United Overseas Bank Ltd

SGX:U11

Earnings Call Transcript 2018-Q2

[Ee Cheong Wee, executive]

Good to see everyone. Thanks for joining us. Before you -- we take any questions, let me just give you an overall view.

The global economy got off to a good start this year, but markets have been choppy the past few months. The trade war between the 2 largest economies in the world adds to uncertainties. We have always been disciplined in balancing our growth ambitions with stability across our businesses. Our latest results reflect this discipline.

Our second quarter profit reached a new high, exceeding $1 billion. This brings our first half profit to $2.05 billion, up 24% year-on-year. This was driven by healthy contributions from our core businesses. Net interest income saw strong growth in the first half, led by broad-based loan growth of 10% year-on-year and higher net interest margin.

We continue to target high single-digit loan growth for the full year. Net interest margin was up 9 basis points to 1.83% in the first half, benefiting from rising short-term rates in Singapore. Although, competitive pressures remain. We expect to keep NIM around such level.

Noninterest income was boosted mainly by fee income, up 15% year-on-year, particularly from loan-related, wealth management, fund management and credit card fees. And we are maintaining our high single-digit growth target for the full year.

Cost to income ratio was stable at 43.9% in the first half, even as we continue to invest in talent, infrastructure and technology to sharpen capabilities. We expect the ratio at around such levels in the near term.

Our balance sheet remains strong. Balance sheet efficiency continues to be a key priority. Return on risk-weighted assets increased to 2.04% in first half of the year compared to 1.56% a year ago, driven mainly by high profit. Asset quality is largely stable. Credit costs on nonperforming loans for first half of the year was 11 basis points, lower than 39 basis points a year ago. As we have accelerated the recognition of vulnerable exposures in oil and gas and shipping sectors last year.

NPL ratio was stable at 1.7% and should remain so for the full year. Nonperforming assets reserve cover remain adequate at 89%, or 190% after taking collateral into account. Total credit cost was 12 basis points in the first half. For the full year, we expect total credit costs at around 20 basis points, bearing any sudden shocks from the global economy.

On funding. We continue to maintain healthy loan deposit ratio and liquidity coverage ratios. Net stable funding ratio at -- of 110% as at end June is also well above regulatory requirement.

Deposit rose steadily as we have been stepping up efforts to secure diversified sources of high-quality deposits. And we continue to actively manage and optimize our asset liability mix.

Capital-wise, our common equity Tier 1 ratio was robust at 14.5%. Given our good financial performance, the board declared a higher interim dividend of $0.50 per share from $0.35 previously. And this is in line with EOB dividend policy to balance capital needs and growth opportunities with shareholder value creation. It also underlines our commitment to maintain a dividend payout ratio of above 50%, subject to minimum CET1 ratio of 13.5% and sustainable financial performance.

Now let me -- now moving onto business update. Wholesale banking did well in the first half with income and loans up 11% and 12% respectively. Credit cost was stable, as most of the issues in oil and gas segment are behind us.

Risk-adjusted return was higher as we continue to focus on initiative to reshape and diversify our earning mix. Our efforts to boost fee income and tech connectivity flows are making headwinds.

Nonloan income, income from loan-lending business in the first half grew 15% year-on-year.

A key contributor to nonloan income is transaction banking business, which achieved 17% growth in income as we continue to enhance our capabilities in this area. While trade war between U.S. and China could affect trade finance revenues. Our improving product and solution capabilities in cash management in the rising interest rate environment will help support our Transaction Banking business.

When it comes to cross-border flows, our regional expertise and integrated network set us in good state to win cross-border business mandates. We see growing momentum in cross-border activities in the markets of Singapore, Malaysia and Thailand.

Our FDI Advisory team offers clients seamless connectivity and ecosystem benefits across the region. We focus on sectors, which are key drivers of the economy. We have seen good result from initiatives to improve income mix and risk diversifications.

Nonloan income from target sectors grew from -- about 22% year-on-year in the first half.

For retail banking, good performance so far. Year-on-year, loans and income were up 6% and 5% respectively. Singapore housing benefited from volume sentiments in the property market earlier this year, and we maintain our market share of new sales in Singapore despite competitions in the refinancing market. And over the next few months we expect transaction volume to decline in response to recent cooling measures. This will impact future pipeline, though, our housing loan growth this year will not be affected due to progressive drawdown of loans booked previously.

Our portfolio of largely owner-occupied properties and prudent underwriting practice with average LTV of 60%, will help mitigate the impact of a slower property market and higher interest rate environment.

Our housing loan business in the region also did well, up 11% in the first half.

High Affluent business maintains steady growth, with income and profit up 12% and 13% respectively, in the first half of this year.

