you know?
In terms of outlook for your ROE and return on your RWA for 2023 and 2024, could you? You said it's going to be above expectations because of Citi. You could give better numbers. You said more than 13%. Could it be closer to 15% or something like that for your ROE and 2.5% or 3%?
Why don't you ask her the number of questions?
That question. -
Okay, I'll leave the FDI question to Ee Cheong.
Yeah.
There are a couple of questions that you asked, and one is margins and cost of funding.
Mm-hmm.
What was the assumption going in?
Mm-hmm.
I think depends on when you ask me, my answer will be different. Today, everybody after the January Fed, they think that inflation will come in higher, employment is strong, Fed will keep rates a bit more elevated than previously. You already saw the 10-years reacting. You look at the 10-years, the U.S., they have gone back to 3.9.
Mm-hmm.
At one time, 3.95%, moderating slightly down, from the expectation of 3.5%.
Mm-hmm.
That's already an expectation that interest rate will continue to go up. The challenge is how much and by when?
Mm-hmm.
I think this is really the challenge. Most of the calls that we have, we think that by first half it should be over, because by then the question then is where. How much will it be? Will it be elevated from the market consensus of 5%-5.5%, which is some of that call. If that continues to go up, then our margin will have some upside.
Mm-hmm.
The increase pace will be slower, but it'll be positive. Okay? After that, once they stop, and our call is that we don't think that this year the Fed is, the U.S. is strong enough for them to start cutting rates.
Mm-hmm.
In the second half, we expect the cost of funds to catch up more than the pricing. The 2.2% current level was the average level-.
Mm-hmm.
We think that we could have some upside in the first half, moderating in the second. That's probably... The second part is our cost of funding itself. Yes, we have actually been quite confident. If you look at what we did in recent months, we didn't compete aggressively in the FD campaign compared to some of our competitors. We were very aggressive at the beginning, okay? We kept our rates around the 3.9. We didn't cross the 4, which some of our competitors actually went as well.
Mm-hmm.
The other part is the wholesale side has actually been surprisingly very resilient. We are very worried about funding in the subsidiaries, okay? Especially places like Indonesia, because when I don't have a franchise, how do I grow that? I was pleasantly surprised with all these cash management activities that they're doing, and also because of the very strong commodity prices, the companies are actually doing well. There are a lot of excess funds.
Mm-hmm.
My wholesale funding is a lot stronger than we were probably 10 years ago. 10 years ago, on something like this, I will lose in retail, I'll lose in wholesale. Yes, the wholesale people are businessmen. They will pay down and all, but the CASA ratio did not drop.
Mm-hmm.
It was my retail CASA ratio that dropped. we are a little bit more hopeful that we are be able to balance outside of Singapore and then look at that funding and the rate in Singapore itself. The good news is that we think that it has slowed down because the pace of growth, okay, is no longer. I mean, you look at the ten-year treasuries.
Mm-hmm.
Yes, it might grow a bit more, but it has actually come down. That gives you the indication that the cost of funding probably will go up, but not as sharp a pace as we saw in the first half. That's why we are actually quite hopeful on. The second part of your question is ROE and where the drive is.
Mm-hmm.
I think if you really look at it for the two quarters we have been running ROE, core ROE, excluding the Citi at around 14%. The last two quarters, the average we did was around 13. Technically, we hope to maintain that in the short term. Before the one-off expense, I think we'll get core ROE.
With the one-off expense in 2023 maybe another 50 basis points down, but we are already ahead of our original target of ROE of 14% by 2026, et cetera. We are very hopeful that with this refocus on Citi, which is a retail portfolio, the retail portfolio ROE will be significantly higher than the wholesale. With the cash management facilities and the growth of ASEAN, the wholesale will start contributing to actually reach it.
In the short term, core ROE this year, I hope to maintain it at current level of 14%.
Okay, one more question on the, on the capital side. You know, I think one of your peers said they benefit actually when they transition to Basel IV.
Yes.
What's the UOB position on that?
Basel IV has a five years transition period.
Okay.
Okay? In between we could benefit.
Mm-hmm.
We think we are a bit neutral when we are fully implemented.
Mm-hmm.
comes 2024, we will have to, what I call, report two numbers. One is the transition number, one is what we call the fully loaded number.
Mm.
So remember the-
Oh, the Basel III.
The days of the SIBOR.
Yeah, yeah.
Okay? The transition.
Mm-hmm.
During the transition, I think we'll benefit, but at final, we'll be neutral. More important is at final. Where we know that it's at final would be that retail probably will go up.
Mm.
Okay? Because the retail base, today, most of us are very RWA efficient.
Mm-hmm.
I think the Basel, the industry felt that that base is too low, so they actually will raise the cap, okay? Some of it, for us, we think that it could be maybe another 30%, 40% more. Some of the other banks, when they are so low RWA...
Mm.
for retail, some of it could be double the capital in retail. Okay, so that's one sector.
Mm-hmm.
