Good morning, everyone, and welcome to UOB's first quarter 2022 results briefing. This morning, we have our CFO, Mr. Lee Wai Fai, presenting the results. Our CEO, Mr. Wee Ee Cheong, is recovering from COVID-19 and apologizes for his absence today. A few house rules before we start. Please keep all your questions till after the presentations are done. During the Q&A session, 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 also turn on your camera before asking your question. We encourage you to use your headphones or earphones so that we can hear you better. Finally, before we start, please put yourself on mute for now. Without further ado, I will now pass the time to our CFO. Mr. Lee, please.
Thanks, Celine. Good morning. Firstly, our CEO, Mr. Wee Ee Cheong, sends his apologies for not being able to join us today. He was looking forward to meeting all of you but is recovering from COVID-19. Hence, he asked me to deliver his opening remarks on his behalf. Okay. Since we spoke the last time, inflation, rising interest rates, supply chain disruptions, and geopolitical tensions have all taken center stage. These events led to higher market volatility as concern rises over global growth outlook. Across most of our key markets in Southeast Asia, we see green shoots of recovery as borders reopen, including in Singapore. However, in North Asia, the situation remains challenging. The unpredictable COVID-19 situation has triggered lockdowns and disrupted economic activities.
We posted a lower net profit of SGD 906 million, mainly due to the impact of some structural hedges in our trading and investment line, of which we expect to offset with higher net interest income as rates increases. More important to note, our core business drivers remain strong. On a quarter-on-quarter basis, net interest income was higher, led by margin improvement and healthy loans growth, especially in the trade and term corporate loan side. Loan fees hit a new high, supported by strong demand in our lending and advisor business. Credit card fees were seasonally lower, while wealth and fund management fees were impacted by weak market sentiments. Asset quality remains resilient with NPL ratio stable at 1.6% and specific allowances on loans improving 3 basis points to 19 basis points.
Total credit costs, however, rose to 19%, mainly because of the lower general allowances due to write-backs last quarter. Our balance sheet remains strong with healthy levels of capital and funding. As a Southeast Asia bank focusing on intra-regional flows, we are less directly impacted by the Russia-Ukraine conflict. Economies in our part of the world are recovering, consumption is picking up, and business activities resuming. We remain focused on supporting businesses to help them seize opportunities as borders reopen. The trade and investment corridor between ASEAN and China place us in a unique position to serve customers' need. The current disruptions to global supply chain will show up the importance of the role of our region. Our extensive regional network, deep local knowledge, and sector -specific expertise will serve our customers well. Our cross-border revenue grew 11% year-on-year.
We have successfully rolled out our digital cash management system for corporate clients in the region across five markets. We have seen good traction. Adoption has been strong in these markets. User numbers grew 6% year-on-year, and a 19% growth in corporate customers' CASA balances. Looking ahead, we see strong demand for loans with a robust pipeline, especially for working capital. On the retail front, we are on track with our Citigroup integration and digital initiative. In Malaysia and Thailand, we have appointed senior management teams pending regulatory approvals. Working on integration is progressing steadily. Digital is at the core of our growth strategy, and we are gaining traction. For UOB TMRW, we expect to digitally acquire 500,000 customers this year compared to only 300,000 last year. Our omnichannel approach enable us to cross-sell to customers as their needs grow.
On a whole, our digitally engaged customers contribute 66% to our retail revenue, up from 52% in 2019. Our mortgage pipeline remains strong with increasing loans drawdown as more projects get completed. More people are also actively refinancing. Travel-related credit card spending has picked up, and we expect the momentum to accelerate in the coming months ahead. Our own great efforts and support for our customers to make positive impact are progressing well. Earlier this month, we issued our first externally assured sustainability report. Our sustainability financing portfolio reached SGD 18 billion to date, and total AUM in the ESG focus investments grew to SGD 13 billion. We are building decarbonization sector pathways to support our clients' transition to a low -carbon economy, and we aim to announce our net zero plans by the end of this year. Looking ahead, our full -year guidance is as follows.
