Rising interest rates are the culprit behind the sharp tumble in stock prices around the globe.
But for United Overseas Bank Ltd (SGX: U11), or UOB, the surge in interest rates represents a tailwind for its business.
The local bank has seen its share price tumble by 16% in the last six months.
At S$26.33, the lender is now trading close to its year-low of S$25.47.
There may be a silver lining, though.
Investors can make use of attractive valuations to scoop up shares of solid, well-run companies.
UOB has seen its fair share of ups and downs over the decades.
Being one of Singapore’s three big banks, can investors rely on its financial strength and experience to sail through a possible downturn?
A robust set of financials for UOB
UOB continued to impress with its latest fiscal 2022’s first-half (1H2022) results.
The local bank’s net interest income climbed 14% year on year to S$3.5 billion while total income inched up 3% year on year to S$5.1 billion.
UOB also saw several fee income categories hit a new record high as consumer spending resumed with the reopening of borders.
Its loan book grew 8% year on year to S$321.7 billion and its net interest margin (NIM) expanded from 1.56% in the prior year to 1.63%.
UOB also paid out a trailing 12-month dividend of S$1.20, giving its shares a trailing dividend yield of 4.6%.
Interest rate tailwind
Banks’ core business is in lending out money to individuals and corporations.
So, when interest rates rise worldwide, banks can also increase the interest rates they charge on their loans.
UOB had disclosed that for every rise of one percentage point in benchmark interest rates, it can enjoy a net interest income (NII) uplift of S$600 million.
The US Federal Reserve has already hiked its policy rate by 2.25% in a series of three consecutive increases of 0.75 percentage points.
Assuming the same interest rate sensitivity, UOB can expect to earn S$1.35 billion more in net interest income, or around 21% of 2021’s NII of S$6.4 billion — a substantial increase.
Rebranding and a focus on three strategic areas
In mid-September, UOB announced a brand refresh along with a regional marketing campaign to promote the bank’s new logo, seal mark, apparel, and slogan.
The campaign is called “Doing Right By You”.
According to CEO Wee Ee Cheong, the lender is aiming to be the most preferred bank for both consumers and businesses across its key markets by 2035.
To do so, UOB will focus on three strategic areas for growth – connectivity, personalisation, and sustainability.
Connectivity will help numerous businesses to connect with the bank to help them to grow and network, while personalisation involves the bank’s digital banking app UOB TMRW.
This app will tap on data analytics to deliver insights that allow UOB to personalise its banking services to individual customer needs.
Through TMRW, the bank hopes to onboard 500,000 customers across the region by the end of this year.
The third pillar, sustainability, signifies the bank’s long-term approach to creating sustainable development across the Asian region.
Acquisition-led growth
Aside from organic growth from a higher NIM and its rebranding, UOB can also look forward to acquisition-led growth.
The bank had acquired the consumer banking franchises in Malaysia, Indonesia, Thailand, and Vietnam, from Citigroup (NYSE: C) for nearly S$5 billion.
UOB will focus on integrating Citi’s customers and staff to help boost the bank’s ecosystem in these four countries.
This transformative acquisition is set to double UOB’s retail customers to around 5.3 million.
Regulatory approval is expected for Thailand and Malaysia by year-end.
Vietnam should receive its approval by the first quarter of 2023 (1Q2023) while Indonesia’s approval should come by 4Q2023.
Get Smart: Count on expertise and experience
Sentiment may be weak for now, but investors can count on UOB’s vast experience in navigating different economic conditions in sailing through tough challenges.
The Wee family has run the bank successfully since 1935 and the combined expertise of three generations will ensure the lender can weather this storm.
UOB is trading just slightly above its book value of S$23.81 as of 30 June 2022, and investors can get a slice of a solid bank with a long growth runway if they pick up shares at the current price.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
