United Overseas Bank Ltd (SGX: U11) released its 2018 third quarter earnings update this morning. As a quick introduction for context later, UOB is one of the three big banks in Singapore with branches all over South-East Asia. Here are 11 key takeaways from UOB’s latest results (all numbers relate to 2018’s third quarter, and any comparisons made are with 2017’s third quarter unless otherwise stated):
1. Net interest income (revenue from the bank’s lending activities) improved by 13.6% year-on-year, climbing from S$1.41 billion to S$1.60 billion. Total income (overall revenue of the bank) increased by 7.5% from S$2.16 billion to S$2.33 billion, aided by the aforementioned growth in net interest income and a 2% increase in fee and commission income to S$484 million; there was an offset from the 13% decline in other non-interest income to S$244 million.
2. Operating profit improved by 4% year-on-year to S$1.32 billion, but with lower allowances made for credit losses, UOB’s net profit after tax jumped 17% from S$883 million to S$1.04 billion.
3. Both loans and deposits growth were healthy, registering year-on-year increases of 9% each to S$251.8 billion and S$293.6 billion, respectively. The loan-to-deposit (LDR) ratio stood at 85.7% as of 2018’s third quarter, in line with the LDR of 85.8% for 2017’s third quarter. The LDR implies more headroom for UOB to make loans as the metric is still below 100%.
4. UOB’s net interest margin (NIM) rose from 1.79% to 1.81%. NIM represents the difference between the interest rates on the money that the bank lends to borrowers, versus the rates which banks pay to depositors for depositing money with the bank. A higher NIM signifies that UOB is probably lending at slightly higher rates while keeping deposit rates stable.
5. However, UOB’s cost to income ratio increased from 41.6% to 43.4%, as a result of higher staff costs and higher IT-related expenses.
6. Total allowances for bad loans more than halved to S$95 million (from S$221 million), as the third quarter of 2017 saw higher provisions and allowances for bad loans from the oil and gas sector. The non-performing loans (NPL) ratio was flat at 1.6%.
7. The annualised return on shareholders’ equity improved from 10.5% to 11.7%, while the total capital adequacy ratio weakened slightly from 17.8% to 17.4%. But, UOB’s total capital adequacy ratio is still significantly higher than the regulatory requirement of 10%.
8. The bank’s book value per share increased from S$19.88 to S$20.78, and was up very slightly from S$20.77 in 2018’s second quarter.
9. UOB should be able to make more loans moving forward as total funding (which includes customer deposits) has increased by 8% from S$309 billion to S$334 billion.
10. Anticipation of further interest rate hikes should also boost the bank’s NIM further, as banks usually re-price their loans more quickly than they do their deposit rates.
11. At Thursday’s close, UOB’s share price was S$24.95. At that price, UOB has a price-to-book ratio of 1.20.
In all, UOB reported a good set of results for 2018’s third quarter. With the backdrop of rising interest rates, the bank could see further NIM improvement. Its full-year earnings should continue to look good in the absence of major headwinds, and barring a significant deterioration in economic activity, its NPL ratio should also stay stable. With better earnings, there is also a very high chance of UOB increasing its total core dividend per share, for perspective, the bank’s ordinary dividend in 2017 was S$0.80 per share.
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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in United Overseas Bank.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing does not own shares in United Overseas Bank. The Motley Fool Singapore has a recommendation on United Overseas Bank.