Mid- to high-single-digit loans growth, focusing on quality amid the uncertain market conditions. We expect higher margins from rising interest rate. We expect high single-digit fee growth. Costs will remain stable with stable cost-to-income ratio at around 45%. Asset quality to stay resilient. NPL ratio may inch up as the various relief programs taper, but remaining below 2%. Credit costs to be manageable at around 20-25 basis points. We expect ROE to be back above 10% on interest rate increases and stronger earnings power. CET1 will be in the healthy range of 12.5%-13.5%. In summary, we remain optimistic of the recovery of our region and the longer -term potential of Southeast Asia.
With our strong balance sheet backed by healthy capital and liquidity positions, we are well-positioned to navigate these uncertain times together with our customers and the community. We'll continue to invest for the future to support trade and investments across borders, to help our customers transact and bank digitally, and reduce carbon footprint for ourselves and our customers. I thank my colleagues for their teamwork and dedication, and thank you all too for your support. Okay, now I will move on to the financials, where I'll give you a bit more details. Okay. What a quarter. I think at the start of 2022, we were fairly optimistic towards the road to recovery as the world learns to cope with the pandemic. Soon after, emerging geopolitical tensions introduced new uncertainties to the market.
Our net profit for the quarter was at SGD 906 million, 11% lower than the previous quarter. The softer quarter-on-quarter performance was mainly due to lower trading and investment income, mainly from hedging-related impact and lower write-backs in general allowances. Excluding the market impact, our customer franchise showed steady growth. Net interest income rose as NIM was 2 basis points higher at 1.58% and steady loans growth of 3%. Fees were largely flat quarter-on-quarter as record loan-related fees was offset by lower wealth and fund management fees, with customer being more cautious and the seasonally lower credit card spends. Customer-related treasury income showed strong growth amid market volatility. However, this was more than offset by impact of accounting asymmetry of hedging activities with unrealized mark-to-market losses showing up on our investment line.
Customer loans growth grew steadily by 3% quarter-on-quarter and 9% year-on-year as we continue to support trade flows and find pockets of opportunities for strong credit term lending. Asset quality remain resilient with NPL ratios at 1.6%. Total credit cost on loans normalized to 19 basis points, as the previous quarter had higher general allowances write back. Our capital and liquidity position remain healthy, with CET1 at 13.1% and NSFR at 113%, respectively. Retail operating profit was lower year-on-year as wealth activities slowed down on the back of dampened market sentiment. This was partly cushioned by sustained CASA growth. I think just to recap, we actually had record fees in the first quarter last year as customers were a lot more bullish coming out of COVID.
We are confident that with a more positive outlook, together with the Citi consumer portfolio fortifying our regional franchise, there will be opportunities ahead across products and market for growth in the retail space. Wholesale saw double-digit growth led by strong demand for lending and advisory businesses, from trade flows financing to term funding opportunities with good credit customers. Global Markets, on the other hand, benefited from market volatility and achieved better trading and liquidity management results. Our wholesale banking business continued to deliver robust performance on the back of diverse growth engines. Cross-border income rose 11% and now accounts for 31% of our wholesale banking income. Loan-related fees grew 7% year on year to a record high this quarter. Our global financial institution group registered 25% income growth in banking global funds and financial sponsors.
Across the region, we have witnessed rapid growth in transaction volume and cashless payment following the acceleration of digital adoption by our corporate customers. Across the region, we have digitally acquired 140,000 customers in the first quarter, and we are well on track to acquire more than the 500,000 customers this year. Of these 140,000 acquired so far, more than 80% were new to UOB. Our investment into building strong ecosystem partners started to bear fruit, with 30% of our digitally acquired customers in Thailand and Indonesia being referred to by our partners. Such partnerships are instrumental to our retail franchise growth. For example, in Indonesia, we have secured five extensive strategic partnerships that we can leverage on to promote the use of our TMRW Pay.