AUM also saw increased continued growth, hitting $108 billion as of June, 2018. We have been building more meaningful and deeper relationship with our clients, leveraging our network of wealth management centers across the region. As of to-date, we have wealth management centers across a whole region outside of Singapore, 52 wealth centers. And our regional contribution in terms of wealth management profit for the region is about 42% out of the total wealth management.

The last time we met, I spoke to you about blurring line between online and offline and how we are integrating digital and traditional channels to give our customers a truly omni-channel and distinctive experience.

Whether in wholesale or retail banking, our initiatives are driven by our customer-centric philosophy, how well we understand our customers, engage with them meaningfully and enhance every encounter they have with us.

We harness our technology, knowledge and experience, gained across all markets to provide our customers with relevant, smart, simple and safe solutions wherever they may be.

We have been collaborating with ecosystem partners and investing in fintechs to develop solutions and ensure speed to market for our customer's benefit.

We are also launching a digital bank. More targeted at a mobile savvy, more on this later.

Now looking ahead, there are uncertainties in the global economy, with a trade war that could set -- scatter it and signs of a slowing Chinese economy. Closer to home, the property market may see a slowdown from recent cooling measures. Our diversified footprint and customer franchise will help mitigate the impact of some of these macro headwinds. We will continue to stay vigilant and believe our strong balance sheet can cushion volatility. Despite near-term uncertainties, we believe in the long-term potential of Asia, underpinned by intra-regional business flows and rising affluence. UOB is well positioned to tap on these opportunities, given our unique regional footprint, strong balance sheet and enhanced capabilities. We remain focused on growing our core franchise. And we are confident of creating long-term value for our stakeholders. Thank you.

Now I'll pass on to Wai Fai.

[Wai Fai Lee, executive]

Thanks, Ee Cheong. And good morning again to all of you. I think, let me quickly go into the numbers. I'm sure you have other questions following that. The group achieved a high net profit of $2.05 billion for the first half of this year. We are up 24% from a year ago. Over the past 12 months, we saw strong momentum in net interest income from a healthy loans growth and an uplift in loan margins and the rising interest rate environment. Our fees and commission income continues to deliver a strong performance in loans related wealth management and fund management fees.

On the back of a favorable operating environment and lower residual risk from the oil and gas and shipping sectors, our credit costs stay low. Given our strong capital position, we are pleased to reward our shareholders with a higher interim dividend of $0.50 for the first half of 2018.

For the first half of this year, total income grew 10% with new highs for both net interest income and fees income. Net interest income was exceptionally strong, growing 13% with margins improving 9 basis points to 1.83% and broad-based loans growth of 10%. Fees and commission registered a robust growth of 15%, attributed to strong performances in our customer franchise. Our loans related to wealth management, fund management and credit card businesses all show strong growth.

Other noninterest income decreased 12% from lower trading income and lower investment gains, and if you remember, there were some one-off gains last year from disposal of some chunky investment securities. We continue to invest in talent and infrastructure, while maintaining expense-to-income ratio of 43.9%.

Compared to the first half last year, total allowances decreased 55%, mainly due to the favorable operating environment and the lower residual risk from the oil and gas and shipping sector.

For the second quarter, our net profit rose 28% year-on-year to $1.08 billion.

Total income increased 11%, like we said, due to the continued momentum in both net interest margin and net interest income and fees growth. The strong growth in net interest income of 14% was largely driven by the 8 basis point margin uplift and healthy loan growth. Expenses increased due to higher performance related staff cost and our continued IT investments. Total allowance halved to $90 million.

Compared to the previous quarter, our net earnings for the quarter were up 10% at $1.08 billion, and again, like we said, this was led by healthy growth in net interest income and other income line. Total income was up 5% due to the strong momentum. And the growth in net interest income was supported by both healthy loans growth of 4% despite a slight reduction in net interest margin of 1 basis point.

Our total expenses increased in tandem with income growth. The increase in total allowances for the quarter, the $11 million increase, was largely due to higher allowances, what we generally call, GP at the back of higher loans growth.

On our margins, against last year, our overall margin increased 9 basis points to 1.83%. We benefited from our ongoing balance sheet management and a rising interest rate environment. Compared to last quarter, our net interest margin declined marginally, as we are building our funding capability and capacity in anticipation of further rate hikes, I'll elaborate on that slightly later.

Our loans margin are relatively stable, despite the stiff market competition. Backed by the strong -- the group's strong capitalization and improve our RWA, we extend our credits to strategic client segments to grow our loans. We were also in the capital market building up our funding needs in anticipation of further rate hikes. As we expect to deploy these funds in the second half, the deployment of the excess funds into the short and safe securities resulted in a marginal decline of 1 basis point in our net interest margin. So if you look at it another way is that as we look at the better second half, if we continue to deploy that, we should see some improvement and stabilization in our margins. Our loans-related fund management and credit card fees continue to perform well. Wealth management fees, however, decreased from last quarter on lower sales margin as market conditions were a little bit more volatile and customer turned cautious.

