SINGAPORE (August 13): United Overseas Bank, often viewed as the most conservative of the local banks, has made two announcements since the beginning of this month. Both of them are aimed at extending its regional reach. On Aug 3, it announced a digital bank for Asean’s large and increasing base of mobile-first and mobile-only customers. UOB’s digital bank will be deployed in five countries — Singapore, Malaysia, Thailand, Indonesia and Vietnam. The plan is for the digital bank to garner three million to five million customers from the region in the next five years.
Then on Aug 6, UOB said it had incorporated United Overseas Bank (Vietnam), its fully-owned subsidiary in the country. UOB is the first Singapore bank to open a foreign-owned subsidiary bank (FOSB) in Vietnam. In July 2017, UOB announced it had received an in-principle FOSB licence from the State Bank of Vietnam.
The FOSB licence enables the bank to extend its branch network beyond Ho Chi Minh City and to offer its products and financial solutions to businesses and consumers in other cities. The bank is planning to open a branch in Hanoi, the political capital and Vietnam’s gateway to fast-developing cities in the north such as Hai Phong, Quang Ninh and Hai Duong. “We also plan to open a wealth management centre and to launch a digital bank targeting the young. So far, the traction seems to be quite good,” says Wee Ee Cheong, deputy chairman and CEO of UOB during a results briefing on Aug 3. Wee’s family is the bank’s largest shareholder.
UOB has had a Foreign Direct Investment Advisory office in Vietnam since 2013, its ninth in the region, and since then has facilitated more than US$3 billion ($4.1 billion) in FDI from Asia into Vietnam. Its regional clients have invested in industries such as construction, real estate, manufacturing and fast-moving consumer goods, all of which help drive Vietnam’s economic growth. The bank’s other FDI Advisory units are in China, Hong Kong, India, Indonesia, Malaysia, Myanmar, Singapore and Thailand.
On Aug 8, UOB announced that it had signed a memorandum of understanding with Vietnam Singapore Industrial Park (VSIP) to increase FDI into Vietnam.
Wee continues to look to the region for the bank’s longer-term growth. “Our housing loan business in the region did well, up 11% y-o-y in the first half,” he says, adding that the 42% of wealth management income in 1H2018 of $296 million was from the region. “We have more than 500 offices in this region. This is our strength. Rather than focus on a few relationship managers to generate sales, we have 52 wealth management centres in the region, situated next to our branches. These are localised relationships,” Wee says, adding, “we don’t believe in suitcase bankers.”
Regional operating profit rose 12% y-o-y in constant currency terms to $855 million, making up 43% of operating profit of $2.56 billion for 1HFY2018, up from 41% in 1HFY2017.
Asean digital bank
Within this year, UOB plans to launch its digital bank in Asean. It launched a digital banking app called UOB Mighty in 2015. The new digital bank is likely to be quite different from UOB Mighty, says Dennis Khoo, head of regional digital bank and digital banking at UOB. UOB Mighty serves UOB’s universal customers and is part of an omni-channel offering. It will co-exist with the digital bank, which will serve mobile-only customers and targets the masses in Asean.
Khoo stresses that the digital bank will focus on customer engagement using a unique data-centric model. This model is designed to address the entire customer life cycle. It consists of five stages: Acquire, Transact, Generate date, Insight and Engage (ATGIE).
Through ATGIE, the customer experience starts with a simple onboarding that is localised to each market. Over time, UOB will use ATGIE — which is powered by next-generation artificial intelligence (AI), machine learning, data analytics, user interface and smartphone capabilities — to analyse data and anticipate customers’ needs to determine how to help and prompt them towards smarter spending and saving habits. Data-centric digital banks will drive unprecedented disruption globally, Khoo says.
In July, UOB announced it had invested in and partnered with Israel-based fintech company Personetics to use AI-based solutions for its Asean customers. In April, UOB and Pintec Technology Holdings launched Avatec.ai, which is able to assess the credit quality of potential customers, including those who are new to credit. Avatec.ai’s solutions can also assess the creditworthiness of e-commerce, retail and travel companies that offer financial products such as point-of-sale financing. Avatec.ai is key to the ability of the Asean digital bank to provide banking services to Asean’s large underserved population.
“[Pintec] is definitely a very crucial part and there are benefits for the core business as well because it helps to improve the underwriting [of credit] we’re doing. But definitely, if we look at where the digital bank is going to make profits, it will be in unsecured lending to segments banks usually don’t lend to, so this new capability to assess a customer is critical,” Khoo says.
