UOB Reports a Robust Set of Earnings: 5 Things Investors Should Know

United Overseas Bank Ltd (SGX: U11), or UOB, became the second lender to report its first-quarter 2021 business update after DBS Group (SGX: D05) reported a blockbuster set of earnings last week.

UOB did not disappoint either.

It reported a year on year rise in income along with broad-based growth across the whole group.

Net profit after tax jumped by 18% year on year to S$1 billion.

In a sign that economic conditions are improving, the bank saw income rising back to near pre-COVID levels amid healthy loan growth and investment banking activity.

UOB’s CEO, Mr Wee Ee Cheong, expects the bank’s momentum to continue as business activity revives amid positive sentiment in both Singapore and China.

Here are five highlights from the lender’s latest business update that investors should know about.

A rise in total income

Net interest income for the bank dipped by 4% year on year to S$1.5 billion, just slightly down from the S$1.6 billion reported a year ago.

Low global interest rates continued to weigh on the bank’s net interest margin (NIM), resulting in this decline.

However, net fee income more than made up for the decrease by jumping 24% year on year to S$638 million.

Fee income hit a new quarterly high, driven by increases in wealth management fees and loan and trade-related fees.

Trading and investment income also increased from S$224 million to S$246 million, led by trading income and gains from investment securities.

As a result, total income increased by 3% year on year to S$2.5 billion.

Growth in loans along with a stabilised NIM

UOB saw healthy loan growth for the quarter, with total loans rising 5% year on year to S$293 billion.

The main growth regions came from Singapore and China, with a 7% and 5% year on year increase in gross loans, respectively.

NIM has also stabilised for the lender at 1.57% for the quarter, in line with the fourth quarter of 2020.

This stabilisation in NIM is another sign that banks are seeing a bottoming out of interest rates as DBS’s NIM was also constant quarter on quarter.

Encouraging performance in wealth management

A key highlight for UOB was its encouraging performance for its wealth management division.

Fees for this division increased by 19% year on year to S$239 million, led by a pick-up in equity market performance and a rise in investment banking deal flow.

The lender also saw a healthy 10% year on year increase in its assets under management to S$136 billion, of which 60% belonged to overseas customers.

Decrease in non-performing loans

UOB took an impairment charge of S$201 million for the quarter, down 29% year on year, as it had already made pre-emptive provisions last year in light of the crisis.

According to the bank, the credit outlook is stabilising and total credit costs on loans were the lowest in five quarters.

Because of the improved outlook, the non-performing loans (NPL) ratio declined from 1.6% in the first quarter of 2020 to 1.5% in the current quarter.

Increased digital presence

UOB has also been hard at work beefing up its digital initiatives.

These moves have borne fruit by lowering the bank’s cost to income ratio to 43.8% from 45.1% a year ago.

Digital banking transactions increased by 6% quarter on quarter, while cashless payments via PayNow by corporations jumped by 43% over the same period.

Affluent customers are also enjoying an omni-channel experience with both physical and online touchpoints. UOB has reported a five-percentage point increase quarter on quarter in digitally engaged customers in Singapore.

Its digital bank TMRW is also doing well, with 314,000 customers as of end-March in both Thailand and Indonesia.

Customer deposits for TMRW grew by 24% quarter on quarter.

For Singapore, new car loan applications were fully digital in the first quarter, while two out of three home mortgage applications were done online.

Get Smart: Further validation of a recovery

UOB’s results are a further validation that a recovery is underway.

Fee income remains robust and has more than mitigated the fall in net interest income.

NIM looks to have bottomed out, allowing future loan growth to provide an uplift to net interest income for the lender.

Provisions have also declined substantially, providing further evidence that its clients are facing less financial stress.

However, investors should note that a surge in infections in Singapore and the Asian region may threaten to derail the recovery.

With Singapore reverting to Phase II of its reopening, there is a risk that economic conditions may deteriorate if the infections are not brought under control.

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Disclaimer: Royston Yang owns shares of DBS Group.

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