Good morning, and welcome to UOB's third quarter 2022 results briefing. I'm Wendy Wan from Group Strategic Communications and Brand, 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. During the Q&A session, if you would like to ask a question, please raise your hand and wait for my cue. For those dialing in via Microsoft Teams, please use the Raise Hand function to indicate that you would like to ask a question. You can find the icon at the top of the frame, third button from the left.
Please wait for my cue and turn on your camera before asking your question. 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 mic to our CEO. Mr. Wee, please.
Good morning, Gula and Kelly. Yeah, good morning. Thank you for joining us. It is great to see everyone here in this room again. Since we last met, uncertainties continue to cloud the global economy. Southeast Asia has shown resilience as it is benefiting from the shift from globalization to regionalization, robust commodity prices, and resumptions of economic activities after countries moved from pandemic lockdowns to endemic management. Last month, we launched our brand refresh.
We lay out our sharpened purpose to build the future of ASEAN. We want to build the future of ASEAN for the people and businesses within the region and those connecting with us. We want to be a truly regional bank that grow with our customers and help them achieve their ambitions. To reach this goal, we will double down on three strategic areas, connectivity, personalizations, and sustainability.
These are recurring themes you will be constantly hearing from us. Our third quarter profit was 34% higher year-on-year at SGD 1.4 billion. This boosted our ROE to 14% from 10.4% a year earlier. Core business is strong, with robust net interest income, driven by higher margins as we remain selective on loan growth opportunities. Fees continue to be soft with current market sentiment, but the decline was more than offset by the net interest uplift. Other non-interest income surge with record high customer-related treasury income due to higher demand for hedging solutions.
Asset quality is benign, with lower total credit costs and NPL. We reversed our one-off real estate NPL classified last quarter after a successful restructuring exercise. Our balance sheet remains strong.
We are well-positioned to ride through this uncertain period and to see through the integration of Citi's retail business from next quarter. Now, let me give some highlights on our business segment. Wholesale banking performed well. Income up 31%. As we grew our CASA balances and loans steadily over the past year, we achieved higher margin from rate hikes. Our clients are optimistic about Southeast Asia's potential as an alternative production base. For example, the nickel industry in Indonesia and its related upstream and downstream supply network is benefiting from the rapidly growing electric vehicle industry.
Our extensive regional footprint, deep local and sector expertise, give us a competitive edge in banking this trade and investment flows and enable us to facilitate and capture cross-border connectivity opportunities effectively. Our cross-border income rose 16% year-on-year and now accounts for 29% of our wholesale banking income.
This was driven by growth across all major product groups. Our regional cash management platform, UOB Infinity, has helped our customers manage their businesses more efficiently. Consequently, our CASA balances trended higher, and digital transactions jumped 14%. We have been recognized by large Asian corporates as their number one preferred financial institution for cash management services in ASEAN. We will continue to help clients go digital, go green, and be future ready. Our retail performance was supported by our balanced business model with diversified revenue drivers. While wealth management fees were lower as clients stay cautious in an uncertain market, but overall AUM helped steady.
We continue to see net inflows, which more than offset negative market impact. Our AUM saw an increase this quarter, reflecting customer trust in a UOB franchise for wealth management. Our bancassurance sales set a new record in September.
Other parts of our retail business saw stable growth. Credit card fees grew steadily with higher billing from spending and travels. Mortgage business held steady despite market slowdown due to rising rates. Our new mortgage sales averaged more than SGD 1 billion a month, and our market share remained firm. Despite higher interest rates, our portfolio is expected to stay healthy. We are making meaningful progress in growing our franchise across the region. Our award-winning digital platform, UOB TMRW, reached a significant milestone in August, achieving 1 million digitally acquired customers.
More than two-thirds of these customers are new to bank. This platform will also be key in us serving digitally our incoming Citi customers across the region. On our Citi acquisition, we are happy with the progress. The regulators have approved our acquisition in Malaysia and Thailand.
We will welcome Citi customers and staff in these two markets to our fold next Tuesday, 1st November . We are working towards taking over the business in Indonesia and Vietnam next year. The business remains strong and around 90% of Citi staff have agreed to join us. Next, on sustainability, we want to help customers in their transition journey from both the financing and investing angles. Our sustainable financing portfolio reached SGD 23 billion today. As a leader in SME segment, we're helping our SME customers jumpstart their sustainability journey.
