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

United Overseas Bank Ltd (SGX: U11) reported its fiscal first-quarter earnings this morning. The reporting period was for 1 January 2016 to 31 March 2016.

United Overseas Bank (or UOB for short), 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 currently has a network of over 500 offices in 19 countries and territories in the Asia-Pacific, Western Europe, and North American regions. The bank counts insurer United Overseas Insurance (SGX: U13) as a 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 a bank’s “revenue”):

  1. For the first-quarter of 2016, net interest income for UOB was up 6.1% year-on-year to $1.28 billion.
  2. The fee and commission income came in at $433 million for the reporting quarter, 4.5% below 2015’s first quarter.
  3. Other non-interest income fell as well, dropping 13.1% to $262 million.

Taken together, UOB made $1.97 billion in total income for the first-quarter of 2016, up 0.7% from a year ago. On the costs and expenses side of things:

  1. Total expenses for UOB was up 4.9% year-on-year to $894 million.
  2. Total allowances was down 30.7% year-on-year to $117 million.

Meanwhile, the bank’s share of profit from associates and joint ventures was a negative $30 million for the reporting quarter. This compares with the $4 million gain made in the comparable quarter last year.

Putting it all together after accounting for taxes and minority interests, UOB’s net profit for the first-quarter of 2016 came in at $766 million, 4.4% lower than the first quarter of 2015.

The bank’s net asset value per share – a proxy for the bank’s real business value – came in at $18.22 for the reporting quarter, up by 1.9% from the $17.88 recorded in the same quarter a year ago.

Operational highlights

UOB’s net interest income had benefitted from an improved net interest margin and an expanded loan base. For the first-quarter of 2016, UOB’s net interest margin was 1.78%, up from the 1.76% recorded last year. Meanwhile, the fee and commission income fell due to lower wealth management fees and investment income.

Elsewhere, customer deposits totaled $254.8 billion, representing a 6.4% increase from a year ago. Net customer loans, meanwhile, rose 2.9% year-on-year to reach $205.6 billion as of 31 March 2016. UOB’s non-performing loan (NPL) ratio for the first quarter of 2016 was 1.4%, a slight increase from the 1.2% recorded a year ago. The good news is that the NPL ratio had remained unchanged from end-2015.

As of 31 March 2016, UOB’s loan-to-deposit ratio was 80.7%. 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) from 1 January 2015 onward: 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 in the reporting quarter are still higher than MAS’ requirements, as you can see in the table below:

UOB's CAR ratios
Source: UOB’s earnings release

It’s worth noting too that UOB’s leverage ratio was 7% as of 31 March 2016, well above the minimum regulatory requirement of 3%.

The bank’s deputy chairman and chief executive, Wee Ee Cheong, had summarized the quarter with a few words:

“While revenue has moderated in line with the slower growth environment, we continue to maintain a healthy balance sheet, with stable asset quality and strong core capitalisation. Our recent successful issuances of covered bonds and subordinated notes reflect the confidence investors have in us.

Even as the region faces macro headwinds in the near term, we believe its economic fundamentals are largely capable of coping with bouts of market volatility. Our resilient balance sheet puts us in good stead to support our customers through economic cycles. At the same time, we stay focused on building our core franchise for the long term.”

At its opening price of $19.02 this morning, UOB traded at slightly above its net asset value and has a trailing dividend yield of 4.7%. Foolish investors should note that the trailing dividend includes a one-off 80th Anniversary payout of $0.20 per share.

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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.