Separately, on Aug 7, UOB launched a fully digital home loan solution in Singapore, remodelling the home-buying experience by making home financing swifter and surer for customers. The digital home loan solution comes one week after the bank announced it had set up Singapore’s largest car ecosystem to offer a fully digital financing solution for car buyers.
The new home loan solution includes a bank-backed property valuation tool, a banker and buyer matching service, and online instant home loan approval service. UOB finances around 30% of new home purchases in Singapore.
1H and 2Q earnings beat estimates
UOB’s net profit for 2QFY2018 crossed the $1 billion mark for the first time to $1.08 billion, up 27.5% y-o-y and 10% q-o-q, beating consensus estimates of $954 million. Net interest income rose 14% y-o-y and 5% q-o-q to $1.54 billion. This was helped by loan growth, which rose 9.7% y-o-y and 3.7% q-o-q. The q-o-q expansion was driven mainly by Greater China, Thailand and the buildings and construction sector. Net interest margins for 2Q expanded 8bps y-o-y but narrowed 1bp q-o-q to 1.83%. Geographically, NIM for Singapore expanded by 2bps q-o-q to 1.51%, but NIM for Malaysia contracted by 9bps q-o-q to 2.07% while that for Greater China narrowed 13bps q-o-q to 0.84%.
Net fee and commission income rose 11% y-o-y, but was 4% lower q-o-q to $498 million. Contribution from wealth management dropped 20% q-o-q to $132 million owing to “risk-off” sentiment as markets turned volatile. Assets under management rose 3.8% half-on-half to $108 billion during 1HFY2018. Net trading income expanded 31% y-o-y to $215 million, due primarily to strong flows from customers.
Analysts say a big surprise was the lower loan loss charge of $90 million for 2Q, down 50% y-o-y, as vulnerable oil and gas and shipping companies were already recognised as non-performing loans, and sufficient provisions were set aside. The sharp decline helped net profit to beat consensus estimates, Morgan Stanley says. NPLs rose 2% q-o-q to $4.21 billion, and the NPL ratio fell marginally to 1.68% from 1.72% in 1QFY2018.
UOB announced a 50 cent interim dividend, representing a payout ratio of 41%. CFO Lee Wai Fai says the banking group has to balance capital needs with shareholder value, and it aims to maintain a payout ratio of 50% subject to a minimum common equity tier 1 ratio of 13.5%. As at June 30, CET1 stood at 14.5%. For FY2017, UOB’s payout ratio was 49%, or $1 per share.
Mixed outlook
Wee is guiding for high-single-digit loan growth in 2H. He is expecting the transaction volumes of housing loans to decline by 10% to 20%, and property prices to drop 5% to 10%. “This will affect the future pipeline, though our housing loan growth will not be affected, due to progressive drawdown of loans booked previously,” he adds. UOB’s housing loan portfolio comprises largely owner-occupier properties, and the average loan-to-value for mortgages is around 60%.
“We’ve gone through some of the stress tests [for developers] and generally, the risk is acceptable. All major developers’ balance sheets are strong and, among the smaller ones, the exposure is small, unlike oil and gas. We’re comfortable,” Wee says.
The trade war could dampen growth, but is unlikely to affect intra-regional investment flows. “There is still a big flow into the region by Chinese, Korean and Taiwanese companies. I’m confident this will continue,” Wee says.
Analysts are divided over UOB’s outlook. Phillip Securities upgraded UOB to a “buy” from “accumulate” previously, with a higher price target of $34.50 (from $31.70 previously), based on the Gordon Growth Model. “The improvement in target price was due to our higher ROE (return on equity) assumption of 11.8% (previously 11.1%). Our FY2018 earnings forecast is revised upwards by 6.1%,” Phillip Securities says. It is forecasting net profit of $4.3 billion for this year, up 26.7% y-o-y, and a further 10% growth to $4.7 billion for FY2019.
Morgan Stanley has a “market weight” or “neutral” recommendation. “We assign probability weightings of 20% to our bull case and 20% to our bear case. We have reduced bull case and increased bear case potential, given Morgan Stanley’s expectations of headwinds in emerging markets plus greater uncertainty over trade and, therefore, potential impact on loan growth,” its report says.
As at Aug 8, UOB was the best performing local bank stock this year, up 6.4%. Most of the gain occurred after its 2Q and 1H2018 results.