We recently launched the UOB Sustainability Compass, a tool to help SME identify steps that they can take to go green in their businesses. We know that climate action is an urgent task at hand. However, here in Asia, and particularly in our home region of Southeast Asia, socio-economic challenges must also be carefully considered.
There must be an orderly and just transition to ensure that lives and livelihoods can continue to improve. At UOB, our promise is to do right by our customers and our stakeholders. As a responsible steward, we have a role to play to help channel the resources needed to the relevant parties on this journey to reach global net zero. Looking ahead, the global economic outlook remains challenging. While growth in our region was slow, we are not expecting an impending recession in our key markets if there is an orderly foreign exchange and interest rate movements.
As a long-term bank, we are no strangers to the up and down of the economic cycles. With our strong balance sheets, diversified revenue drivers, and disciplined approach, we are confident to ride through this cycle with our customers.
In the next 12 months, rising rates will continue to support our net interest income. We expect to end the year with mid-single-digit loan growth, margins above 2%, stable cost-to-income ratio, 20 basis points of credit costs. In closing, I want to thank my colleagues for their dedication and teamwork for this strong set of results. We remain committed to building the future of ASEAN, and we will continue to strive towards being the most preferred bank for both consumers and businesses across our key markets. Thank you. Now I will turn over to Lee Wai Fai to elaborate on our financials. Thank you.
Thank you, Ee Cheong. Good morning, everybody. Thanks for joining us today, including those that are dialing in online. I think it has been an exciting quarter for us. Third quarter profit reached a high of SGD 1.4 billion from record net interest income and lower credit costs. This is 26% higher than last quarter and 34% higher than a year ago. For the 9-month period this year, profit increased 12% to SGD 3.4 billion. Strong NIM expansion of 28 basis points to 1.95% drove NII to register another quarter of double-digit growth, surpassing the SGD 2 billion mark. Loan-related fees moderated from last quarter's high, while wealth fees remain soft as investors continue to be cautious. Customer-related treasury income continued to remain strong. It surged to a record high from the increased demand for hedging activities.
Trading and liquidity management activities also achieved better performance amid the market volatilities. Asset quality stabilized with NPL ratio improving to 1.5%. Total credit cost on loans also improved to 17 basis points. We continue to focus our effort on selective growth with our loan book growing 1% quarter-on-quarter, but 6% year-on-year. Our capital position remain healthy with CET1 at 12.8%. I think bearing in mind that this is actually post our interim dividend payout for this quarter. On the business front, retail operating profit benefited from the stronger deposit growth and higher margin. This was partially dampened by the lower fees, lower wealth fees on the back of cautious market sentiment.
We are confident that with the Citi consumer portfolio adding to our regional franchise next quarter, there will be more opportunities to growth in the retail space. Wholesale did well and saw double-digit growth led by volume and margin expansion, with loans and investment banking fees at record levels, as well as strong customer-related treasury income. Global market benefited from the market volatilities and achieved better trading results. The wholesale business continued to register strong growth momentum on the back of diverse growth engines.
As we have often emphasized, our comprehensive ASEAN footprint, sector specialization and deepened product capabilities has enabled us to capture the growing cross-border opportunities as economies open and companies diversify their supply chain. Cross-border income rose 16%. Loans-related fees growth 7% and our Global Financial Institution Group rose 26%.
Across the region, our new cash management platform is driving higher digital adoption by our corporate customers with robust growth in transaction volume and cashless payment. For the retail side, we continue to grow our franchise and deepen capabilities in our retail business. We are on track to digitally acquire 500,000 new customers across the region by the end of this year. In Indonesia itself, the UOB TMRW registered remarkable customer growth of 2.4x year-on-year. Ecosystem partnership has been key in scaling our franchise.
Today, we have established more than 140 ecosystem partnership across the region to drive customer acquisition, engagement, and cost efficiencies. In fact, one in four of our digitally acquired customers were successful partnership referrers. Despite market volatilities, our assets under management increased 2% year-on-year to SGD 140 billion, underscoring our customer trust in us. Notwithstanding the negative market sentiment for the quarter, our wealth AUM showed an increase of 1%, as highlighted by my CEO.
