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

United Overseas Bank Ltd (SGX: U11) reported its second quarter earnings this morning. The reporting period was for 1 April 2016 to 30 June 2016.

As a brief background, 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).

It 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 also catch up with UOB’s earnings for the previous quarter here.

Let’s get going with the latest earnings release.

Financial highlights

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

  1. For the second-quarter of 2016, net interest income was flat at $1.21 billion compared to a year ago.
  2. Fee and commission income came in at $475 million for the reporting quarter, 2.0% above 2015’s second quarter.
  3. Other non-interest income increased 36.2% to $338 million.

Taken together, UOB made $2.04 billion in total income for the second-quarter of 2016, up 5.0% from a year ago.

On the costs and expenses side of things:

  1. Total expenses for UOB was up 5.7% year-on-year to $927 million.
  2. Total allowances was also up 5.7% year-on-year to $161 million.

UOB also reported share of profit from associates and joint ventures of $32 million for the reporting, down 19.7% from a year ago.

Putting all the above numbers together, UOB’s net profit for the second-quarter of 2016 came in at $801 million, or 5.1% higher than the second quarter of 2015. The net profit figure includes the share of profit from associates and joint ventures

The bank’s net asset value per share – a proxy for the bank’s real business value – came in at $18.16 in the reporting quarter, up 2.5% from the $17.71 recorded last year. But, this was down slightly compared to the previous quarter’s net asset value of $18.22 per share.

UOB’s board of directors had recommended an interim dividend of S$0.35 per share, unchanged from the previous year.

Operational highlights

Net interest income was flat as loan growth was offset by a lower net interest margin. For the second-quarter of 2016, the net interest margin was 1.68%, down from the 1.77% recorded last year. Meanwhile, fee and commission income rose due to higher wealth management and credit card fees.

Elsewhere, customer deposits totaled $248.2 billion, up 2.8% from a year ago. But, customer deposits were down 2.6% compared to the previous quarter. Net customer loans also rose 4.9% from a year ago to reach $208.4 billion.

As of 30 June 2016, the Group’s loan-to-deposit ratio is 84%. 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.”

The non-performing loan (NPL) ratio for the second-quarter of 2016 is 1.4%, a slight increase from the 1.2% recorded a year ago. The first-quarter of 2016 also saw a NPL ratio of 1.4%.

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) 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 second-quarter of 2016 are at 13.1%, 13.2%, and 15.9% respectively.

UOB’s leverage ratio is also well above the minimum requirement of 3%. As of 30 June 2016, the bank’s leverage ratio is 7.4%.

UOB’s deputy chairman and chief executive, Wee Ee Cheong, summarised the quarter with a few words:

“While our performance reflects the effects of a cyclical slowdown, with softer revenue growth and rising NPLs, we kept our balance sheet strong. This was evidenced by our well-subscribed Additional Tier 1 capital securities and the upgrade of our standalone rating by Standard & Poor’s.

Even as growth in the region is on a modest trajectory, the economies are well-positioned to fend off shocks from the global financial market turmoil. We will stay vigilant and nimble, while setting our sights on the region’s long-term prospects. Continued investments in furthering our capabilities and productivity will help to strengthen our franchise and to sustain our growth through economic cycles.

At its opening price of $18.95 this morning, UOB traded at slightly above its net asset value and has a trailing dividend yield of 4.7%. 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.