United Overseas Bank Ltd’s Latest Earnings: What Investors Should Know

United Overseas Bank Ltd (SGX: U11) – or better known as UOB – reported its second-quarter earnings for the fiscal year ending 31 December 2015 this morning. The reporting period was for 1 April 2015 to 30 June 2015.

UOB is one of the three major banks based out of Singapore along with DBS Group Holdings Ltd  (SGX: D05) and Oversea-Chinese Banking Corp Limited (SGX: O39). UOB has a network of over 500 offices in 19 countries and territories in Asia-Pacific, Western Europe, and North America. The bank counts United Overseas Insurance (SGX: U13) as its subsidiary.

You can catch up with UOB’s earnings for the previous quarter in here.

Financial highlights

The following’s a quick rundown on UOB’s total income (essentially the “revenue” for a bank):

  1. For the second-quarter, net interest income for UOB was up 7.9% to $1.2 billion on a year-on-year comparison.
  2. Fee and commission income came in at $465 million for the reporting quarter, about 13.4% above 2014’s second-quarter.
  3. However, other non-interest income for the second quarter plunged by a hefty 29% to $248 million compared to the same quarter a year ago.
  4. Share of profit from associates and joint ventures rose 53% in the reporting quarter, ending up at $40 million. This compares with the $26 million made in the comparable quarter last year.

Taken together, UOB made $1.93 billion in total income (excluding share of profit from associates and joint ventures) for the second-quarter of 2015, or up 2.2% from a year ago.

On the costs and expenses side of things:

  1. For the reporting quarter, UOB’s total expenses recorded an 11.4% year-on-year increase to $877 million.
  2. Total allowances was up 1.7% year-on-year to $152 million.

When its revenue and costs are put together, UOB’s net profit in the second-quarter of 2015 was $762 million, or 5.7% lower than the second-quarter of 2014. The net profit figure includes the share of profit from associates and joint ventures.

The bank’s net asset value per share – a good proxy for the bank’s real business value – saw a healthy increase of 9.5% from $16.18 in the second-quarter of 2014 to $17.71 in the reporting quarter. But, there was a sequential decline from the net asset value of $17.88 that was recorded in the first quarter of 2015.

UOB’s board of directors declared an interim dividend of $0.35 per ordinary share for the quarter, up 75% from the 20 cents per share paid out last year.

Operational highlights

Net interest income for UOB rose from higher loan growth and a better net interest margin. To the latter point, net interest margin for the reporting quarter was 1.77%, up from the 1.71% recorded a year ago. The improvement came from loans that were repriced on SIBOR increases.

Meanwhile, the fee and commission income registered growth on the back of an expansion in wealth management, credit card, and fund management income. Other non-interest income was down due to an unfavorable comparison with the previous year’s second-quarter which had included a one-off gain from investments.

Elsewhere, customer deposits for the second-quarter was $241 billion, up a healthy 11.7% from a year ago. Gross loans, meanwhile, inched up by 4.8% from a year ago to reach $202 billion on 30 June 2015. The non-performing loan ratio for the second-quarter of 2015 was 1.2%.

As of 30 June 2015, the total and SGD loan-to-deposit ratios were 82.3% and 91.9% respectively. As my colleague James Yeo had noted before:

“A bank’s deposit to loan ratio should not be too high as that might cause liquidity issues if there were a sudden flood of depositors needing to withdraw their deposits from the bank.”

Based on regulatory requirements from the Monetary Authority of Singapore, banks in Singapore must at least match the following Capital Adequacy Ratios (CARs) from 1 January 2015 onward: Common Equity Tier 1 (CET1) at 6.5%, Tier 1 at 8%, and Total at 10%. UOB may be considered well capitalized as its CARs at the end of the reporting quarter are comfortably higher than MAS’ requirements at 14.0%, 14.0%, and 16.8% respectively.

UOB’s leverage ratio was 7.6% as of 30 June 2015, well above the minimum requirement of 3%.

Wee Ee Cheong, the bank’s deputy chairman and chief executive, summarized the quarter and gave his thoughts about the future with a few words:

“Our core business continued to deliver with growth in net interest income and fee income. Our balance sheet remains strong. Even as growth is expected to moderate in the regional markets, we are comfortable with the resilience of our portfolio and adequate level of provisions.

We continue to invest in capabilities to tap the growing opportunities arising from increased regional connectivity. Our recently opened Myanmar branch will strengthen our ability to support our clients as they expand regionally. We are also investing in areas including digitalisation to enhance connectivity and customer experience across delivery channels.

By tapping on our core strengths – an integrated network, deep customer insights, regional expertise and strong balance sheet – coupled with new digital capabilities, we are confident of continuing to deliver value to our customers and shareholders in the long run.”

Foolish summary

At its opening price of $22.35 this morning, UOB traded at around 1.26 times its latest net asset value and has a trailing dividend yield of 4%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.