At a glance, United Overseas Bank’s (UOB) results, announced on May 6 were not as spectacular as that of DBS Group Holdings, announced a week earlier. UOB’s net profit rose 46% q-o-q and 18% y-o-y to $1 billion. This compares with DBS’s 72% y-o-y and 99% q-o-q surge to $2 billion. Interestingly, though, UOB’s profit before allowances rose 16% q-o-q and 6% y-o-y, while DBS’s profit before allowances rose 35% q-o-q but fell 8% y-o-y.
“UOB’s strong financial results for 1Q2021 highlight the rising profitability trend for Singaporean banks. We expect that Singapore banks’ profitability will continue to recover in 2021 amid receding asset risks and improving operating conditions,” says Eugene Tarzimanov, vice president, senior credit officer, at Moody’s Investors Service.
Unlike DBS, UOB had a more cautious message for investors. During an analysts’ call, Lee Wai Fai, group CFO at UOB, gamely answered the same question asked in a number of different ways: What would it take for UOB to write back some of its cumulative general provisions which now stand at $3.03 billion as at March 31? Of this, more than $1 billion is in management overlay, the amount over and above what a bank’s macroeconomic variable (MEV) model requires a bank to have in general provisions.
Lee says there will only be two main criteria that would allow the bank to write-back provisions and none are currently present. The first is a worst-case scenario in which non-performing loans (NPL) are so bad that the bank will use some general provisions to offset specific provisions. “My stand is we will write-back NPL formation because conditions are as bad as we thought,” Lee says.
The most well-known instance of a bank using its excess general provisions to offset a specific provision was for Swiber in 2016. The second instance is in a best-case scenario — if the bank’s management is absolutely certain that the pandemic and all its related problems are completely over. “We work for the best outcome but we’re ready for the worst. So, we took a preventive step to build up lots of general provisions and we’re not going to throw it back to the P&L,” Lee explains.
For MEV models there are base, stressed and best-case scenarios. Different banks will have different risk appetites. The MEV models can also depend on how aggressive banks apply stress or best-case scenarios. DBS’s cumulative provisions as at endMarch stood at $7.2 billion, and $4.1 billion were general provision reserves.
DBS wrote-back $190 million to its P&L account in 1Q2021. Piyush Gupta, CEO of DBS, said during a results briefing: “Our general allowance reserves of $4.13 billion has two components. The main component is model-driven. The second is from the management overlay, which are discretionary allowances set aside to cover potential credit costs not accounted for in our models, such as the loan moratoriums. The write-backs in the first quarter have all come from the model-driven component, reflecting an improvement in our portfolio quality. We have not reversed any general allowances from the management overlay. We’ll continue to observe what happens to the moratoriums before we decide what to do with that.”
Four key messages
Wee Ee Cheong, group CEO of UOB, had four key messages. “Message one: The bank had a strong start to 1Q2021. Our portfolio remains resilient and well secured even as relief measures are tapering off. The impact on our book is manageable. Having set aside sizeable provisions, our credit costs are almost halved,” he says.
Message two is about the recovery. Two of UOB’s key markets, Singapore and Greater China, are recovering. “As China rebounds, most of Asia is set to benefit,” Wee says. In addition, part of the growth in fee income was attributed to investment banking. UOB was able to structure deals which included financing some privatisations. “UOB has been active in the privatisation space. We have advised eight takeover deals and provided acquisition-related financing as part of a holistic offering. We expect the growth momentum to continue, cross-border activities to increase and to be extended to other Southeast Asian markets in 2H2021 as countries speed up their vaccine drives,” Wee continues. Regional growth could also come from infrastructure projects, he adds.
Message three is on environmental, social, and corporate governance (ESG). “Research indicates a potential of US$1 trillion [$1.3 trillion] in annual economic opportunities in Southeast Asia as the region transits into a green economy,” Wee — who is a well-known nature lover — says.
Message four is basically the outlook for this year, where profit is expected to rebound driven by high single-digit loan growth, stable net interest margin (1.57% in 1Q20201 and 4Q2020), double-digit non-interest income growth, stable cost-to-income ratio (43.8% in1Q2021) and lower credit costs of below 30 basis points.
Mainly organic growth; mulling over Citi’s sale
By all accounts, UOB’s growth is likely to remain largely organic, with the bank continuing to focus on cross-border investment, and capital flows. For instance in 1Q2021, wholesale banking saw faster growth from greater demand from trade and investment banking activities. Cross-border income grew 7% and accounted for 29% of wholesale banking income, Lee indicated. And, as trade and investment activities picked up, non-Singapore income rose 8%. The bank’s non-Singapore operating profit in 1Q2021 in Singapore dollars rose 22.8% q-o-q to $673 million, compared to an 11% q-o-q rise in operating profit from Singapore to $724 million in the same period. Non-Singapore operating profit now accounts for 48.2% of total operating profit. Wee says UOB is interested in parts of Citi’s portfolio that are up for sale. “We are always open to acquisitions. In fact we have a team of dedicated people to look for opportunities.” It would be in those jurisdictions where UOB has an operating licence and hence would include Malaysia, Thailand, Indonesia, and Vietnam out of the 13 countries which Citi plans to divest.