Based on the bank’s latest set of results released on Aug 7, Thum notes that the only positive was its non-interest income.
During the 1HFY2025, UOB saw broad-based growth across wealth management, loan-related services and credit card fees, which led to a 3% y-o-y increase in fee income. Notably, UOB’s assets under management (AUM) for the 2QFY2025, rose by 5% y-o-y to $191 billion with net new money of $3 billion for the quarter.
Fee income in the 2QFY2025 made up 18% of the bank’s total income, unchanged from last year.
Other non-interest income was up by 8% y-o-y supported by higher customer-related treasury income and improved trading and liquidity management performance. Overall, non-interest income rose by 5% y-o-y, writes Thum in his Aug 11 report.
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Meanwhile, negatives include the decline in NII from lower net interest margins (NIMs). NII was down by 3% y-o-y as NIM contracted to 1.91%, 14 basis points lower y-o-y. The lower NIM was due to asset yields declining faster than funding costs at 23 bps and 13 bps respectively. The bank’s exit NIM for the 2QFY2025 was around 1.84%, revealed CFO Leong Yung Chee at the results briefing.
That said, the bank expects NIM to recover “slightly” in the 2HFY2025 from a gradual recovery in the Singapore overnight rate average (Sora), which is expected to end the year around 1.7%. A reduction in funding costs as the rate cuts in the bank’s high-yield accounts are expected to flow through in the 3Q2025. Finally, the bank is also anticipating a recovery in the Hong Kong interbank offered rate (HIBOR), which is tipped to reach around 1.6% by end-2025. UOB is guiding for an FY2025 NIM of 1.85% to 1.95%.
During the 2QFY2025, UOB also posted higher total allowances, 20% higher y-o-y from higher specific provisions (SPs) of $273 million, up from $169 million in the 2QFY2024.
“New non-performing assets (NPAs) rose to $472 million (2QFY2024: $438 million), mainly from one US commercial real estate (CRE) account that was previously provided for and did not affect 2QFY2025’s credit cost,” Thum notes.
“Management mentioned that US real estate only accounts for 0.8% of total loans and are mainly to network customers in gateway cities. Resultantly, total credit costs were up 8 bps y-o-y to 32 bps,” he adds. “[UOB’s] non-performing loans (NPL) ratio inched up slightly to 1.6%, and asset quality remained resilient, with 2QFY2025 NPA coverage at 88% and unsecured NPA coverage at 209%.”
As a result of this, Thum has lowered his FY2025 earnings estimates by 4% to $5.83 billion as he expects to see lower NII and fee income for the year.
The analyst, who has also lowered his target price to $34.60 from $36.30 previously, assumes an FY2025 P/B of 1.23 times. His return on equity (ROE) estimate is also lowered to 12.3% from 12.8% in his Gordon growth model (GGM) valuation.
In his view, UOB’s fee income will be the most “significant driver” from the successful integration of its Citi portfolios, a move which will “accelerate UOB’s expansion into Asean.
The bank also reaffirmed its plan to return $3 billion of surplus capital over FY2025 to FY2027 including a 50-cent share payout in FY2025 and a $2 billion share buyback over three years. UOB has indicated that it will maintain its 50% dividend payout ratio guidance even if absolute dividend per share declines y-o-y.
As at 1.23pm, shares in UOB are trading 28 cents higher or 0.77% up at $36.47.