Our omni-channel bancassurance solutions continue to be well received by our customer. Bancassurance sales grew 23% in the quarter. In fact, like what Wee Ee Cheong said, in September, we recorded our highest monthly growth over the 13-year partnership that we have with Prudential. For the quarter, we saw good momentum in ASEAN and Singapore. Singapore showed strong growth from NIM expansion and exceptional trading income. Our regional franchise continued to be a key platform for our customers to gain market access across ASEAN as we fund cross-border activities and trade flows.
Actually, if you look at it, Malaysia actually showed a similar momentum as Singapore. I think margins improved 21 basis points for the quarter, and also very good trading income. For the numbers itself, I think as we mentioned earlier, we achieved a record quarter of SGD 1.4 billion. I will go through the key drivers in the next few slides. Okay, margins. I think on the back of rising interest rate environment, net interest income registered another quarter of double-digit growth and crossed the SGD 2 billion mark. NIM expanded by strong 28 basis points to reach 1.95% for the quarter. On a year-on-year basis, NII grew 23%, boosted by NIM uplift and the 6% loans growth volume.
For fees, our 9-month loan fees grew to a new high, spurred by trade and investment growth. Credit card also increased as consumer spending picked up with the reopening of the borders. On the other hand, wealth and fund management fees slowed as investor sentiment turned cautious alongside the market volatility. For the quarter, loan fees moderated from an exceptional high second quarter, while wealth momentum remained soft. As mentioned by Ee Cheong, the decline in fees, especially in the wealth side, is more than compensated by our NII expansion. Customer-related treasury income rose to a record high this quarter as customers seek hedging opportunities during this time of market volatility.
Other trading and investment income also surged on improved performance from both trading and liquidity management activities. Expenses rose in line with income growth, with cost to income ratio improving to 42.6% for the quarter. I think if you noticed, year-on-year, staff costs increased 9%, okay, as we responded to the tight labor market conditions, especially in Singapore.
Asset quality, I think asset quality improved this quarter. I think NPL formation was lower, coupled with better recoveries, especially with that single credit case that Wee Ee Cheong mentioned, and NPL ratio improved to 1.5%. NPA coverage remained stable at 33%. Credit costs also improved by 5 basis points to 17 basis points this quarter, mainly from lower specific provision. In anticipation of the heightened taxation risk, we are maintaining similar levels of general allowance this quarter. We expect credit costs for 2022, this year, to close at around 20 basis points. The group total allowances were at SGD 4.9 billion for the quarter, of which SGD 3.2 billion was in general allowances.
NPA coverage at 98% or 207% after taking collateral into account. Performing loans coverage at 0.9%, I think both remain adequate. We are confident that our general allowances will be sufficient to cushion the anticipated credit losses should it happen from the portfolio. Loans growth momentum sustained well, increasing 1% quarter on quarter and 6% for the year. I think there was some impact on exchange rate. If I take a constant exchange rate, year on year, growth would have been 7%. More important is our ASEAN region would have grown 7% year on year, okay, at constant rate. With rising interest costs in the wholesale market, we maintain our focus on customer deposits as a major source of stable funding.
Customer deposits grew steadily at 5% quarter-on-quarter and 6% year-on-year, with fixed deposits being the largest contributor. I think most of you will ask me that question, but with the rise in interest rate, we do notice customer switching, okay. From their current account into FDs. However, we do have net positive fund flows as customers reacted favorably to our FD campaign, okay. In fact, 20% of the FDs opened were new-to-bank customers. In addition, we still get a positive carry. I think as you know, we are competing with the government, right. The Singapore T-bills are already closing this quarter. But we still can get short-term yield paper at above 4%. So we are not having a negative carry.
Our liquidity and funding positions strengthened this quarter with LCR at 142% and NSFR at 114%. Despite seeing some volatility in our OCI reserves, our capital position remained resilient with CET1 at 12.8% post the interim dividend payment. I think it's good to note that the mark-to-market losses in the OCI reserves, these are mainly due to our holdings of our statutory reserve, and there is no real credit risk. These losses will be reversed when the holdings mature. With that, I conclude my presentation, and I pass it back to Wendy. Thanks.
