UOB posts sparkling Q2 earnings, but CEO expects home loans and home prices to slide

Sat, Aug 04, 2018

GOOD news was announced at UOB's Q2 earnings briefing on Friday, despite its chief executive Wee Ee Cheong projecting a drop in home loans and the prospect of housing prices falling over time as last month's property measures hit home.

The bank posted record Q2 earnings. Net profit jumped to S$1.08 billion, 28 per cent higher than a year ago and 10 per cent up from the previous quarter, due to overall strong operating income. This beat estimates provided by S&P Global Market Intelligence of S$967 million.

The net profit translated to annualised earnings per share of S$2.51, up from S$2 a year ago.

Mr Wee said: "Our second quarter profit reached a new high, exceeding S$1 billion. This brings our first half profit to S$2.05 billion, up 24 per cent year-on-year. This was driven by healthy contributions from our core businesses."

UOB enjoyed loan growth of 10 per cent; Mr Wee said the bank "continues to target high single-digit loan growth for the full year". (The bank's biggest rival, DBS, announced that it was revising its full-year loan growth down from eight per cent to between six and seven per cent at its Q2 briefing on Thursday.)

UOB posted an interim dividend of 50 cents, up from 35 cents. Mr Wee said the higher dividend shows UOB's commitment to a dividend payout ratio of 50 per cent, subject to a minimum common equity Tier 1 capital adequacy ratio of 13.5 per cent and sustainable financial performance.

UOB has suspended the scrip dividend scheme. Chief financial officer Lee Wai Fai said that for the final dividend, the bank is "comfortable with at least 50 cents".

On the recent measures to cool the property market, Mr Wee said his "gut feel" is that housing loan activity will fall by 10 to 20 per cent, and that prices will wilt by 5 to 10 per cent over time.

"Singapore housing benefited from buoyant sentiment in the market earlier this year. We maintained our market share of new sales this year despite competition in the refinancing market," he said. UOB's market share of new sales is 34 per cent.

"But over the next few months, we can expect transaction volume to decline in response to the recent cooling measures. This will impact the future pipeline; our housing loan growth this year will not be affected due to progressive drawdown of loans booked previously."

UOB is maintaining its 6 to 7 per cent housing loans growth for 2018, he said. The bank does between S$3 billion and S$4 billion in new mortgage sales, including refinancing deals each quarter, he added.

DBS, the nation's biggest mortgage provider with a 31 per cent market share, said it is trimming its 2018 home loans growth to S$3.5 billion from S$4 billion. It had earlier projected S$12 billion of new home loan bookings for the year, and has already booked S$6 billion in the first half.

Mr Wee also said UOB's housing loan business in the region did well, up 11 per cent in the first half.

Net interest income in Q2 grew 14 per cent to S$1.54 billion, supported by loan growth of 10 per cent and an improvement in net interest margin (NIM) by eight basis points (bps) to 1.83 per cent. Mr Lee said he expects NIM to improve by one to two bps by year end, which will translate to higher yield and higher margin.

Non-interest income was up 6 per cent to S$800 million, as stronger fee income was slightly offset by a weaker gain from investment securities. Net fee and commission income rose 11 per cent to S$498 million, though other non-interest income fell by 3 per cent to S$302 million.

Total expenses for the quarter gained 10 per cent from a year ago to S$1.02 billion, primarily from staff expenses and planned IT-related investments. The cost-to-income ratio for the quarter stood at 43.6 per cent.

UOB said allowances halved to S$90 million in the second quarter from a year ago, with the year-ago quarter including higher allowances that were mainly driven by specific allowance set aside for non-performing loans (NPL) from the oil-and-gas and shipping sectors. The NPL ratio for the quarter stood at 1.7%, up from 1.5%.

Mr Wee flagged near-term uncertainties for the global economy and Singapore, but remains confident in Asia's long-term potential, underpinned by intra-regional investment flows and rising affluence.

"Looking ahead, there are uncertainties in the global economy, with a trade war that could escalate and signs of a slowing Chinese economy. Closer to home, the property market may see a slowdown from recent cooling measures. Our diversified footprint and customer franchise will mitigate the impact of some of these macro headwinds. We'll stay vigilant and believe our strong balance sheet can cushion the volatility."

UOB closed down 11 cents to S$26.59.