UOB 1Q 2024 results: Earnings beat estimates but pales in comparison to DBS

Broad Overview

With DBS’ stellar outperformance setting the stage for Singapore bank earnings last week, high hopes are in place for UOB and OCBC to deliver as well. For 1Q 2024, UOB’s total income was flat from a year ago at $3.5 billion, while net profit declined 2% year-on-year to $1.49 billion.

The net profit still beat market estimates of $1.43 billion, but one can say that the beat was not as strong as DBS last week. DBS’ net profits were up 15% higher from a year ago, beating estimates by 20%. As such, UOB’s performance is more tame, with profits beating estimates by around 6%.

Perhaps not too much of a surprise for the small year-on-year decline in net profit is that there has been a concurrent 2% drop in net interest income arising from a lower net interest margin. However, UOB sees total income to see positive growth in 2024 so some resilience over coming quarters may still seem to be guided here.

Moderating interest margins to drive peak in net interest income

The narrative for rate outlook has taken on a different course from last year, with chatters now surrounding the timing and scope of rate cuts ahead. With signs of peaking in benchmark lending rates, UOB’s net interest margin has been on a slow taper as well. Its net interest margin came in at 2.02% which is 12 basis point (bp) lower than a year ago but some comfort is that margins remain stable from the previous quarter.

Loan growth for UOB has also been resilient, increasing 2% from a year ago. In terms of guidance, UOB guided that loan growth will stay in the low single-digit in 2024, so the lukewarm state in lending activities should continue through the rest of the year. Expectations for a potential soft landing in the global economy may help to uplift some business confidence to pursue growth opportunities, translating to a broad improvement in business loans.

Recovery in non-interest income remains the bright spot

Similar to DBS, the recovery in the non-interest income portion has provided a cushion for the banks’ earnings and momentum seems set to continue over coming quarters. For UOB, net fee income was up 5% from a year ago. While it does seem to pale in comparison to DBS’ 23% growth, UOB’s forward guidance may suggest some catching up over coming quarters. The bank still expects to see double-digit fee growth in 2024, sticking to its original guidance in 4Q 2023.

Improvement in market conditions amid a risk-on environment in 1Q may have offered some support for wealth management activities, alongside loan-related fees. It was however mentioned that credit card fees have normalised from last quarter’s seasonal high, which understandably was from a bump in concert tie-ups previously (Taylor Swift mania) versus any significant shift in economic environment.

Loan loss provisions stable, capital position strong

The bank remains prudent in terms of loan loss allowances to cater for any economic uncertainty. With the relatively stable economic environment, the 1Q 2024 build-up from UOB is 4% lower from a year ago at $163 million.

The bank’s asset quality remains healthy as well. UOB’s non-performing loan ratio remains unchanged at 1.5%. Total credit costs improved by 2 bp to 23 bps this quarter, while the bank sees credit costs at the lower end of 25 - 30 bp in 2024.

UOB Common Equity Tier 1 (CET1) capital ratio currently stands at 13.9%, which is ahead of its minimum regulatory requirement and provides a strong capital buffer to weather any downturn.

Valuation/Dividend

In terms of valuation, DBS remains the priciest among the three Singapore banks. Price-to-book for DBS stands at 1.6, way above UOB’s 1.1 and OCBC’s 1.2, but justification is that DBS offers the highest return on equity among the trio.

UOB pays dividends twice a year, unlike DBS which pays quarterly dividend. The bank has announced a $0.85 per share dividend in 4Q 2023, so investors will have to wait for the next quarter’s earnings release to have the next set of dividends.

Comparing across the banks, UOB’s forward dividend stands at 5.5%, while DBS and OCBC stands at 6% and 5.8% respectively. In this case, it may seem that UOB may have some catching-up to match its peers.

Technical Analysis: Breather on recent rally

UOB has managed to break out of its months-long consolidation lately, reflecting buyers taking greater control. However, given an 9% rally over the past two weeks, recent days were marked with a breather, which saw some further profit-taking following today’s results release. Its daily relative strength index (RSI) saw some easing back into neutral territory from previous overbought levels, while a bearish crossover was formed on its daily moving average convergence/divergence (MACD). Nevertheless, the broader trend may remain upward-bias for now. Further retracement may leave the S$29.60 level on watch for any formation of a higher low to resume the upward trend.