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United Overseas Bank Ltd’s Profit Jumps Around 20% In 2018’s First Quarter

2017 proved to be a fantastic year for banks in Singapore. Robust regional economic growth, an improving oil and gas market, and a buoyant home-loan market, were all factors that contributed to the strong performance by banks. With net interest margins expected to rise further this year, many investors and analysts are anticipating that the good times for the banks are set to continue throughout 2018.

The biggest bank in Singapore, DBS Group Holdings Ltd (SGX: D05), got the ball rolling for the banks when it released its 2018 first quarter results last week. As expected, its profit reached a record level, its net interest margin widened, and its loan volume expanded.

The next bank that released its 2018 first quarter earnings update was United Overseas Bank Ltd (SGX: U11), which did so in early May. UOB did exceptionally well too, as its profit after tax in the quarter soared 21% year-on-year. Here are 10 more important highlights from UOB’s latest earnings update:

1. Total income grew 9% from a year ago to S$2.23 billion from S$2.05 billion. Expenses rose 11% to S$987 million from S$887 million. Operating profit increased 7% to S$1.24 billion from S$1.17 billion. After accounting for a 57% decline in allowances, net profit after tax rose 21% to S$978 million. Consequently, diluted earnings per share rose 18.8% to S$0.568.

2. Net interest income, which accounts for the bulk of the bank’s income, rose 13% year-on-year to S$1.47 billion from S$1.30 billion. This was driven by an increase in the net interest margin by 11 basis points from a year ago to 1.84%. A 5% increase in loan volume was also a factor in the net interest income growth.

3. Net fee income, which includes wealth management and fund management fees, increased by 18% year-on-year to S$517 million. This was largely due to strong growth in wealth management fees, loan-related fees, fund management fees, and credit card fee income.

4. UOB’s expense-income ratio, a measure of the cost-efficiency of the bank, stood at 44.2% in 2018’s first quarter. This was up slightly from 43.2% a year ago, but down 1.8 percentage points from 46.0% in the previous sequential quarter. With the expense-income ratio, generally speaking, the lower it is, the better.

5. The non-performing loans (NPL) ratio, a metric to determine the amount of loans that the bank has not collected interest on, has decreased to 1.7% from 1.8% in the last sequential quarter.

6. The bank had broad-based growth across most geographical sectors. Operating profit in Singapore grew 4% to S$697 million from S$672 million. Operating profit from regional countries grew 12% year-on-year to S$425 million. This was largely driven by a 43% increase in operating profit in Thailand, and a 12% increase in Greater China.

7. As of 31 March 2018, UOB had a comfortable capital position. Its CET1 CAR (Common Equity Tier 1 capital adequacy ratio), a common metric used to determine the ability of a bank to withstand any economic shocks and loan losses, stood at 14.9%. Banks in Singapore are required to have a CET1 CAR of 6.5%. UOB also had a safe leverage ratio of 8.2%.

8. Over the reporting quarter, customer deposits increased by S$1 billion, or 0.3% to S$274 billion. Customer loans grew S$5 billion, or 2.1%, from the previous quarter to S$237 million. Therefore, the loan-to-deposit ratio (LDR) was at 86.7%, giving the bank ample room to grow its loan portfolio in the future. Typically, a LDR of 90% is considered optimal.

9. On the outlook for the rest of the year, UOB’s CEO and deputy chairman, Wee Ee Cheong, said, “Despite ongoing trade tensions and financial market volatilities, we are confident of Asia’s economic fundamentals and growth potential which continue to present immense opportunities given rising urbanisation, affluence and business flows. As a long-term player with an extensive footprint and connectivity in the region, UOB is well-placed to meet our customers’ growth needs.”

10. At the time of writing, shares of UOB exchanged hands at S$29.46 each. This translates to a price-to-book ratio of 1.47, and a trailing dividend yield of 3.4%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on DBS Group Holdings and United Overseas Bank. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings.