The Three Numbers That Toughen United Overseas Bank

There is something very quaint about the three quoted banks in Singapore. They are almost identical in every way – even down to their Net Income Margins and Asset Turnovers. So it is possibly true, especially when it comes to Singapore banks, that a bank is a bank is a bank.

United Overseas Bank (SGX: U11) is Singapore’s third-largest bank. Its Return on Equity (RoE) of 10.8 is roughly in line with the median returns for the 30 companies that make up the Straits Times Index (SGX: ^STI). It means that UOB generates around S$10.80 for every S$100 of shareholder equity.

UOB’s high Return on Equity can be traced to its high Net Income Margin of 47.6%. It is marginally less profitable than Oversea-Chinese Banking Corporation (SGX: O39) but marginally more profitable than DBS Group (SGX: D05).

In common with its two Singapore peers, United Overseas Bank has a very low Asset Turnover, as a result of its extraordinarily large asset base. After all, no one wants to deposit money in a bank with a small asset base. Nevertheless, UOB’s Asset Turnover of 0.022 is considerably lower than the market average of 0.47.

What UOB misses out on in terms of Asset Turnover, it more than makes up for in terms of Leverage. That is because every dollar that we deposit in banks is treated as a liability. In the case of UOB, its Leverage Ratio of 10.3 is nearly six times higher than the market average.

By disassembling the Return on Equity for United Overseas Bank, it is easy to see why it is tough. Its RoE of 10.80 is the product of an very high Net Income Margin of 47.6%; a low Asset Turnover of 0.022 and a hefty Leverage Ratio of 10.3.

The Motley Fool's purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock -- Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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