We managed to grow assets under management by 3% year-on-year to a new high of SGD 140 billion. Our customers really appreciated our omni-channel services. I think in the 2021 franchise finance sector ranking of customer satisfaction index in Singapore, we actually came up top. Operating profit in Singapore and North Asia decreased due to lower trading and investment income amid market volatility. For the other Asian countries, operating profit improved as we have been more disciplined with spending while monitoring for new opportunities when economic recovery can be more sustained. Our regional franchise continued to be a key platform for customers to gain market access as they fund cross-border capital and trade flows. As a result, our overseas contributions stayed strong at 49%.
Just to recap some of the key highlights for the quarter, our customer franchise remains strong with net interest income, stable fees, and expense well managed. Operating profit was lower, mainly due to the accounting asymmetry impact of our hedges and market-driven volatilities impacting our trading and investment income line. As my CEO earlier articulated from his speech, the impact on hedges will be more than offset by increasing net interest income in the coming months. Excluding this impact, total income actually grew 1% quarter-on-quarter and 4% year-on-year. I will go through some of the key drivers in my next few slides. As you heard, net interest income increased 1%, led by healthy loans growth and a 2 basis point improvement in margin to 1.8% on the back of rising interest rate.
We expect this to continue to increase because most of our books are actually floating rate. We will be beneficial to us when the short end start going up and we can reprice our assets more aggressively next few quarters. Total fees was largely flat at SGD 502 million. Loans-related fees hit a new high, recording 14% growth quarter-on-quarter as we see trade flows returning and structuring opportunities to support strong customer demands. On the other hand, wealth and fund management fees dipped as market sentiment was dampened alongside geopolitical tensions. Credit card fees were seasonally lower compared to last quarter but above the same level, same quarter last year. I think this sort of indicates the increasing customer confidence and will expect increasing customer spends as border reopens.
I want to spend a little more time to explain the reason for the lower trading and investment income for the quarter. Our trading and investment income can be broadly classified into customer-related activities, such as helping customers to hedge their business risk, and our own activities, such as hedging, trading, and excess funds deployment of our banking book. On the customer-related front, we are at record high, growing 18% quarter-on-quarter as demand for hedging activities rose when more customers want to hedge their own business risk in this volatile market. Other investment income showed a sharp drop, mainly from the accounting asymmetry on hedges for our perpetual capital securities. These hedges, I think we did this earlier when rates were lower and when the outlook was more uncertain, was meant to match our funding profile to the asset book repricing.
However, from the accounting perspective, there is a mismatch between the mark-to-market line on the hedges, which is showing up in this T&I line, and the accrual of the income showing up in the NII line in the assets. You think about it, if we expect short-term interest rate to rise faster than the longer-term rate in the coming quarters, then our reprice assets will generate significantly higher net interest income than the mark-to-market losses, which is one time that occurred this quarter. We have already guided that we have estimated that for every 25 basis points rate increase, our net interest income will improve by SGD 150 million on an annualized basis. For the quarter, like I said, the trading and liquidity management results from our global markets actually did reasonably well.
However, these were offset by some of these mark-to-market impacts from the hedges. Moving forward, as the market stabilizes over time, we expect some of these mark-to-market losses and accretions that happened in this quarter to reverse in the coming future. Okay. Expenses, I think, well managed. Decreased 3% Q-o-Q in tandem with the lower income. I think our CIR stays steady at 44.8%. Asset quality of our loans portfolio also remains resilient. NPL formation reduced this quarter, with NPL ratio stable at 1.6%. I think for the countries with extended relief program, we'll continue to monitor and assess the residual risk of this portfolio. We believe that the impact on credit costs of future NPAs will be manageable as the general allowances set aside remain adequate. Total credit costs at 19 basis points were in line with management expectation.