Thank you, Mr. Lee. We will now move on to the Q&A. Do identify yourself before asking the question. We will start the session with those in the room with us. Please raise your hand if you would like to ask a question. First question, please. Mira, would you like to start? Yeah.
Perfect. Okay. Wait. Can we just ask about the NPL recovery? It was that one c ustomer from North Asia.
We specifically mentioned about one real estate company. We are confident because, as it turned out, and then after heavy negotiation. It's a very well-secured property with a very low LTV. I think we're able to, and i t's very good location. We are able to write back. Because of that, I think the whole NPL situation is improved.
In terms of the overall outlook for credit costs and the stresses in the portfolio, are you seeing any? Because interest rates have risen very sharply and also have you repriced most of your portfolio to that?
I think over 70% of our loans are floating, right? As interest rate were to go up, I think we will get some floating effect, right? You should not just look at because of the high interest rate that will equate to h igher NPL, because there are equally important factor to consider. In fact, it's even more important is the growth of the economy, t he employment situation, t hat is also equally important, o kay?
Today you look at Singapore, you look at employment is very, very tight, o kay? The growth is opening up. All this factor, you have to look at it holistically, right? Interest rate is only one factor. If it's just gradually increased and with people continue to employ, I don't see any major issue. If there are some, I will urge my customer to talk to us. We will know how to restructure, how to m ake sure that the situation will be further improved.
Yeah. Thanks for the presentation and congratulations on your results. I think you mentioned earlier that you don't foresee a recession in the region. Could you elaborate on, you know, like, what are some of the opportunities that UOB hopes to tap in ASEAN? How much do you think the bank could benefit from, you know, like the reorientation of supply chains towards our region?
We have invested heavily the past 5-10 years, right? In my speech, we focus on connectivity. I think that is the area that we will benefit the whole ASEAN. You, if you look at the whole ASEAN with the exception of Cambodia and Laos, that we are not present, the rest of the countries we are there, o kay? We should be able to seize the opportunity. That is one thing as far as the physical branches is concerned. We also invest in our technology, our cash management system. That is equally important.
We are focusing on trade, on sector that I think it will benefit the region as well as us. We are seizing that opportunity. If you look at the whole ASEAN, generally, they're fairly strong, right? You will see the continuously shifting of supply chain, you know, activities in this part of the world. For Singapore, you know, there is a fair bit of inflow.
You can see from our funds, right? Partly due to some political risks elsewhere. We also get the benefit. I think overall, I would say if U.S. interest rate continue to rise, U.S. may potentially face a recession. Our part of the world, I think it could potentially be just a slowdown, but I don't see any major, you know, hiccup in our economy.
Gura, yep.
The CET1 of 12.8%, does it include the Citi acquisition? Because you've brought on already Malaysia and
No, no.
Thailand. No.
I think Malaysia, Thailand is scheduled to come on next week, 1st November. You will see that impact more in the next quarter. Like I said, we are confident that we'll be able to maintain it above 12.5%. L ike we have guided the market. We need 2023 to make that portfolio work. By 2024 we'll get the full benefit, coming on stream.
Has there been any change in your wholesale funding costs because of the lower CET1? Or has that remained stable? Because the ratings, I mean, so?
I think the market, we just did some roadshows and all. The market is still fairly confident of our credit quality. Some of the lower CET1 doesn't reflect the weakness. Part of it is the mark-to-market losses and all that will recover. More important is the underlying momentum, right? We are now earning, I mean, if you are that investor, you just have to make sure that your interest is being paid. You look at performance itself, I think there is no issue getting that. We are still highly sought-after credit when we did that, so. In general, it's not because of UOB. Market funding cost has gone up, okay? Even for wholesale funding. Somebody asked us why did we go and do FDs at 3%.
Because if I'd gone to the wholesale market, okay, even some of our customers now they're demanding 3.5%-4%. So I think that is what we are looking at. We always urge people to think that should they stabilize. I don't think we'll go back to the 2019 low interest rate environment. We're probably going to go back all the way to 2008, where interest rate was at that level, and we have to start understanding to operate.
I think some of our customers are getting the message. That's why you look at them hedging a lot of their, a lot of their positions. Previously, they always think that we want to make money out of them. Now they've realized that they want their risk to be hedged. I think that's where we are. Wholesale funding costs in general has gone up, not because of our credit.
