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UOB's exposure to Mainland China comprises 'predominantly low-risk short-term facilities': UOB Kay Hian

Felicia Tan
Felicia Tan9/29/2021 08:39 AM GMT+08  • 4 min read
UOB's exposure to Mainland China comprises 'predominantly low-risk short-term facilities': UOB Kay Hian
The worst also appears to be over for UOB as credit costs continue to stabilise in 2HFY2021.
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UOB Kay Hian has estimated that United Overseas Bank (UOB)’s loan growth should pick up in the 2HFY2021 given its “strong pipeline and loan-related fees being on track to hit a new record” in the FY2021.

The bank’s management, during the SGX-UOB Kay Hian Virtual Singapore Corporate Day, guided high single-digit loan that is driven by Singapore and developed markets in North Asia and the rest of the world.

“There are opportunities to support large corporations and institutional clients, especially for the acquisition of commercial real estate, hospitality properties and new economy assets, such as logistics warehouses and data centres,” write UOB Kay Hian analyst Jonathan Koh in an unrated report dated Sept 28.

UOB, which targets to achieve a return on equity (ROE) of 10% in the current near-zero interest rate environment, should rise in line with higher interest rates.

“It is a commercial bank with loans accounting for 60% of total assets. 80% of its loans are on floating interest rates,” write Koh.

“UOB is aiming for an ROE of 12% and above when interest rates recover and growth in fees from cross selling kicks in,” he adds.

In the rest of his report, Koh is positive on UOB due to its lean cost structure, bottomed-out net interest margin (NIM) and stabilising credit costs.

UOB’s NIM should “remain relatively unchanged at 1.56% in the near term until interest rates start to rise in mid-2023”, says Koh.

On credit costs, the “worst appears to be over”. UOB’s asset quality has also stabilised since November 2020.

“UOB has completed a loan by loan review in 3QFY20020, leading to elevated recognition in new nonperforming loans (NPLs) of $622 million in 4QFY220 for highly geared companies and companies with business models that are not viable,” he writes.

“The bulk of UOB’s NPLs are well collateralised and the bank has set aside adequate general provisions. Thus, management expects credit cost in 2HFY2021 to be lower than the 24 basis points seen in 1HFY2021.”

During the event, UOB stressed that it has no exposure to Evergrande. A spokeswoman from UOB, on Sept 23, told The Edge Singapore that the bank did not have “any exposure” to the second-largest property developer in China.

See: Local banks have no direct exposure to Evergrande and Singapore banks have no exposure to Evergrande, but Citi Research believes their share prices are vulnerable

The bank also has minimal exposure to other highly-geared Chinese property developers.

In the report, Koh writes that the bank is “Asean-centric” with the least exposure to Greater China among the Singapore banks.

To be sure, Greater China accounted for 16.1% of UOB’s total loans, compared to DBS Bank’s 30.6% and OCBC’s 25.6%.

“UOB has only one branch in Hong Kong. It has a small footprint of 22 branches focusing on Tier 1 cities in China (DBS: 35 branches, OCBC: 18 branches),” writes Koh.

The bank’s exposure to Mainland China also predominantly comprises low-risk, short-term facilities with maturity of less than one year.

Of the facilities, 70% are exposed to the top five domestic banks and three policy banks in the region.

UOB also has exposure to China’s state-owned enterprises, large local corporations and foreign investment companies of $11 billion as at June 2021.

“About half of the exposure is short-term facilities of less than one year, such as working capital loans and trade finance facilities. NPL ratio is low at 0.4%,” he writes.

For more stories about where the money flows, click here for our Capital section

In addition, UOB is primarily focusing on large blue chips in Hong Kong, with an exposure of $38.2 billion as at June 2021.

“60% of its corporate loans have maturity of less than one year. Its exposure to the property market in Hong Kong is primarily through commercial properties, as it does not have exposure to residential mortgages. NPL ratio is low at 0.8%,” says Koh.

Shares in UOB closed at $25.63 on Sept 28.

Photo: Bloomberg

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