We continue to invest and build capabilities and infrastructures to support our digitization drive and the customer regional business needs. Due to strong revenue momentum and continued cost discipline, our expense-to-income ratio improved to 43.6% for this quarter. Credit costs on loans increased marginally to 13 basis points this quarter, largely due to higher GP from higher loan base.

The group total NPA stood at $4.4 billion. I think it's the reduced residual risk in the oil and gas and shipping segments. The new quarterly NPA formation has reached at to the $400 million level mark per quarter. The group NPA remains stable after the accelerated recognition of the residual exposure in the oil and gas and shipping sectors last year.

Against last quarter, our NPL increased slightly to $4.2 million. Our NPL ratio remains stable at 1.7% this quarter. Like Ee Cheong said, the group NPA coverage remains adequate at 89% and 190% after taking collateral into account.

For loans, we actually registered very healthy loans growth of 10% year-on-year and 4% quarter-on-quarter to $250 billion. The growth is broad-based across most territories and industries. The only slight weakness is in Indonesia, where the year-on-year decreased is mainly due to the weakening of the Rupiah. Our funding position remains healthy with LDR at 85.7%. So Singapore, dollar LCR of 206% and all currency LCR of 142% for the quarter is well above regulatory MAS requirements. More important is our NSFR for the quarter stood at 110%, which means that we are well positioned to actually take interest rate hikes.

Year-on-year, customer deposits grew 11% to $288 million, largely led by growth in US dollars. So if you realize, we have actually been increasing our funding capability ahead and in the second quarter, we issued $3.2 billion of debt securities and basically to diversify our funding needs and also to refinance debts due for redemption, because we anticipate hikes will go up in the second half. So our deposit base is well positioned to absorb the expected rate hikes to give the margin uplift that we will expect in the second half.

On performance by business segment, group retail operating profit grew 2% to $1.02 billion. I think this mainly driven by double-digit growth in fee-based income from wealth management and credit cards. I think net interest income was also higher, mainly from loans, volume and like Ee Cheong said, this is offset by a very competitive mortgage market, the margins in there are really competitive.

Group wholesale operating profit rose 11% to $1.48 billion, the strong performance was largely driven by our net interest income and from healthy loans growth and margin uplift. Our noninterest income acquisite on loans related investment treasury, Transaction Banking fees, showed very good strong improvement.

Global market reported a 8% increase, mainly due to higher trading, income and a more favorable foreign exchange environment movements. On the group performance by geography. Singapore was very strong, we increased 6%, driven by the high net interest income. Our regional franchise has also grown strongly, we grew 12% to $855 million. Again, there is some slight weakness in the short term in Indonesia, where the margins were still very competitive and also because this is translated to sing-dollars an unfavorable FX impact.

We ended the half year with a very strong CET1 of 14.5%, coupled with our higher earnings resulted in an improved RWA to 2.13% for this quarter. So with that backdrop, like Ee Cheong said, the group dividend policy itself, we aim to balance our group's capital needs and growth opportunities with rewarding shareholders. With the encouraging earnings performance and returns achieved so far, the board has declared an interim dividend of $0.50 per ordinary share. And UOB will commit to a dividend payout ratio of 15% -- of 50% subject to minimum CET1 of 13.5% in sustainable financial performance. I think with the group's strong capital position the scrip dividend scheme will be suspended.

I think, with that, will pass it back. Thank you.

[Ee Cheong Wee, executive]

Okay. As mentioned earlier, we are launching a digital bank. Targeted at ICN Asian increasing base of mobile savvy consumers. It will also help accelerate and skill-up our regional customer franchise.

To take you through the details, I will now hand over, Dennis Khoo, Regional Head of our digital bank.

[Dennis Khoo, executive]

Thank you, Ee Cheong, and thank you, Wai Fai. Thank you very much for the opportunity to share view, what many people in the bank have been working on. I'm going to start by telling you about our approach. Any -- I have prepared materials, probably will last about 10 minutes and then we can take your questions.