The increase in allowances this quarter was mainly due to a higher general allowances write-back last quarter. We expect credit costs for the year to stay within the 20-25 basis point guidance range. The total allowances for our book were at SGD 5 billion for this quarter, of which SGD 3.4 billion was for general allowances. I think NPA coverage at 94% or 216% after taking collateral into account and performing loans coverage at 0.9%. They all remain adequate. We are confident that our general allowances is sufficient to absorb anticipated credit loss from our portfolio. Loans growth momentum sustained well, increasing 3% both for the quarter and 9% year-on-year. I think this quarter-on-quarter growth was largely to fund trade flows as economic activities resume and pocket opportunities for strong institutional loans.
While market continues to be very competitive in the lending space, we are very encouraged by these results, as it shows that we are able to support our customer needs. Our liquidity position remains healthy with the quarter's LCR at 129% and NSFR at 113%, both well above regulatory requirement. Capital was deployed to mainly pursue loans growth opportunities. I think this led to the RWA growth of 3% for the quarter. We ended the quarter with CET1 at 13.1%. With a solid balance sheet and adequate general allowances, we are comfortable with our current CET1 position. I think with that, I conclude my presentation, and I'll pass it back to Celine.
Thank you, Mr. Lee. We will now move on to the Q&A. Please use the Raise Hand function if you wish to ask a question. Do turn on your camera before asking your question. Can we have the first question, please? Can we have Goola from The Edge? Hi, Goola. Can you turn on your camera?
Hi. Yes. Hello, Wai Fai. Yeah.
Hello Wai Fai. Thanks for the presentation. I'm sorry; I have to say that I'm confused by the hedging impact, so would you be able to explain that again?
Okay. I know I have to go into a bit technical, so bear with me for the rest.
Okay.
Normally, when we do hedging, I convert fixed to variable. Okay? On the normal cases, there will be some natural hedges because we can actually recognize both leg of the revaluation. For the specific case of perpetuals, which we call Tier 1, Additional Tier 1.
Yeah.
The leg that is actually
Oh, right. AT1. Okay. Additional Tier 1.
Yeah. The leg that we actually pay interest is actually recognized as dividend. It goes into retained earnings rather than a P&L impact. Whereas the hedge that we take now is straight away mark-to-market, okay? What we did was we actually hedge it to match the variable part. That means I'm converting fixed to variable so that the interest expense will actually coincide with the interest income as the repricing works. From an economic standpoint, it makes sense. Because of this accounting side , they only recognize half of it. Okay, I have part of it going to my retained earnings as dividend payment. The second impact is that all these marks that we have, okay, is actually, because they are treasury instruments, are actually mark-to-market. Two impact that you think about.
A lot of these mark-to-markets are a longer-term present value hit, so as the rising interest rate goes up, for example. For example, if I have a SGD 1 billion coverage, the SGD 1 billion will hit me straight away because the mark-to-market is on the whole balance sheet. Whereas if I put it to earnings, okay, if I have 1% increase in earnings because interest rate goes up, it will be spread out over the year, which means that, you know, it won't happen all in one quarter. We will see over the forthcoming quarters. That's why we argue that, yes, we are hit by this, but going forward, my earnings will more than offset this. Just to give some color, because this was asked, during the quarter was very exceptional.
The short-term rates, okay, if you look at the 3 months, probably went up by maybe 40 basis points, okay? From a very low, a bit higher to the last quarter. The long -end rate when we started the quarter, okay, was way below 1. It closed at close to 3. The long -end rate moved by more than 200 basis points. Okay, so you think about it if you go forward, okay? Most people think that the long -end rate, yes, there'll be some increase, but it won't be as significant because you've already reached the upper limit. Whereas the short -end rate has a lot more potential because if you think about the 6 or 7 rate hikes that's coming up, then we will have very little impact on this mark but very high accrual coming out from the interest income.
Bear with us on this accounting asymmetry in that sense. If you ignore this and you look at going forward next three quarters, we won't see this impact, and I will expect T&I to be coming back by at least SGD 150 million-SGD 200 million, because some of this will not recur.
Okay. Bye.
Sorry, I had to be a bit technical, Goola. I hope the rest bear with me.
Oh, thanks. Okay. I think that clears it up a little.
