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2 Reasons Why Long Term Investors Should Consider UOB Now

United Overseas Bank Ltd (SGX: U11), commonly referred to as UOB, is one of the three main local banks listed in Singapore. UOB stocks are currently out of favor among investors; at its current price of S$25.50 (at the time of writing), UOB’s shares are down by 16% from its peak of S$ 30.37 in the last 12 months.

Though the market is not in favor of the company now, there are still good reasons for long term investors to consider UOB as an investment candidate. Here’s two of them.

Proven financial track record

One of the most important factor that investors seek in any investment is the ability of a company to sustain its profitability in the foreseeable future. To assess this, investors will usually look at the company’s track record for a minimum of five years.

Here, the idea is simple. A company that has a proven track record has a higher probability of sustaining its profitability in the future.

Personally, a good track record is one that is either stable or growing over a period of at least five years.

As for UOB, it delivered a commendable performance over the last five years. Here are some numbers to detail the performance – Total income grew from S$ 6.7 billion in 2013 to S$8.9 billion in 2017. Similarly, net profit attributable to shareholders grew from S$3.0 billion in 2013 to S$3.4 billion in 2017. The former was up by 33% while the latter was up by 13% during that period.

Conservative capital adequacy ratio

A capital requirement (also known as capital adequacy) is the amount of capital a bank has to hold as required by its regulator. Capital requirements are set to ensure that banks will not default during difficult economic conditions.

For investors, the capital adequacy ratio is a good indication of whether a bank is operating in a conservative manner. In general, the higher the capital adequacy ratio, the more conservative a bank is in conducting its business.

Here, we think UOB maintained a rather conservative capital requirement. As of 30 September 2018, its Common Equity Tier 1 capital adequacy ratio (CAR), Tier 1 CAR and Total CAR were 14.1%, 15.1%, and 17.4%, respectively. These ratios were well above the respective regulatory requirement of 6.5%, 8%, and 10%. Or in other words, the risk that UOB will run into trouble (due to capital requirements) during difficult times will be low.

Conclusion

From the analysis, we looked at two good reasons for investors to consider UOB for their long term portfolio.

If you find the above insightful, look out for the next installment of this analysis where we’ll take a look further.

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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 Lawrence Nga doesn’t own shares in any companies mentioned. Motley Fool has recommendations for United Overseas Bank Ltd