The other one is SME will benefit. Okay? One of the things is that the SME, they were very worried during the transition model. They put a lot of weights to payment. I think really you look at the SME portfolio itself, looking at the performance, et cetera, they are a lot better. I think SME will be better. The rest of it is mixed between the FIG's and off. We are probably neutral to slightly positive in the final. In the transition, we are definitely better.
Mm-hmm.
The question is that we are now have to be careful that I don't lock in in the interim.
Mm-hmm.
I give it back at the final.
Oh.
Okay? That's what... I don't know what competitors say, but this is where we are. At the final, we are probably neutral.
Mm-hmm.
In between, yes, we are better-
Mm.
We are repositioning our portfolio to make sure that at final, I don't suffer.
Okay. I think the competitors about the same. Yeah.
Thank you, Mr. Lee. Maybe we'll take one question from line.
Yeah, yeah.
Advisory.
Well, we started that about.
10 years ago.
12, 13 years ago. We have a team of people, actually in 10 different city in ASEAN. All those in the subsidiary, we have a team of people helping, customer who are interested, potential investor who are interested in China, from China, from Taiwan, from Japan, interested in ASEAN. This advisory unit, right, will actually help.
We tied up with a law firm, we tied up with an accounting firm, because when investor come to this part of the world, banking is only one product, right? They also have to take care of the taxes, they also have to take care of the rules and regulations. It's an arrangement that we have started it about 12, 15 years ago. The traction is actually very good. We feel very proud of it.
In fact, every time when we go to a country like Vietnam, Malaysia, Indonesia, we talk about we are not there just to compete with the domestic bank, we also help to provide solution, help to create job, employment. The formula is actually fairly standard. Okay?
The fact is, we are known to this part of the world, people are coming to us. We are unique in a sense. Not many banks have that focused referral model. As a result of that, even I talk about the private banking, right? Some of them, they are coming in as a private banking. You look at our private banking, our cost income ratio is about 30% compared to the industry of 60%-70%, right?
We do a lot of referral business. Okay? This is the strength of our network. Most of the organization, they still run in a very silo manner, right? You take care of yourself, somebody will take care of something. For us, as a culture, we want to make it more holistic. We support our customer, commercial banking customer, not only loans, right, and also their own wealth, right? We set up family offices for them.
Mm-hmm.
We help them to plan estate, help them to plan succession, things like that. That is our model. It has been going on. So far has been quite encouraging. Let's switch it back to our colleague from BT.
I just wanna ask because I saw that UOB recently put a loan to Adaro. Do you have any comments on that, and how is that gonna play out in your sustainability?
We generally don't finance coal. Adaro is an existing customer. The terms are very ring-fenced. It's not for the coal. Yeah. As a rule, we don't finance them. That loan is ring-fenced. We are helping some good customer to transit. Very important. We are also playing a supervisory role, especially for the SME customer. We want to help them together.
We are not big player. The whole sustainability is cut across globally, right? We are just playing our part, right, to help our customer to work together with our customer, have different segment of our customer that we try to penetrate them, help them. In the interest of time, we'll take just one more question from Chanya, which I'm helping her to ask.
On one-off costs, is there going to be more in 2023, given Indonesia and Vietnam integration is not done yet? Her second question is, are you still looking to attract fixed deposit this year? Why do you raise so much of that last year and CASA ratio actually dropped?
I think we'll continue to have one-off costs because like we said, until OD one, we call it, we still use Citi to help us. Malaysia will go OD one probably in June, July this year. Thailand will be in 2024. Indonesia will come in by probably the last quarter of this year. Although legal day one for Vietnam would be in September, but I still need Citibank to resolve. Yes, there will be some.
In fact, the technology cost to support it, okay, will be higher because you need two months in 2022. What we estimated in that SGD 300 million - SGD 400 million, in that it might happen in 2024, sorry, 2023. We'll continue. We're trying to reduce it and accelerate the system integration. The faster we bring our system in, the less we have to pay. That's the plan. Yes, there will be another SGD 300 million - SGD 400 million that you expect this year. That is just according to our plan, et cetera. What's the other question? FDs. I think we have to live in an environment where interest rate will be high. You...
I always ask people to go back in time when interest rate is high. People will be a little bit more selective to make sure they don't have idle money putting into CASA. We believe that the most of it already has happened, but there will be still continue to be this, especially where we think that the interest rate environment will stay elevated for a bit longer. I think it's only realistic, but what we are hoping for is the current trend, is that the CASA outflow, okay, based on the statistics, is still negative, but it has slowed down, okay? Because the pace of the increase in interest rate is a bit lower.
Yes, I think it will happen, still happen, but we expect that reduction in CASA to be slowing down, because we had the biggest outflow in third quarter, maybe because we were very aggressive. Slowed down, but still negative in the fourth. We expect it to be negative still in the first two quarters, with that slowing down.
Yes, we think that there will be still be some competition out there, because some of the market players probably will need it more because they are coming in later in the game. Thank you, CEO and Stanley. That's all the time we have today. Thank you and for joining us this morning. Mm-hmm. We wish you a good day ahead. Thanks. Okay, thanks. Thanks, everyone.