How Does United Overseas Bank Ltd Make Money?

A few days ago, I wrote an article that looked at the revenue sources and business segments of one of Singapore’s banking giants, Oversea-Chinese Banking Corp Limited (SGX: O39).

I thought it’d be interesting as well to do the same here for United Overseas Bank Ltd (SGX: U11), Singapore’s third-largest local bank, by digging into its latest 2015 annual report. So, let’s get rolling.

UOB’s revenue (reminder: a bank’s revenue is known as income) is split into non-interest income and net interest income. The latter is more important for UOB, as it accounted for 61.2% of the bank’s total income of S$8.048 billion in 2015.

In my article on OCBC, I wrote the following:

“The most important source of revenue for OCBC is its net interest income, which comes from the traditional banking business of borrowing and lending. It is heavily affected by the difference between the interest that the bank pays to borrow (from say, depositors and other financial institutions) and the interest it receives from loans it has extended.

These rates are, in turn, heavily affected by the prevailing interest rate environment. In general, a rising interest rate environment would be beneficial for the bank’s net interest income. And given that the bulk of OCBC’s total income comes from its net interest income, changes in the interest rate environment would be important to keep an eye on.”

You can substitute the two mentions of ‘OCBC’ in the quote above with ‘UOB’ and the statements will still hold true. Changes in benchmark interest rates can have big impacts on UOB’s income, and thus profitability.

UOB also has diverse sources of non-interest income, which generally come from the bank’s other business activities apart from borrowing and lending. The following table illustrates all of the bank’s revenue sources (everything that is below the net interest income entry combine to form UOB’s non-interest income):

UOB's 2015 revenue source table
Source: UOB’s 2015 annual report

In the 2015 annual report, UOB mentioned that it “is organised to be segment-led across key markets.” The segments are: Group Retail; Group Wholesale Banking; Global Markets and Investment Management; and Others. Here’s how the quartet stack up in terms of their income contribution:

UOB's 2015 business segment revenue table
Source: UOB’s 2015 annual report

As you can see, Group Retail and Group Wholesale Banking accounts for the lion’s share of UOB’s income. So, let’s take a look at them first, starting with the latter.

Group Wholesale Banking is where UOB takes care of its medium and large corporate clients. Some of the products and services that UOB provides here are: Cash management and liquidity solutions; trade finance and structure finance solutions; working capital and term lending; and corporate finance services (such as advisory work for mergers and acquisitions).

Group Retail, as its name suggests, is where UOB works with individual consumers. This segment also houses the bank’s business with small enterprises. Depending on the level of affluence of the individual, UOB’s product and service suite can range from simple things such as savings accounts, credit cards, and housing loans, to something more complex such as asset management and estate planning.

Moving on to Global Markets and Investment Management, it is where UOB provides structured products and other financial products such as foreign exchange, fixed income, precious metals and more. UOB said that the segment “is a dominant player in Singapore dollar instruments as well as a provider of banknote services in the region.” Some of the segment’s other activities include asset management and proprietary investment activities.

The Others segment include UOB’s property activities, insurance businesses, and more. At the end of 2015, UOB has a portfolio of investment properties that were recorded on the books at a value of S$1.108 billion. But, these properties had a collective market value of S$3.252 billion.

There is clearly a lot that is going on with UOB’s business – and that’s why it’s important for investors to understand just how the bank makes money. A failure to do so would mean that investors would not able to get a good grasp on the opportunities the bank has, and more important, the risks that could choke the bank’s business.

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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 writer Chong Ser Jing does not own shares in any companies mentioned.