United Overseas Bank Ltd (SGX: U11), or UOB, is one of the three main local banks in Singapore that offers a comprehensive range of banking services. Banks are traditionally complex companies as they have many divisions and moving parts, but investors can look at four key metrics in order to get a better understanding of how UOB works.
Net interest margin
Net interest margin (NIM) is the difference between the interest rates at which the bank lends out and borrows money, and it represents the “spread” the bank enjoys if it’s able to lend out money at higher rates and accept deposits at lower rates. As an example, if the bank’s overall lending rate is 4%, and it pays an overall 2% on its customer deposits, its NIM would thus be 2% (4% minus 2%).
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UOB’s NIM was 1.79% as reported in its first-quarter 2019 earnings. This was down from 1.84% in Q1 2018. This could be due to the bank paying out higher rates on its deposits while not being able to re-price its loans quickly enough, resulting in a slight compression in NIM.
Cost to income ratio
The cost to income (COI) ratio for UOB was 44.6% for Q1 2019, slightly higher than the 44.2% recorded in Q1 2018. The COI ratio is simply another name for the expenses of the bank in relation to its revenue. A lower COI ratio implies that the bank is more efficient in its operations and incurs a lower expense ratio with respect to its revenue base.
Loan growth is an important metric for any bank, as it demonstrates the bank’s ability to attract borrowers to borrow more. As a bank’s core business is predicated on lending money to individuals and corporations and charging them interest, investors should keep track of the loan book trend as it is also a reflection of economic conditions.
UOB’s net customer loans increased by 12.2% year on year in Q1 2019, from S$237.4 billion to S$266.5 billion. Such a double-digit year-on-year increase is very positive and signals healthy loan book growth for the bank, which flows through to income and profits.
Finally, we come to the non-performing loans (NPL) aspect of the bank, which measures the portion of loans that are deemed irrecoverable or uncollectible due to business failure (for corporations) or personal bankruptcy (for individuals). A higher NPL ratio may also imply that the bank has inadequate risk controls and does not stringently review the credit quality of its customers before making loans.
UOB’s NPL ratio stood at 1.5% in Q1 2019, slightly better than the 1.7% in Q1 2018. Investors should, therefore, be heartened to know that the bank is managing its loan book well and ensuring NPL is kept within reasonable limits.
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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 Royston Yang does not own shares in United Overseas Bank Ltd. The Motley Fool Singapore has recommended shares of United Overseas Bank Ltd.