So first, if you go to the second page, from what we have seen across the industry, both local and overseas, no additional bank is taking this approach and making their key focus. And what is that approach? It's basically very key focus on engagement. Why is this important now? Because we see that with emerging capabilities in machine learning, in data, UI design and also the emerging rapid learning and feedback loops that smartphones provide, we believe this is the right time for us to launch a digital bank and the difference here is a digital bank with a relentless focus on customer engagement, leveraging the latest digital capabilities. So now let me go into detail and explain to you why we have come to this conclusion. If you turn to the next slide, we have spent the past 18 months studying both global banks as well as local banks, and going around the world talking to experts. We have visited the U.S., Canada, Europe, Asia and what became very clear, as a result of this study, was that the retail banking scene globally will face very frequent change in the next 10 years. Addressing these changes will require very fundamental rethink. So what does this future entail? If you refer to the slide, first I'll spend a bit of time explaining the difference between digital banking and digital bank. So digital bank, digital banking will coexist, they are distinct and different. Digital banking is part of an omni-channel way to bank, complementary to branches, self-service ATMs, call centers and serves typically customers across all segments. And naturally, because it serves customers across all segments, we tend to design it for customers that have more complex products. Digital bank, however, is a mobile only way to bank. And basically, at the start, it will serve mobile savvy customers and what comes to mind, all the generation Y, 22 to 35 year olds, the generation Z, 22 years and below. However, we expect that these new mobile digital banks they thrive on data-driven insight, rapid learning, feedback loops. This will drive unprecedented disruption globally. And it will start with the young and mobile savvy, while over time it will quickly spread across all segments. And as an example, if you look back, Facebook started, basically, in the Harvard campus, went to the Yale campus and then quickly spread out across the whole world. Progressive banks, bigtech, fintech, will capitalize on this opportunity and the capabilities to power these data-centric digital banks, they are just emerging. And we believe the capabilities and solutions will accelerate.

Therefore, you'll be decided to pioneer a new digital bank model to take us well into the future. So what is this model? I think the best way to sum it up is what banks need to do in the future, cross-selling, basically moving from cross-selling to engaging. The industry traditionally focused on cross-selling. And you also know many famous banks that have made their mark there. Our focus, however, will be on engagement. Banks generally tend to place emphasis on acquiring customers. Hours on engaging them. From their very first encounter with us in the sign-up to basically what they do every day in regular banking. In this future, digital engagement will be the data centric digital banks most powerful advantage. And so we have constructed a new business model for this future and we call it ATGIE, A-T-G-I-E-, for short ATGIE and what it stands for is Acquire, Transact, Generate data, get Insight and Engage. And this ATGIE model will power our new data centric digital bank. The model will attract underserved customers because of its engagement focus and also drive large scale financial inclusion by providing access to credit and banking at lower costs of service. And this is very important for the markets that you'll be servicing because if you look across the region in Indonesia, in Thailand, in Vietnam, there are many who are still not banked. And so as we rollout the digital bank over time, the financial inclusion will shrink. How will UOB capture this disruptive opportunity? By launching a new kind of digital bank in Southeast Asia and providing an experience to our customers that's always simple, engaging and transparent. What do we mean by simple? What we mean is forever improving on an intuitive user interface that remembers who you are, remembers your relationship with us and provides service that's fast and digital. By engaging, we mean we understand you, we can anticipate your needs, and we also work hard to help you cultivate smarter spending and saving habits. By prompting you to better manage your finances. This is something that banks find difficult to do for large customers today. And we have also done a lot of research with our segments. In the end, it's about banking, transparency and trust are very important. So by transparent, we mean being open and clear so that our customers always understand what they are signing up for. This they have told us is critical and not anyone can occupy this position. It has to be someone that has established trust and transparency. Now how will we power -- if you can move to the next slide, how will we power this digital bank for engagement? Because while we can talk about it, if we don't have the capabilities then how will we deliver. So the building blocks we have put in place showed on this slide. In Acquire, customer onboarding has been completely redesigned, to be fast and modular, and also recognizing the many markets we serve with different regulatory requirements and pace. We announced earlier in the year a joint venture Avatec.ai with our China partner fintech. This offers better next-generation credit assessment capabilities. As we extend unsecured credit to new customer segments, this will become critical. After you Acquire, we need to help customers transact. So we're investing in new UI capabilities that'll be much easier to use. Also, new product capabilities include things like goal savings and control capabilities, for example, credit limit reduction, among others. Our segment have told that these are important to them, and we have uncovered this through detailed design thinking that help us realize what are the unserved and unmet needs of our target segment. In doing so we hope that they will see value and begin to use these services very frequently. Increased transaction frequency will generate more real-time data, which we then categorize to increase relevance and context. Our cognitive analytics engine then uses this machine learning to identify patterns, extract insights from this data and we had our first bank in Asia with this capability through our investment and partnership with Personetics, which we announced a couple of weeks ago. This allows us to understand customers better and anticipate their needs. For example, telling them who they forgot to pay or who forgot to pay them, will become an everyday thing. We can then have engaging meaningful conversations and help customers meet their life goals. In Engage, we're pioneering a new concept in banking, an engagement lap across functional unit that will start with practitioners in behavioral science, in analytics, data specialists, design -- sorry, decision science, communications and marketing. And this team sole role is to design and rapidly learn the best ways to engage customers and prompt them towards better financial habits. As customers engage more, they transact more. And generate more data, creating a virtual cycle, encouraging even deeper understanding, interest and engagement. We believe that this will lead to long-term customer loyalty, increased advocacy for digital bank.

