United Overseas Bank Ltd (SGX: U11) released its earnings update for the second quarter of 2018 on Friday last week. The headline numbers were impressive, with first-half earnings at a record high of S$2.06 billion, up 24% year-on-year. Here is a summary of the important information from UOB’s earnings report.
Overall business grows
For the three-month period from April to June (Q2), total income rose 11% year-on-year to S$2,342 million from S$2,114 million a year ago. Operating profit, likewise, rose 11% to S$1,320 million. Including allowances and share of profit from joint ventures and associates, net profit was up 28% to S$1,077 million from S$845 million.
The strong Q2 performance was driven by both higher net interest income and net fee income. Net interest income was up 14% to S$1,542 million, while net fee income rose 11% to S$498 million. Other income declined 3% to S$302 million.
Quarter-on-quarter, operating profit rose 6% due to higher net interest income (NIM) and other income. This was despite a 1 basis point decline in net interest margin from the previous quarter.
Interest income driven by loan margin and volume growth
Interest income has been steadily increasing each quarter since the start of 2017. Below is a chart showing the interest income and interest margin changes over the last six quarters:
Source: UOB 2018 Q2 presentation
From the chart, we can see that there has been a steady increase in net interest margin over the last six quarters. However, there was a slight decline in net interest margin in the latest quarter. But with interest rates expected to be raised again this year and in 2019, it is likely that the net interest margin will improve later in the year.
Strong liquidity and capital position
The bank is also well-positioned to take advantage of the higher net interest margin by having ample liquidity to increase its loan book. As of June, UOB had a fully loaded Common Equity Tier 1 (CET1) capital adequacy ratio (CAR) of 14.5%. The CET1 ratio is a common metric used to measure if a bank has sufficient liquidity in case of a liquidity crunch. In Singapore, the Monetary Authority of Singapore requires banks to have a minimum CET1 CAR ratio of 6.5%. UOB is well-covered in this regard and has ample liquidity headroom to issue more loans. It also has a liquidity coverage ratio of more than 100% at 142%.
The bank had new non-performing assets (NPA) of S$436 million in Q2, in line with previous quarters. Non-performing assets are loans that are in default when loan payments have not been made for more than 90 days.
The non-performing loan ratio was a manageable 1.7%. The bank has adequate allowance coverage to factor in the non-performing assets, with NPA coverage of 89%. An NPA coverage of more than 100% is ideal but 89% is still adequate.
Non-interest income shows steady growth
In total, UOB’s non-interest income rose 5.5% year-on-year to S$800 million. This was largely driven by improvement in the net fee income, which includes the wealth management business. Below is a complete breakdown of non-interest income over the last six quarters:
Source: UOB 2018 Q2 presentation
Increase in dividend payout
Finally, the bank declared a dividend of 50 Singapore cents for the first half of 2018. That is a 15 cents, or 42%, increase from the previous year’s interim dividend. At the same time, UOB maintained a low dividend payout ratio of 41%, giving it headroom to increase its dividend in the future if it so wishes.
With its share price at S$27.10 per share (at the time of writing), it has an annualised dividend yield of 3.6%, a price-to-earnings ratio of 11.3 and a price-to-book ratio of 1.3.
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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 recommended shares of United Overseas Bank. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.