Profits Inch Up At UOB

800px-Uob-uobplaza One of Singapore’s three banking stalwarts, United Overseas Bank (SGX: U11), released its third quarter results yesterday evening and delivered a flat top-line with increased profits.

The bank has a global network of more than 500 offices in 19 countries and territories in Asia Pacific, Western Europe, and North America. Some of its profit-generating banking activities include financial and portfolio planning for individuals; current account, deposits, lending, trade finance, and cross-border payments for corporations; and the underwriting of equity and debt offerings for both public and private businesses.

Some basic numbers

In the three months ended 30 Sep 2013, the bank’s Total Income – its top line, or ‘revenue’ – was essentially flat at S$1.66b compared to a year ago. Quarterly profits meanwhile, inched up 3.3% year-on-year to S$730m.

UOB’s Total Income is essentially made up of two components: Net Interest Income and Non-interest Income.

Net Interest Income managed to grow 7.7% to S$1.05b compared to a year ago as loan growth managed to overcome a decline in net interest margin from 1.84% to 1.71%.

A decline in net interest margin – the spread between the interest it earns from the loans it makes and the interest it pays out – is not an isolated phenomenon for UOB. DBS Group Holdings (SGX: D05) faced a similar issue in its recent third quarter earnings and it was the same over at Oversea-Chinese Banking Corporation (SGX: O39).

As I’ve mentioned before, “with a shrinking net interest margin, banks have to depend on increasing its loan volume to boost its Net Interest Income. In such events, there’s always the risk of banks being willing to write poor-quality loans to drive [top-line] growth.” It’s something bank investors have to watch.

Elsewhere, UOB’s Non-interest Income, which itself is comprised of Fee & Commission Income and ‘Other’ Non-interest Income, dropped 10.8% to S$618m. Fee & Commission income grew 9.2% to S$407m on the back of more wealth management and trade-related activities.

On the other hand, ‘Other’ Non-interest Income had dropped 34.2% year-on-year to S$211m, predominantly due to a 17% decline in Trading & Investment Income on the back of lower gains on the sale of securities.

With the bank’s top-line action out of the way, let’s move further down its income statement.

UOB’s bottom-line had outpaced its top-line mainly as a result of a 29.5% decline to S$85m in amortisation/impairment charges, in addition to a 148% jump to S$52m in share of profits from associates and joint ventures.

Operational highlights and the balance sheet

UOB’s non-performing-loans (NPL) ratio had fallen from 1.6% a year ago to 1.2%. This is an important metric as it can give investors clues on the quality of a bank’s loan-portfolio. And for the third quarter of 2013 at least, it seems that UOB’s portfolio of loans had improved.

In similar circumstances to DBS, UOB’s loan-to-deposit ratio (LDR) had inched up from 86% in the previous year to 88.3%. While not necessarily a bad thing in and of itself, sustained increases in the LDR could negatively impact the bank’s liquidity in the future; if there are unusually large amounts of deposits being withdrawn, the bank might find itself unable to cough up the cash as the bulk of it would be ‘trapped’ in loans.

UOB’s balance sheet has weakened somewhat using the ratio of tangible book value to total assets, which fell from 7.4% a year ago to 7.1%.

Besides that, UOB’s capital adequacy ratios (CAR) – a measurement of the amount of ‘cushion’ a bank has to withstand losses – have also declined. The bank’s Tier 1 CAR dropped from 14.3% to 12.9% while its Total CAR slipped from 18.3% to 16.3%.

Despite the ostensible slight-deterioration in the bank’s balance sheet over the last 12 months, it should be noted that UOB’s Tier 1 and Total CARs are well above the Monetary Authority of Singapore’s Basel III requirements of 6% and 10% respectively, signifying a position of strength for the bank in the overall picture.

What’s next for UOB

The bank’s chief executive Wee Ee Cheong commented on the quarter: “[The bank] has achieved another decent set of results this quarter, driven by steady core income and continued growth in our regional franchise. This was underpinned by stable margins and healthy asset quality as we stayed disciplined in pursuing sustainable growth.

While the US economy appears to have avoided the fiscal cliff and QE tapering has been postponed for now, the lack of clarity on these fronts will continue to impact Asia. Despite the near-term headwinds from ongoing global uncertainties, the long-term fundamentals of our region remain strong as intra-regional trade and wealth management activities continue to expand.

Our strong balance sheet enables us to continue investing in regional capabilities to support seamlessly our customers’ expanding needs within and across countries.”

UOB, along with the other two local banks, managed to side-step the recent Great Financial Crisis with relatively few scratches due to prudent risk management.

Much of the bank’s profitability in the years ahead would depend on it continuing to cleverly avoid financial risks like what it has done in the past and investors could use the level of leverage it is willing to take on as a proxy for the risks it chooses to undertake.


UOB closed at S$20.80 on Tuesday. At that price, shares of the bank are valued at 1.4 times book value and 1.7 times tangible book value, with a dividend yield of 3.4% based on its pay-out last year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.