You turn to the last slide. We will launch a digital bank to scale our regional franchise in Southeast Asia. We aim to build a base of at least 3 million to 5 million new customers -- new mobile savvy customers in the next 5 years. We will assess the quality of our engagement through our customer engagement index in which our highly engaged customer who have a score of 8, 9, 10 out of 10. We aim for direct cost income ratio as 36%, 35% on the back of process redesign and digitization, for example, all high-volume processes and services, we fully automate it. No paper, no people, and this allows us high scalability and growth across the region's we serve in Southeast Asia.

Today, you will find such that customer engagement business models, they are found in fintech, they're found in startups and bigtech. But for banks, without the ATGIE business model and the building blocks that we have just articulated, engagement is in reality where how to do and expensive to do if you cannot have a very scalable model. We have the building blocks in place to launch a new type of digital bank designed to engage present and future customers in Southeast Asia by launching now and putting a big focus on engagement we hope to have a sustainable advantage well into the future. As I've shared, we have a distinctive approach a unique business model our buildings blocks in place and our performance measures are clear. We believe that this will set us apart from the industry. That's the end of the presentation. Thank you very much, and I leave this back to Miss...

[Jean Khong, executive]

All right. Thank you, Dr. Khoo. So we’ll now move onto the Q&A segment. [Operator Instructions] [ Tania from Bumba ].

[Unknown Analyst]

I have a few questions. Could you mention your 2018 NIM estimate again? And the second question is, I think Wai Fai mentioned competitive, mortgage, margins, now banks cutting -- are looking to cut the rates, which have been increasing earlier this year. And last thing about a digital bank, the projection of cost income ratio at 35%, is this for the whole bank? And could you tell me the time frame?

[Wai Fai Lee, executive]

Can I take the first few, I -- and cover a bit of the last question? On margin expectation, like I say, we were positioning ourself for interest rate hike. So you look at our deposit base, we are already increasing it, including capital market funding. So basically we expect probably another 2 interest rate hikes for the remaining of the year, if it goes through according to plan, hopefully, we'll get one soon, maybe in the next 1, 2 months, and those, in our mind, will translate to higher yield, higher margins. The second point for local banks is the differentiation between cyber and, okay? And the U.S. inter-bank. So we think that with the rising U.S. rates, some of the SOR rates, there will be also an increase which will then give us the further uptick into the wholesale margins. So we are probably a lot more confident that in the second our half margins will improve, okay? We'll still stick to our original guidance where, when we look at our structured balance sheet we will push it to 1, 2 basis points per quarter, we'll try and bringing it back up to where we were at least to the 1.84%. But we are confident that at this we'll be able to maintain that, because we have positioned our balance sheet for such a event.

[Unknown Analyst]

You said 1.84%?

[Wai Fai Lee, executive]

1.84% or higher. Because we were at -- today 1.81% -- probably if you recover 1, 2 basis points you'll be back to where we were. So we think that margins owned, as a whole will be positive and just to take that next question on digital bank. Digital bank, today is important part, but it's just not a big part of the overall bank. So you remember he made a distinction between digital and digitalization. So we are using what they learned from there, some are straight though process in the digital bank and apply that to conventional banking to hopefully reduce that. That itself will be the long-term targets that we set, that will take time, and we are working towards that to bring down the cost, but that will take time. But meanwhile, we are using the experience in the digital bank, because they do look at straight through, they look at accounts openings and all. How much can we apply that to? For example, wholesale. Wholesale is actually a very different market, different proposition for account opening, but we are using the experience to actually look at reducing that and we hopefully will bring it down, by -- in my mind maybe move the overall bank back to the closer 40% and not 35%.

[Ee Cheong Wee, executive]

Just make 2 quick points on that. First, it's a steady state number, which means that it is scaled. Once you have reached enough customers to be a scalable business. In the initial phases, obviously, as you're acquiring customers the engagement strategy is meant to create advocacy and drive your acquisition costs down. Also, this is a space that's emerging. So when we find that we need to invest in mixed general technology. So the number is a long-term ambition and UOB is a long-term player to really look at where we are scaled, we believe that with the kind of automation that we have we can achieve that kind of cost income ratio.

[Jean Khong, executive]

Next question? [ Nicholas ]?

[Unknown Analyst]

A couple of questions. How much of your loan book is on SIBOR? And how much of it is on SOR? And where is the better uplift on that one? And then, with property cooling measures, how are your customers in terms of the developers? I mean what are their credits' like? Any of them going to be adversely affected? You could look through the portfolio. And then could I ask again on the digital. So what's the difference -- so you -- so difference between this bank and UOB Mighty? That's the one question. And second is that, did you -- did the -- I'm sorry, I have to bring it up, period. DBS is digi-bank, it's still sort of loss-making. So when do you expect -- I mean, what's your breakeven period like par for this?