Yeah.
This is a one-time impact.
Yes. Yes.
Okay.
Because of the movements between the two rates, which was really exceptional for the quarter.
Secondly, in terms of your credit cost, you know, has the macro environment changed because of the MEV, you know, with your MEV model, because of all these headwinds that we're seeing now? Is your forecast of 20-25 basis points sufficient? Is the buffer from your management overlay also sufficient to tide you over if, you know, if things become very challenging?
Yeah. Like, I started this to say what a quarter, right?
Mm-hmm.
Beginning last year, you're asking me whether I will write back because the MEV will improve. This quarter, people are asking us, you know, "Will it become worse?" I think we are reviewing that, to be fair. I think we have sufficient in my management overlay to cushion that should that happen. I have especially a lot of excess in the region. Our concerns are more in the region. I think Singapore, we are well managed. We do have enough should that scenario happen.
Okay. Thanks. Thanks. Yeah, there's a question on funding costs. I just wondered because your CASA, you say, proportion has risen, but have funding costs risen? Or will there be an impact from that? Or is that a lag?
No, funding costs will definitely go up. Okay, you already see reports about people competing for FDs and all. In, it's in the industry. I think FDs now will grow a little bit more than CASA. The good news is that we are holding on to the CASA and hopefully the wholesale part itself; we are trying to hold on because of all the systems that we have, and they are making us as the primary account holders. We are building up in the retail space. That's more important. Yes, it might be a bit more costlier, but I think when you match it to the expected rate hikes that we are expecting from loans, it will be positive for us.
Yes, there will be some impact, but we think that we just manage, and it's within the scenarios that we actually plan for ALCO.
Okay. The next question comes from Dylan, from Nikkei.
Hi, Wai Fai.
Hey. Hi.
Thanks for the briefing. Just wanna get more color on the quarters ahead. You mentioned that your Southeast Asia franchise, I think, will be a strength for you in the coming months. That said, the macro environment may be deteriorating as a result of the Ukraine war, other factors. Do you have any visibility on how that might impact your earnings going forward? Perhaps whether in your wealth management or other units, which might see some impact. Thank you.
Actually, if you look at the region itself, they are actually even more less impacted by the Russia-Ukraine war because a lot of they are domestic. Like Malaysia and Indonesia, they have a lot of oil reserves. Technically, as a country, they might be stronger. Of course, the second -order impact will affect everybody. That's why the question by Goola itself, whether I have enough GP to cover that should that scenario occurs, and we're actually confident. There might be some upticks in credit weakness when it actually happens. Like I say, we are quite comfortable in the region itself.
In the longer term, whether wealth will be affected itself, I think depending on how long this will carry on and the outlook that the world has on whether the geopolitical situation is there a solution coming out of it, okay? I think if it's none, then just being very frank, market sentiments will be affected, okay? We are hopeful, and as you look at the recent things, like if the war is still happening but people seems to be taking it in their stride, and hopefully life will come back to normal, we don't think that will be a serious happening this year. Some of you asked whether a stagflation will happen, which is the short term will go higher than the long term.
It might be a scenario, but I think for the time being, we are still looking at continued economic growth as the economy opens up, right? Because that was one of the major factors that was holding back economic growth. With the thing coming through, we're actually more confident that there's growth. Maybe growth will be slower, but there's still growth in the region.
Okay. Thank you, Dylan. The next question comes from Faris, from Bloomberg.
Hi, Wai Fai. Just one quick question. Operating profit for Greater China, you know, fell. I'm just wondering, you know, whether going ahead in the subsequent quarters, as you know, China is still maintaining a COVID zero policy and you have lockdowns happening there, you know, how much of a concern it is for the bank going forward.
I think our portfolio in China itself is still pretty healthy at this point. The operating profit is mainly because of some mark-to-market gains in our portfolio last quarter. I think if there are weakness coming out from what you are seeing on our portfolio, it will appear in the provisioning line, in the credit SP line. Our China portfolio onshore is not big. Okay? You look at our disclosure; it's not big. Yes, we are concerned. We are monitoring that. We are also worried about the second-order impact because we are actually not in retail in a big way in mainland China. We are watching that, but we think that the impact at this point is manageable.
