Has United Overseas Bank Ltd Become Too Big To Grow?


United Overseas Bank Ltd (SGX: U11) is already one of the largest banks in the Southeast Asia region. Given its size and scale (the bank had some S$284 billion in total assets in 2013), is it even possible to continue growing? The bank announced its second quarter results yesterday and showed that elephants can gallop too.

Some basic numbers – The Good

For the first half of 2014, United Overseas Bank’s Net Interest Income (one part of the bank’s ‘revenue’) grew 12.9% year-on-year to S$2.23 billion. The bank had managed growth in Net Interest Income in most of its key markets (Singapore, Malaysia, Thailand, Indonesia, and Greater China). In fact, the bank even saw its Net Interest Income balloon by 40.6% in Greater China; this could be a sign that United Overseas Bank is making some progress in the Chinese geographical market.

Elsewhere within the bank, Other Non-Interest Income (another part of the bank’s ‘revenue’) was also a bright spot as it grew 29.5% year-on-year to S$578 million in the first half of 2014. The last part of United Overseas Bank’s top-line – Fee and Commission Income – was the disappointing one as it fell 7.3% to S$824 million. All told, Total Income (the bank’s total ‘revenue’) for United Overseas Bank was 9.7% higher at S$3.64 billion.

With total expenses that increased by only 8.5% to S$1.54 billion, the bank was able to improve its operating profit by 10.6% to S$2.09 billion. All told, the bank’s net profit had grown by 6.1% to S$1.6 billion.

Some basic numbers – The Bad

Of course, life wasn’t just a bed of roses for the bank. For one, the bank’s loan margin has been dropping in each consecutive year since at least 2010 when it was at 2.88%; in the first half of 2014, loan margin was 2.06%, down from 2.12% in the corresponding period a year ago. This has caused its net interest margin to follow a similar (though not identical) downward trajectory. The bank’s net interest margin was at 2.09% in 2010 and has since fallen to 1.72% for the first half of 2014. Although, it must also be noted that net interest margin in the first half of 2013 was at only 1.71%. So, there’s some improvement at the very least.

But that said, if United Overseas Bank’s loan margin continues to fall, we might be seeing its net interest margin compress again soon.

Other less desirable developments with the bank include a 49.7% year-on-year surge in its impairment charges to S$307 million for the first half of 2014. The increase in impairment charges was most significant in markets like Singapore and Thailand with United Overseas Bank seeing more non-performing accounts from the two areas.

Cost management and capital requirements

Operationally, the bank has managed to keep its costs in check. Its expense/income ratio has fallen from 42.9% a year ago to 42.4% in the first half of 2014.

In June this year, the Monetary Authority of Singapore had announced that United Overseas Bank – along with the other two local banking stalwarts DBS Group Holdings Ltd (SGX: D05) and Oversea-Chinese Banking Corp. Limited (SGX: O39) – would be subjected to more stringent capital requirements.

Although the new requirements deal with other facets of the banks’ capital, it’s still great for shareholders of United Overseas Bank to see that their bank has managed to maintain a rock-solid capital structure in the  form of having strong capital adequacy ratios (CAR). As of 30 June 2014, United Overseas Bank’s Common Equity Tier 1 CAR and Total CAR stood at 13.9% and 17.8% respectively, well above the MAS’s requirements of 

Foolish Summary

United Overseas Bank believes that its long-term success lies on two fronts: Its strategy of focusing on its key regional markets and having a strong balance sheet. The company will continue to maintain those two prongs which has been proven to be very effective. I tend to agree with management – if there is nothing wrong with the soup, don’t change the ingredients.

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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 Stanley Lim doesn't own any shares of companies mention above.