[Wai Fai Lee, executive]

Okay, you want to take the question [ Zoi ]?

[Dennis Khoo, executive]

So I think first let me elaborate on digital banking, digital bank. So Mighty is our digital banking, and we are launching a new digital bank. I think maybe the difference is best summed up when we did our study, one of the banks we visited was one of the largest European banks, and we were sharing -- doing best practice sharing with the CEO of their open bank, which is the equivalent of their digital bank. Their digital bank is more like our digital banking, it served universal customers. So when we showed them our user interface, he was quite blown away. Because when you focus on segment like the young and mobile savvy, they have much simpler requirements. So we were able to design the interface in a way that it was truly revolutionary. He had never seen something like this. So I think the way to best articulate it, #1, is the segmented approach, right? We are focusing on young mobile savvy, they have different needs. In fact, they have different expectations of the bank. They're expectation of the bank, their parent's expectations are very different. Whereas in Mighty, we're serving existing clients. I'm sure many of you are banking the omni-channel way. So we continue to serve those customers. But I think the most important thing is the rapid learning that we can get from serving those 2 groups. One, can be very innovative very far out there and then the learnings we can take to basically than put back into our digital banking digitization, I think that learning look is going to be very valuable to us. In response to the question around profitability that is precisely the reason why we are focusing on engagement because banking is a long-term business. If you attempt to acquire lot of customers very quickly, it's very expensive. So engagement is our focus, quality is our focus. If we get enough, and that's why we have an engagement index, because if we have highly engaged customers, they're going to be advocates. They're going to tell people to sign-up because of the experience, and when that happens, our cost of acquisition will drop. So this is a very holistic, a very considered approach and very cognizant of the fact that we don't want to go down the same path. We could've easily just do what the rest of the industry is doing, but it is the sustainable growth that we're looking for, not just a quick announcement. So that's why we have done so much work and really focused our entire strategy around how we can engage customers.

[Jean Khong, executive]

All right. Next question? [indiscernible]

[Unknown Analyst]

Just need some clarification on your digital bank. So your announcement is you're launching a digital bank today, so does it replace UOB Mighty?

[Dennis Khoo, executive]

No. They will coexist side by side. So digital bank, digital banking...

[Unknown Analyst]

[indiscernible] UOB.

[Ee Cheong Wee, executive]

No, no.

[Dennis Khoo, executive]

The digital bank will serve the young mobile savvy and Mighty will continue to serve all clients from our oldest client to our younger client, and these will coexist. And we actually believe the question you're asking are very important, because we don't think that the industry has fully come to terms with how this works. And from our study visiting a lot of the major banks around the world, this is the model that makes sense you must do this because the learning loop required is very different when you execute it this way.

[Jean Khong, executive]

So we will come to your question later. [ Gulf ], second half of her question?

[Unknown Analyst]

The first half.

[Jean Khong, executive]

First half.

[Unknown Analyst]

SIBOR, so the book -- your book is -- which part -- how much of the book is SIBOR, SOR the different end?

[Wai Fai Lee, executive]

So the SIBOR, SOR is probably our wholesale book that is actually affected probably today of the wholesale probably half, half, okay? Half, half. And today, the SOR actually, because of the U.S. dollars book has some track, so we expect if the effect hikes increase. The SIBOR margin hopefully will improve. So that's probably the thing. The second question on development, if you want to?

[Ee Cheong Wee, executive]

We can't choose out the stress test. I think, I would say generally the risk is acceptable. All the major developer, I think balance sheets are strong. Some of the smaller one, I think, exposure is small -- is unlike oil and gas. I think we are quite comfortable.

[Jean Khong, executive]

Okay. Next question, Chris.

[Chris Wright]

Sure. Chris Wright from Euromoney. Two, if I may. One for Mr. Wee, first. You, Ee Wee, have spoken before about how well positioned today is for outbound flows from China into Asian, whether Belt and Road or more broadly. Over the last year or so you've had some changes in the dynamic, changes in China's attitude towards outbound capital and also some of the recipient countries in Belt and Road, perhaps something of the backlash, most obviously Malaysia seeking to renegotiate China-funded infrastructure. Now how do those changes affect UOB and its positioning?

[Ee Cheong Wee, executive]

No, I think generally the trend is to continue to be there, okay? If you look at them, business structure will continuing to gain momentum. Yes, there will be some pockets of, like Malaysia, they cancel some of the projects, but in an overall sense, not only this infrastructure project, there is still a big flow. Chinese company, not only just Chinese company, Korean company, Taiwanese company, they flow to this part of the world. So we continue to engage them. I think, I'm still very confident that I think this thing will come true.

