All three local banks reported their second-quarter earnings last week.
Granted, it was not a pretty picture but investors should have seen the carnage coming.
COVID-19 has swept through the globe like a cyclone and left a path of destruction in its wake.
As banks form the central pillar of the economy, they cannot escape unscathed.
Today, let’s look at United Overseas Bank Ltd (SGX: U11), or UOB’s results.
Here are eight things you need to know about how the lender has performed.
Net interest income fell by 12% year on year during the quarter to S$1.46 billion, while net fee and commission income tumbled by 15% year on year. Total income weakened by 12% year on year to S$2.3 billion.
UOB upped its provisions during the quarter as a pre-emptive measure to account for possible bad loans. Allowances jumped nearly eight-fold from S$51 million to S$396 million as a result.
Net profit after tax plunged by 40% year on year due to weaker income and higher allowances. Excluding allowances, the profit would have declined around 16% year on year.
The bank’s loan book grew 3% year on year to S$280.7 billion, but the growth was more than offset by a sharp decline in the net interest margin from 1.81% to 1.48% as interest rates plunged globally in the wake of the pandemic.
UOB’s cost to income ratio, a measure of its level of expenses in relation to its revenue, jumped to 46% from 43.7% a year ago.
Non-performing loans (NPL) ratio inched up slightly from 1.5% a year ago to 1.6% in the current quarter.
As a result of the weaker performance, the bank’s return on equity fell to 7.1% for the quarter, a sharp drop from last year’s 12.5%. Net asset value, however, improved slightly from S$22.12 to S$22.59.
In line with the Monetary Authority of Singapore’s advice to banks to cap their dividend payments this year, UOB trimmed its interim dividend to S$0.39 for the first half, down from S$0.55 a year ago.
Get Smart: Optimism for the second-half
UOB is suffering from the same troubles that are plaguing the other two banks as well – falling net interest margins amid weak loan growth.
Along with higher provisions and allowances for bad loans, profits may continue to suffer in the near-term.
There are reasons to be optimistic, though.
The lender continues to serve different customers through various touchpoints, and more than 50% of its customers are digitally-engaged, allowing them to continue banking through lockdowns and movement restriction orders.
UOB’s assets under management has also risen by 9% year on year to S$129 billion for the first half.
And the bank has won 17 awards for its digitalisation efforts, with its digital-only bank, TMRW, reducing the customer onboarding process to less than 9 minutes in Indonesia.
Technology investments have paid off as personal internet banking transactions increased by 12%, PayNow transactions went up 2.4 times, and PayNow corporate transactions jumped up nearly nine-fold.
Finally, in its 2020 guidance, the bank expects net interest margin to improve in the second half of 2020 as it believes the bottom has been hit.
As economies gradually reopen, fee income should also see some recovery.
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Disclaimer: Royston Yang owns shares in DBS Group Holdings Ltd.