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

United Overseas Bank Ltd (SGX: U11) reported its fiscal fourth-quarter earnings earlier this morning. The reporting period was for 1 October 2015 to 31 December 2015.

United Overseas Bank – or better known as UOB – is one of the three major banks based out of Singapore along with DBS Group Holdings Ltd  (SGX: D05) and Oversea-Chinese Bank 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: G07) as its subsidiary.

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

Financial highlights

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

  1. For the fourth-quarter, net interest income for UOB was up 9.3% to $1.3 billion on a year-on-year comparison. For 2015, net interest income had climbed by 8.1% to $4.93 billion.
  2. Fee and commission income came in at $480 million for the reporting quarter, about 6.7% above 2014’s fourth-quarter. For 2015, fee and commission income grew 7.7% to $1.88 billion.
  3. Other non-interest income rose as well, rising 39.4% to $323 million compared to the same quarter a year ago. Growth in non-interest income for the whole of 2015 was less stellar, coming in at S$1.24 billion, 7.6% higher than in 2014.

Taken together, UOB made $2.08 billion and $8.05 billion in total income (excluding share of profit from associates and joint ventures) for the fourth-quarter of 2015 and the whole of 2015, respectively. These figures represent year-on-year growth of 12.5% and 7.9%.

On the share of results of associates and joint ventures as well as the costs and expenses side of things:

  1. Share of profit of associates and joint ventures declined by a sharp 59% in the reporting quarter to $18 million; it also shrank by 40% to $90 million for 2015.
  2. Total expenses for UOB was up 19.8% year-on-year to $964 million for the quarter and up 14.3% to $3.60 billion for the year.
  3. Total allowances also jumped 14.6% year-on-year to $190 million for the quarter but increased by just 5.7% to $672 million for the year.

When UOB’s revenue, results from associates and joint ventures, and costs are put together, the bank’s net profit for the fourth-quarter of 2015 came in at $788 million or 0.3% higher than the fourth quarter of 2014. For the whole of 2015, net profit was 1.2% lower, ending at S$3.21 billion.

UOB’s higher expenses in 2015 were a result of continued investment by the bank in “people and technology capabilities.” There were other factors at play, such as bonus adjustments, one-off expenses of $67 million (for Singapore’s Golden Jubilee celebrations), and the launch of a brand campaign.

The bank’s net asset value per share – a proxy for the bank’s real business value – saw a 4.4% increase from $17.09 in the fourth-quarter of 2014 to $17.84 in the reporting quarter.

UOB’s board of directors had declared a final dividend of $0.35 per share. Together with the one-off 80th Anniversary dividend of $0.20 per share and the interim dividend of $0.35 per share, UOB’s total dividend for 2015 works out to be $0.90 . This is an increase from the $0.75 in total dividend seen in 2014, which did not include a one-off anniversary dividend.

Operational highlights

Net interest income had grown because of an improved net interest margin. For 2015, net interest margin was 1.77%, up from the 1.71% recorded in 2014. Meanwhile, fee and commission income had registered growth on the back of increases across most businesses (credit card, fund management, and wealth management activities).

Elsewhere, customer deposits for the fourth quarter was $240.5 billion, up 2.9% from a year ago. Net customer loans meanwhile rose 3.9% from a year ago to reach $203.6 billion, as of 31 December 2015. The non-performing loan ratio in 2015 was 1.4%, a slight increase from the 1.2% recorded a year ago.

As of 31 December 2015, UOB’s loan-to-deposit ratio was 84.7%, a slight increase from the 83.8% seen at end-2014. As my colleague James Yeo had once noted:

“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): Common Equity Tier 1 (CET1) CAR of 6.5%, Tier 1 CAR of 8%, and Total CAR of 10%. UOB may be considered well capitalized as its CARs at the fourth-quarter of 2015 are higher than MAS’s requirements:

UOB CAR ratios (end-2015)
Source: UOB’s earnings release and MAS’s press release

UOB’s leverage ratio was 7.3% as of 31 December 2015, which is well above the minimum requirement of 3%.

UOB’s deputy chairman and chief executive, Wee Ee Cheong, had summarized the reporting quarter and year with a few words in the bank’s earnings release:

“2015 was a milestone year for us as we celebrated UOB’s 80th anniversary. Our approach since our founding in 1935 has been to stand by our customers and to plan well ahead in building our franchise across the region. Despite the slowing environment and bouts of market volatility during the year, we have kept our earnings steady and our balance sheet strong.

Financial markets will continue to grapple with volatility and uncertainty in 2016 underpinned by ongoing concerns such as the impact of falling oil prices and China’s slowdown on the global economy. Our view is that the risks are largely manageable and the underlying economic fundamentals are strong enough to withstand the shocks even as we enter an environment of slower growth.

It is against this backdrop that UOB is ensuring a resilient balance sheet and staying disciplined in pursuing sustainable growth and this will continue to see us through economic cycles. Times like these present opportunities for long-term players such as UOB. We remain confident of the region’s underlying prospects and will continue to invest in our capabilities and selectively grow our franchise for the long term.”

Foolish summary

At its opening price of $17.70 this morning, UOB traded at slightly below its net asset value and has a trailing dividend yield of 5%.

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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.