[Chris Wright]

A question for Dennis, if I may. There's just some -- how this is differentiated. I certainly get that your footprint is differentiated and then roll and get out across 5 of 1s is different, but this point that engagement is in some way unique and digital. What is it that makes you think that none of the other offerings out there have truly engaged properly with their customers?

[Dennis Khoo, executive]

I think first, my experience in the banking industry, technology for 13 years, 17 years in banking, you don't have it. When you talk to any of the bigtech, the fintech, and we have met many of the CEOs of these company, the first thing that comes from their mouth is engagement. I don't know if you've attended any banking event or conference where it is the key focus. I certainly don't see that and if you do any kind of check on this topic you'll find that there is very little focus on engagement. It's hard to do. That's one of the key factors because if you are not first fairly automated, it's very hard to serve the best. Secondly, I think that technologies are coming together in a way that you can integrate them in the banking system. And banks are very different in the way that you can adopt and simulate these technologies. So what we see is that the -- all the elements are coming -- all the building blocks are coming together and that's why we have laid out the approach, the distinctive business model and I think you have to see in totality when you see that in totality, you then realize that this is really what's going to make the difference in the future. And I think the bigtech and the fintech companies have gotten that. But the banks, I think, we have been -- had difficulty trying to make that happen also because the solution the building blocks were not in place and the business model was not in place. So I think the significance what we have done is really the approach is very different. The coming together, the business model, and you're having all the building blocks in place to make this happen, I mean, just that alone, takes time. Takes a lot of time to put together.

[Chris Wright]

I'm sorry, how important is fintech? Just going back to your earlier announcement from, I think, it was April, wasn't it? Now is that an instrumental part of the new digital banking operation or should that be seen in isolation?

[Dennis Khoo, executive]

It is definitely a very crucial part. There are benefits for the core business as well because it can help us improve some of the traditional underwriting we are doing. But definitely if you look at where the digital bank is going to make profits, it will be from unsecured lending, it will be from unsecured lending to segments that banks traditionally have not lent. So this new capability of using nonfinancial data to assess customer is critical and to build the intellectual property there, which is why we announced the joint venture earlier this year?

[Jean Khong, executive]

Okay. Kevin, I know you had a question, but I want to go back, I just wanted to make sure that you have any other questions following your earlier one? Do you need a clarification?

[Unknown Analyst]

I would like, Ee Cheong, if you can, to clarify, earlier you said that you don't expect your housing loans growth to fall?

[Wai Fai Lee, executive]

I the short term?

[Ee Cheong Wee, executive]

Not in the...

[Wai Fai Lee, executive]

Not in the short term...

[Ee Cheong Wee, executive]

You know why because the pipeline -- because we booked some of the loans the last 3 to 6 months. So it was started to draw down.

[Unknown Analyst]

Not in short term. What is your housing loans growth for this year? Can you share with us?

[Ee Cheong Wee, executive]

Yes, look, housing loan growth, I think, I have the numbers, right? I can't remember where the.

[Wai Fai Lee, executive]

6%, 7%.

[Ee Cheong Wee, executive]

6%, 7%, growth.

[Jean Khong, executive]

Kevin, your question?

[Kevin Kwek, analyst]

Yes. Can you -- sorry, I'm Kevin I represent [indiscernible]. Can you talk a bit about your treasury and investment income during the second quarter? You did better, but I'm sure you know one of -- some of your rivals have not done as well.

[Wai Fai Lee, executive]

When I don't do so well. Yes, they ask us why we don't trade. But our trading model, like you say, has always remained focused on customer. We don't do many preparatory risks. The only risk that we have in their is a structured balance sheet, okay? And that is in the banking book. So the trading itself, yes, we are affected in trading, but not as big as the rest. The customer flow is the one underpinning our treasury income. Today, there's probably 60%, 70% of that and they're probably continue to grow because [indiscernible] right on the customer demand for FX, et cetera, rather than pure propriety trading. So as a result, we are less affected. That's what investment securities, last year was like I mentioned there were some very unique counters that we were just selling. So this one, also investment security was a bit different from the trading part of our book. So you will see less volatility in the sense in our trading book.

[Unknown Analyst]

Also can I clarify, you said that you raised $3.5 billion capital right to [indiscernible] self. Is that U.S. or Sing?

[Wai Fai Lee, executive]

We have a combination, so if you really look at what we did, the 3.2% is Sing equivalent, but most of it are in the U.S. dollars market. We have also told people that we have also gone into the local market, if you really look at it, we've actually done CNY in China, a local issue, have done an Indonesia issue. In fact, just after we crossed the quarter we did an Australian issue and we're going to do a Malaysian issue. So it's not -- U.S. is important, but we are actually positioning ourselves for the uncertainty even in the local currency where our franchise deposit growth might not be as strong. So we actually move into market activities in the Indian subsidiaries itself.