The 12.8%. The decline to 12.8% was because of the securities portfolio, which has hit or they've hit the European and the U.S. banks, but our banks as well.
Correct. Because I mean, commercial banks have a natural holding for liquid assets, right? I need to do that. When you look at the rise in short-term and long-term rates, definitely we have some impact. But over the next two, three years, we'll get it back because it's irreversible.
Let me also further add, these are all government securities, o kay, there is no credit cost there. Yeah.
Any other questions from the floor? Maybe I can open it up to our online media friends. We have one question from Bloomberg, Chanya.
Hi, Mr. Lee and Mr. Wee. Congrats on the big beat. I have a question on the 2023 outlook. Are you seeing a peak in net interest margins this year, or when is it going to be from your expectations? Earnings outlook for 2023, are we going to see more good news from UOB next year? Thank you.
Maybe you try and take the margin, you take the outlook. I mean, we expect. If you look at where U.S. is, okay, I think there'll be a big one coming next week, okay? The market already factoring a 75 basis points increase. Probably the market view is that from where we are today, there will be at least 100 basis points- 150 basis points over a period. Our in-house view is that probably, that will come through in the first or later second quarter, before rates peak.
We'll see some momentum upside of margins from now to the first half flowing through, before it peak. After that, the correction, should it happen, we don't think, like I said, I'll go back to 2019. If you look at where the market is looking at the terminal rates for the U.S. 10-year, if you factor that at 2.5%-3%, I think maintaining our margins above 2%, we are comfortable, r ight.
Now, with the margin, if assuming the margin continue to further improve to over 2%, if our part of the world, I think if it's stable or even further slow down, we are still generally, to answer your question, for next year, we are still quite positive. I believe the credit cost should remain around 25 basis points. Factor all this in, I reasonably optimistic given the challenges that we are facing today.
I see. Thank you. Just to be clear, you are for next year, Mr. Wee, is expecting 20 basis points-25 basis points for credit cost.
Yes.
Mr. Wai, Lee Wai Fai say that, for net interest margin, above 2.5% next year you would be comfortable, and you think that the Fed interest rate increase will come through, flow through UOB, and other banks by the first half of the year. Is that correct?
Yeah, that's correct. Just to elaborate, Mr. Wee says that 20 basis points-25 basis points doesn't mean that our portfolio is weaker, okay? Although we are close at 20. Remember, we have Citi coming in. Citi is an unsecured portfolio. The natural portfolio will add around 5 basis points to our credit cost. But from a NII standpoint, they're accretive. They will probably add 10 basis points to my margins. On the net basis, they are positive. That doesn't indicate a weakness in the portfolio. It just basically shows that we are factoring the Citi portfolio coming in. P&L, they are positive.
I'd rather surprise you on the upside. Yeah.
Thank you.
For our media friends online, if you have a question, do raise your hand. As of now, I don't see any questions online. To the ladies here, any questions?
In one of the appendices, there is the Greater China exposure. Because you said these are all the top just state-owned enterprises and banks, et cetera. Are there any property exposures here? Because you had some previously, is that?
Okay. If you really look at that for yourself, on the right-hand side, we said that we have SGD 3 billion loans to Chinese developers.
Oh, oh, I see.
Okay? I think the worry is that M ainland China itself, because of some of the concerns with the development. Some of the clampdowns that they have, some of the over-leveraging, there was a big concern on the Mainland China property. We have SGD 3 billion in there. We have actually seen that itself. We are actually pretty comfortable.
In the first place, they are, number one, completed property. Okay? I don't have construction in progress, which is one of the main worries of the market. That the developers don't have enough funding to complete the project. Number two, like I said, we have actually looked at that and the cash flows and the ratings of this, they are highly profitable.
That is the portfolio that we keep very close watch on. The rest of our Greater China property, if you look at one at the bottom itself. Sorry, not China, o f Mainland China non-bank exposure of the SGD 12.2 billion that we see in there. This, I think, a lot of these are what you call network customers.
Oh, the Singapore customers.
Singapore customers going in. We do have a small U.S. customer where they fund data center in there.
Oh. Oh, I see.
