• Maintain NEUTRAL and SGD32 TP, 0% upside. United Overseas Bank’s 2Q24 results are in line and, as such, its 2024 guidance is unchanged. Looking ahead, the roll-off in Citi integration costs in 2H24 is positive for earnings and, beyond that, efforts to build up the wholesale platform look to be bearing fruit. However, we think investors’ focus will be on dividend yields and DPS growth in a rates downcycle – and UOB’s preference for capital retention means yields and DPS growth are more muted.

• 2Q24 results in line. 2Q24 reported net profit of SGD1.4bn (-4% QoQ, +1% YoY) brought 1H24 PATMI to SGD2.9bn (flat YoY) - 50% and 49% of our and consensus FY24F PATMI. Annualised ROE was 12.4% (FY23: 12.5%) while CET-1 was down 40bps QoQ to 13.4% (higher RWA density on increase in special mention loans). An interim DPS of 88 SG cents (1H23: 85 SG cents) was declared, translating to a payout ratio of 51% (1H23: 49%).

• Results highlights. The QoQ decline in 2Q24 PATMI was mainly due to: i) lower non-II, specifically, other trading & investment (T&I) income, given 1Q24’s elevated level; and ii) a 43% QoQ rise in credit and other impairments due to increases in provisions for contingent facilities. Credit cost, however, was stable at 24bps. Otherwise, other line items were decent. NIM rose 3bps QoQ on higher lending margin (deposit repricing and mix), loan growth and liquidity management. The banking group’s loan base grew 2% QoQ (+3% YoY), led by Greater China and Rest of the World segments. These relate to trade (eg electronics sector) and loan demand in developed markets, where asset pricing is more attractive vs domestically. Meanwhile, although deposits were flat QoQ, CASA was up 2% QoQ (traction from both retail and wholesale) while fixed and other deposits were down 2% QoQ. As such, CASA ratio improved further to 51.5% vs 1Q24: 50.6% (2Q23: 47.6%).

• Briefing highlights. UOB experienced some Operating Day One friction relating to the Citi Thailand portfolio, which caused it to divert resources away from collection efforts. Consequently, there was some slippage in terms of loan staging requiring higher specific provisions (SP) in 2Q, but UOB thinks 70-80% of the SP can be recovered over the next two quarters. Going forward, the Citi integration cost is expected to ease to SGD30-40m/quarter for Citi Vietnam, and this should be done by 2Q25. During the quarter, a Hong Kong commercial real estate loan (c. SGD200m) was downgraded to NPL but UOB thinks this is an isolated case and is not systemic. Given the low LTV, no additional provision was required.

• Other highlights. The new Basel regulations kicks in in 3Q24, which UOB estimates would result in a 150bps short term uplift to CET-1 ratio under the transitional arrangement. Upon full adoption, the impact is expected to be slightly positive. Lastly, with the impending rate cut cycle, UOB continues to expect that improved loan volumes can help cushion the NIM pressure.

• Earnings and TP maintained. Our TP includes a 2% ESG premium.

Source: RHB Research - 2 Aug 2024