[Jean Khong, executive]

Any other questions? Tanya, first. Ladies first.

[Unknown Analyst]

I meant also to congratulate you both on stellar numbers for this quarter, and my question is more on wealth management. Ee Wee mentioned about income from wealth that came from outside of Singapore. Could you elaborate about your other wealth management centers? Where are you drawing from? And also your comment, your thoughts on onshore private banking that is quite a trend these days.

[Ee Cheong Wee, executive]

Well, I think, we look at the whole wealth piece not just confined to private banking, okay? It's the whole mass affluence. This is where you will be today as a commercial bank. As we have offices, 500 offices in this region. We are trying to institutionalize the relationship, okay? This is our strength. Rather than depend on few selective individual like most of the private banking our -- they generate [indiscernible]. So we do have something like 52 wealth center, and these are centers which basically embedded into our Southeast Asia region, next to our branches, right? So every time the cross-selling effort will come in when we have a commercial clients, a simple product, right? Competition is less, because of our dissolutions, right? We don't believe in all this suitcase banker, they just fly in and out. These are localized relationship, and this is where we are able to get up about 40%, 42% of the wealth piece outside of Sing area, yes, Southeast Asia.

[Jean Khong, executive]

Okay. All right. Kevin, your question?

[Unknown Analyst]

All right. For the digital bank, so launching today meaning all 5 countries here, Indonesia -- I mean, like from later this afternoon we'll start seeing ads in Indonesia, Vietnam, Thailand.

[Dennis Khoo, executive]

Today's announcement is more on the business model the approach and the goals that we hope to achieve in doing so. The actual announcement will be in -- we'll inform you in due course.

[Unknown Analyst]

Can you give us a rough time frame like these 5 countries over the next 3 months, 6 months, 1 year?

[Ee Cheong Wee, executive]

I think, definitely over the next year, you will see some announcements. The specific timing and the specific countries, we will be letting you know soon.

[Unknown Analyst]

Okay but I can say that the launch in these countries will take place over the next 12 months, would that be fair?

[Ee Cheong Wee, executive]

I think you could say that. And certainly not all the countries because we have many more countries than our competitors, but certainly, you will see progress in some of the countries within the next 12 months.

[Jean Khong, executive]

All right. Probably have time for one last question.

[Unknown Analyst]

Just to clarify, Ee Cheong. So your high [ F1 ] income of $731 million for first half of this year, 42% of that's from the region. Is that the way I should?

[Ee Cheong Wee, executive]

The wealth piece, the whole wealth, include private bank.

[Jean Khong, executive]

Okay. Great. Sure.

[Unknown Analyst]

When you talk bringing in 5 million new customers across 5 geographies and when you couple that with the early announcements in April about a new method of credit assessment, that's does raise questions about credit quality. How confident are you that you can expand in this way through new acquisition methods without compromising asset quality?

[Ee Cheong Wee, executive]

From what we've seen from our partner in China, we basically are going to be quite prudent in how we use the underwriting method. Currently, we focus the underwriting method mostly on, basically small amount, short tenure, and we are not going to basically grow that simply outside of small amount, short tenure, unless the methodology restrain appropriately. In that space, I think we can already attract a lot of young mobile savvy. So our position on this is that we will maintain our current, risk appetite. Within that risk appetite, we believe that we can take on additional customers using this new technology. So we will be prudent in doing this.

[Jean Khong, executive]

Okay. Any final question?

[Unknown Analyst]

Yes, on your dividend, would final also be $0.50? Barring uncertainty and meeting your capital need?

[Wai Fai Lee, executive]

We are comfortable for at least $0.50.

[Jean Khong, executive]

I'm heading -- okay. [ Gulala ], final question.

[Unknown Analyst]

Just wondered how far have you got with your Vietnam licenses?

[Ee Cheong Wee, executive]

I'm going there tomorrow.

[Unknown Analyst]

[indiscernible] You will look out for something from us.

[Ee Cheong Wee, executive]

We really got the official license. In Vietnam, we also have the digital initiative, we started that about few months ago. Not 100% digital, because the local rules still require you to have a physical signature, but that is the last 10% off the [indiscernible] . Otherwise the whole thing is digital. The traction seems to be quite good in Vietnam.

[Unknown Analyst]

All right. But will you be operating like a foreign bank or a local bank? I mean...

[Ee Cheong Wee, executive]

We are still foreign bank, but we are locally incorporated.

[Jean Khong, executive]

Okay. I think we're quite covered. So we have come to the end of our results briefing. And we'll now invite Mr. Wee and Mr. Lee to take their leave. If any further questions, please do ask though. Thank you.