United Overseas Bank Ltd (SGX: U11), or UOB, is the third and last local bank to report its full-year 2020 earnings.
OCBC Ltd (SGX: O39) had reported its earnings yesterday, while DBS Group Holdings Ltd (SGX: D05) announced its 2020 earnings two weeks earlier.
Like its two counterparts, UOB also bore the brunt of the economic damage caused by the COVID-19 pandemic.
Its full-year 2020 net profit fell by one-third year on year due to higher allowances for bad loans.
Despite this, the bank is navigating the crisis well and has also sounded a note of optimism about 2021.
Here are five other highlights from UOB’s earnings that investors should take note of.
Buffer from fees and commission income
UOB saw its net interest income declined by 8% year on year to S$6 billion for 2020 as lower interest rates negatively impacted net interest margin.
Operating profit before allowances declined by 10% year on year as operating expenses fell less than the 9% year on year decline in total revenue.
Fees and commission income proved to be a bright spot for the bank, though.
Credit card fees did fall by 21% year on year due to lower spending but higher fees from fund management and wealth management picked up some of this slack, resulting in a 2% year on year decline in fee and commission income.
Healthy loan growth and improving NIM
UOB’s overall loan book grew 4.7% year on year to S$281.4 billion despite the tough economic conditions.
Singapore loans made up half the loan book and inched up 3% year on year to S$143 billion.
The highest growth came from Vietnam and the “Rest of the World” regions each experiencing a 17% year on year growth, albeit from a lower base.
Net interest margin (NIM) fell from 1.78% in 2019 to 1.57% last year, in line with falling interest rates and similar to what was reported by both DBS and OCBC.
The silver lining is that UOB’s NIM seems to have stabilised, with the bank seeing its second consecutive quarter on quarter rise in NIM.
NIM hit a trough two quarters ago at 1.48% but has since climbed to 1.57% as of the bank’s latest fourth quarter.
Although interest rates are forecast to stay low for the rest of 2021, UOB is confident that NIM will stabilise at current levels.
Digital platforms aiding customer growth
UOB has spent the last few years enhancing its digital capabilities with products and services such as UOB Mighty, TMWR and UOB Infinity.
These moves have served the bank well during the pandemic as they enabled it to continue engaging with customers during lockdowns.
The investments in digital will also prepare the bank better as it faces increased competition from digital bank aspirants that are slated to launch their services by 2022.
Two-thirds of the bank’s customers were served via digital means in 2020, up from 59% a year ago.
Compared to customers that transacted through physical methods, omni-channel customers (described as one who is served using both physical and digital means) brings in 50% more revenue.
What’s more, if a customer is served exclusively through digital means, it will help to reduce the bank’s cost of serving this customer by 30%.
If UOB continues to enhance its digital offerings, it could, over time, bring down its cost-to-income ratio from the current 45.6% for 2020.
Adequately provisioned for 2021
The level of provisions made for 2020 more than tripled from S$435 million to S$1.55 billion as more companies came under financial stress.
UOB has around S$18 billion in loans under relief measures as of January 2021, taking up around 6% of the bank’s total loan book.
Of these, 90% are collateralised and the risk of them being unrecoverable is low.
The lender’s dedicated restructuring task force has been proactively engaging with its borrowers to extend support to them during these tough times.
As a result, UOB expects its credit costs to reduce this year, implying that provisions for bad loans are adequate.
A positive signal for dividends
A final dividend of S$0.39 was declared for 2020, similar to the bank’s interim dividend, taking full-year 2020’s dividend to S$0.78.
The payout ratio stood at 45% for this year, slightly below the 50% payout ratio that the bank has maintained for the past three financial years.
Investors should note, however, that each of the last three years’ dividends included a special dividend of S$0.20 per share.
For 2019, the total dividend stood at S$1.30 but if the special dividend is excluded, the total ordinary dividend would have been S$1.10.
Recall that the Monetary Authority of Singapore had called on the local banks to moderate their dividend payments to 60% of 2019’s total dividend.
UOB did pay out 60% of 2019’s dividend, but if investors used the S$1.10 ordinary dividend instead, the dividend of S$0.78 declared for 2020 would amount to around 71% of 2019’s ordinary dividend.
The bank has also reiterated its commitment to resume its 50% dividend payout ratio once the dividend cap is relaxed.
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Disclaimer: Royston Yang owns shares in DBS Group Holdings Ltd.
