Singapore's United Overseas Bank (UOB) is expecting significant growth in interest income for the next quarter following the U.S. Federal Reserve's recent announcement of a fresh rate hike.

Robust Second Quarter Performance

In the second quarter, UOB's core net profit witnessed a remarkable 35% jump, reaching 1.5 billion Singapore dollars ($1.13 billion) compared to last year. The net interest income for the quarter also grew by 31% from the previous year. This growth was driven by a robust net interest margin that expanded by 50 basis points, reaching 2.13% due to higher interest rates. The bank made this announcement early on Thursday.

Understanding Net Interest Margin

Net interest margin is a key metric used to measure the lending profitability of banks. It represents the difference between the interest the bank earns on its assets and the interest paid to depositors.

Optimism for the Following Quarter

UOB's Chief Financial Officer, Lee Wai Fai, hoped the favorable net interest margins would continue in the subsequent quarter. He mentioned potential upside biases following the Federal Reserve's rate hike announcement.

Federal Reserve's Rate Hike Decision

The Federal Reserve raised interest rates by 25 basis points, reaching a target range of 5.25%-5.5%. This marks the highest level in over 22 years. The financial markets had already priced in this anticipated move. The midpoint of the target range is the highest benchmark rate since early 2001.

Positive Market Response

On Thursday, UOB's shares rose by 0.7%, reaching a three-month high. This increase in stock price was in line with the benchmark Straits Times Index in Singapore and was slightly below the 1% gain for the MSCI Asia ex-Japan.

Managing Cost of Funding and Loan Growth Expectations

Lee highlighted that UOB expects loans to be repriced, enabling them to manage their cost of funding more effectively. The bank anticipates a more robust cost management strategy, primarily due to the flight to quality for Singaporean depositors. However, loan-related and wealth management fees declined as investor sentiments remained subdued. An increase in card fees partly offset the decline.

Revised Fee Income Guidance and Credit Cost Projections

UOB recently adjusted its guidance for fee income, revising it to a high single-digit growth projection. This comes from the double-digit growth projection announced during the first-quarter earnings report. The bank maintains its forecast for low to mid-single-digit loan growth.

The bank also adjusted its credit cost projection for the rest of the year. It now expects the credit cost to reach around 25 basis points, slightly higher than the previous projection of 20 to 25 basis points.

Positive Outlook for the Second Half

Despite facing challenges in the first half, Lee expressed optimism about the second half of the year. With the reopening of the economy and the revival of trade-related activities, the bank expects to see improved performance. Customers accustomed to the high-interest rate environment will likely return to the market.

Quarterly Earnings Reports

UOB is the first of Singapore's three central banks to report quarterly earnings. DBS, Singapore's largest lender, will report on August 3, followed by Overseas-Chinese Banking Corp. on August 4.

UOB's second-quarter solid performance and positive outlook for the future demonstrate its resilience and ability to navigate the changing economic landscape. The bank remains cautiously optimistic about the upcoming quarter, driven by the expectation of sustained net interest margins and opportunities in the market.

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