I think in some Hong Kong itself. Those itself we are comfortable. We are keeping an eye on that SGD 3 billion. That's why we, w e expose it separately for you all to take note of.
Okay.
Seems like we have a very good set of results.
Okay, o kay. I see one question from ST Online.
Sorry.
Thank you.
Thanks for the presentation just now. I just want to clarify something because I saw that loan in the Q3 versus Q2, right? Loan related fees moderated from last quarter's high, but in the 9 months, loan related fees were at a record high of SGD 565 million. I'm a bit confused about that. Also another thing is CASA to total deposits dropped. Yeah, just now, Mr. Lee was mentioning that it's because of the flight to safety fixed deposits. The question is then, are you guys looking to raise deposit rates?
Okay. Basically the first question really was because we had very high first and second quarter. If you remember our strategy, we were anticipating some slowdown, but we didn't expect this. We ramp up our loans growth, a lot of it in the first quarter. If you look at the history and in the second and third quarter, we are already starting to moderate. A lot of these fees are relating to this cross-border activities when you do the loans. A lot of it was also from the property funds portfolio. Since then, I think the people are really re-looking at it because of the macro outlook. With the slowing loans growth, we expect loans related corporate side to moderate a bit.
That's why you see a lower third quarter, and we think that we are likely going to at least stay around that level, since we are moderating loans growth. Your second question was on CASA ratio itself. Yes, a lot of people ask us, now you are below 50%, which seems to be the end of the world, for a lot. I remind people that if I go back in times in 2008, our CASA ratio was probably 32%. Okay. Since then there are two things that happened. Number one is we have built up our CASA capability. The important part to note is that in a high interest rate environment, retail CASA becomes more important than wholesale CASA, o kay?
Wholesale itself, I think with all the cash management activities that we are coming in, we think that we hold it. We think that we can sustain it slightly above 50% and not going back to the 30% that we did. The second part of your question was that it's true. During this quarter, we actually lost SGD 9 billion in CASA and we added SGD 16 billion in FD. We added. Total loans, we grew 5%, but the mix actually changed. That trend probably will continue, but the speed of that change, we think that, will slow down because the rate of change of interest rate won't be as steep as what we saw, because it was a very sharp rise. Within the 3 months, we have interest rate going up more than 1%.
Many of us were surprised by the market, I think we still remember, right, in Singapore, this milestone in Singapore, crossing the 2% FD was a big deal. Because you were below 1% and now within less than a quarter, we are 3% now. Do we see it going to 4%? I don't know, but hopefully not. Although I think we expect the government treasuries that were closing today to be around, I don't know, maybe 3.6%-3.8%.
I think this is quite natural. This is a market momentum, right? Interest rate going up, inflation is going up. I mean, it's very logical for people to switch, right? We anticipated all this now, right? Also you look at most of our assets is also floating, right? It doesn't matter. Okay.
I think like what E-Chang said, the way that we pace our FDs was that during this period of uncertainty where we expect wealth fees to come down, but these people are not putting the money because hopefully at least if they put money with us, okay, on maturity and we are playing that 10 months, 12 months bucket, when they mature, we have the opportunity then to cross-sell into that. Okay. I think that's the strategy that we have. More important, like I elaborated, we are still positive.
Okay. It's not a negative, okay. I think previously when I do FD at 1%, wholesale tell me they can fund at 80 basis points. Okay. Today, I do at 3%, wholesale tell me they can only fund at 3.5%-4%. That's the shift of the market dynamics on the rising interest rate environment.
Have you seen any losses?
Everyone's been buying those treasury bills, the government 6-month treasury bills.
Okay. Number one is they are limited, okay? Because they come in tranches. Today there are two, right? I think most of you, the 6 months is in the market. Number one, it's limited. Number two is, for the better sophisticated investors like you all here, probably you won't put the FD, so you go online. For the majority, I think we have to make sure that we put in a rate that they will stay, like Ee Cheong said. I think if you look at the MAS core, inflation is going to stay higher.
That's something that we are locking in our funds for. I think the rate of change hopefully will not be as steep as what we saw in the last quarter.
Thank you, Hayat, for your questions earlier. Okay, last call for any questions. Okay. If not, then thank you, everybody, for joining us this morning.
Thank you.
We wish you a good day ahead. Thank you.
Thank you.