United Overseas Bank’s Q1 Net Interest Income Holds Steady Amid Macro Challenges

United Overseas Bank (UOB) reported a net interest income (NII) of S$2.409 billion for the first quarter of fiscal year 2025 (January-March 2025), marking a 2% year-on-year increase compared to the same period in 2024. While the result reflects resilience in core lending operations, the 2% quarter-on-quarter decline from Q4 2024’s estimated S$2.46 billion underscores the ongoing pressures of a maturing interest rate cycle and macroeconomic uncertainties.

NII Trends: Growth Amid Margin Pressure

The Q1 2025 NII result builds on a stable performance in 2024, where full-year NII totaled S$9.674 billion, nearly flat compared to 2023’s S$9.679 billion. The slight dip in quarterly NII compared to Q4 2024 is attributed to a “shorter quarter,” but the year-on-year growth highlights the bank’s ability to navigate challenges.

• Loan Growth Drives Revenue: The 2% annual NII increase was fueled by 6% year-on-year loan growth, particularly in wholesale lending and mortgages. This expansion offset a marginal decline in net interest margin (NIM) to 2.0% in Q1 2025 from 2.02% in Q1 2024.
• Margin Pressure: The NIM contraction reflects broader trends of falling benchmark interest rates and rising credit costs (35 basis points in Q1 2025 vs. 20 basis points in Q1 2024). These costs, however, remain manageable, with UOB’s non-performing loan (NPL) ratio holding steady at 1.5% as of December 2024.

Key Drivers and Risks

Loan Portfolio Resilience

UOB’s focus on ASEAN markets, where loan growth outpaced global peers, has been a key strength. The bank’s wholesale lending, driven by corporate demand in Singapore and neighboring markets, and mortgage growth in high-income segments, have insulated NII from broader economic headwinds.

Asset Quality and Capital

• NPL Stability: The NPL ratio of 1.5% remains among the lowest in the region, with coverage ratios of 91% (excluding collateral) and 194% (including collateral), signaling robust risk management.
• Capital Buffer: UOB’s Common Equity Tier 1 (CET1) ratio of 15.5% (unchanged from Q3 2024) exceeds regulatory requirements, providing a cushion for future credit losses or market volatility.

Macro Challenges

CEO Wee Ee Cheong highlighted US tariff uncertainties and global trade disruptions as factors weighing on demand. While these risks have slowed NII growth, UOB’s diversified revenue streams—22% year-on-year fee income growth in Q1 2025—offer a hedge against interest-sensitive revenues.

Investment Considerations

1. Valuation: UOB’s price-to-book (P/B) ratio of 1.3x trades at a discount to regional peers, suggesting potential upside if NII growth stabilizes.
2. Interest Rate Cycle: With benchmark rates in Singapore expected to stabilize or decline modestly in 2025, UOB’s ability to grow loans without excessive margin compression will be critical.
3. Geopolitical Risks: The bank’s heavy exposure to ASEAN economies—where 60% of its loans are concentrated—could amplify risks if trade tensions escalate.

Conclusion

UOB’s Q1 2025 results demonstrate a resilient core business, with loan growth compensating for margin pressures and asset quality remaining strong. While the 2% year-on-year NII growth is modest compared to peers like DBS and OCBC, the bank’s fortress balance sheet and disciplined cost management (cost-to-income ratio of 42.6%) position it to weather macro challenges.

Investors should monitor two key metrics:
- NIM stability: A further drop below 2.0% could pressure earnings.
- Loan growth trends: Sustained expansion in wholesale and mortgage lending would reinforce UOB’s leading position in ASEAN banking.

With a dividend yield of 4.2% and a track record of conservative risk management, UOB remains a defensive play in the Singapore banking sector. However, the path to outperformance hinges on its ability to grow loans without sacrificing margins—a tightrope walk as the region’s economy navigates 2025.