Our book in China itself, we have actually slowed down while waiting for better, clearer direction of both how the COVID situation will affect the bigger economy. Yes, there'll be some impact. We might see some credit coming up, but our positions are not big in China, so we do have enough to be able to offset that in my management overlay.
Sure.
Teng from Straits Times. Teng, please turn on your camera so we can see you. Yeah, thanks.
Hi, Wai Fai. Just one question. Does UOB plan to raise savings rates?
I think there are two ways in the retail side, right? One is whether we raise savings rate. I thought it was more whether we raise FD rates. I think that's what you are actually seeing in the market. We need to increase in response to the market, okay. For savings and CASA, like I said, we do have that benefit that I don't have to time it as aggressively as my loan rate hike, and that's how banks make money, yeah, from that. I mean, it's only logical to expect funding costs to go up. I think that's only logical, especially with the inflation. I think we are actually looking to make sure that our rates are competitive, and we are also watching whether the movements of our customers' behavior, okay?
That's why I was saying that the good news that in my retail side, the CASA is still growing, okay? That was the important part that we have. Basically because of the products that we're actually introducing, we do have a lot new to bank customers. That's probably where the focus is. I mean, it's only logical to expect some increases in CASA rates.
Okay, thank you, Teng. Do you have any follow-up questions from you?
What about? Are loan rates going to go up as well?
Loan rate, definitely . Yes. Like I said, we are more sensitive to loan spread pricing because most of my books are shor-end. . Okay? Within 2-3 months, probably 70%-80% of my books will be repriced. If there is another rate hike, we will be more positive about it. We already see that happening. We are already anticipating that. Definitely loans, because of the direct formula, because many of our loans are tied to the benchmark rate. You see that direct correlation more coming out with loans.
Okay. Thank you, King. Goola has a follow-up question. Can we invite Goola next?
Hi, Lee Wai Fai. I'm just wondering, what's your management overlay? Is there any difference from the last quarter?
We have utilized some. We are still very strong, way above SGD 1 billion. We still have very strong in there. We are keeping most of it, although we are not adding onto it. We are keeping most of it because of the uncertainty in the region. There is some movements that utilize a bit, but we have not reversed it aggressively, no. We prefer to keep that overlay to buffer the economic shocks should they happen.
We can ask also about the UOB. Any further update plans for Citi, the Citi acquisitions?
Yeah. Okay, thanks. In Ee Cheong's speech, I think he did give some updates. Today we are working well, okay, together. Remember that there are a few things that we need to do. One is to get the people over. That's the most important thing. I think we have got the leadership in the two big markets of Thailand and Malaysia; okay, confirmed. We are actually now working on the other two markets. That's probably the good news. The systems integration is doing well. We are actually looking at talking to Citi to make sure that the transitional period, okay, between legal day one to when our systems are ready, their systems are able to support us. That's also doing well. I think so far it's good.
Now there is a lot of people engagement that's happening, and so far I think the vibe has been very positive. Okay. The two teams now are coming together regularly, and that's important for us because we bought it for the people as well as the portfolio. The second thing is, the good news is that the portfolio is not weakening, okay, during this period. Okay. We have, actually, in fact, until this slight slowdown; they are showing the same thing that we have. Okay. So I think it's doing well. Now we are working with regulators. More important is when they will approve. We don't see a big problem. Regulators are asking for documentation that we will provide.
We think that it will be on schedule, and we're quite happy with the progress, especially on the people's front that we have managed to anchor, because that's the most worrying because you don't want to buy a portfolio without people. Okay. That we are very, very happy with.
Okay. Thank you, King. Okay, I think that's all the time we have today. Thank you , everyone, for joining us this morning, and we wish you a good day ahead. Stay safe, stay healthy.
Thank you.