United Overseas Bank's Profit Rises 35% as Fees Outweigh Loan-Margin Drop

United Overseas Bank Ltd., the smallest among Singapore’s three banks, said fourth-quarter profit gained 35 percent as higher sales of investment products boosted fees and commissions, offsetting a drop in loan margins.

Net income rose to S$706 million ($554 million) in the three months ended Dec. 31 from S$522 million a year earlier, the company said today in a Singapore stock exchange statement. That’s higher than S$551 million average estimate of seven analysts surveyed by Bloomberg.

Singapore banks are selling more investment products as the city’s shares climbed for a second year in 2010, with the benchmark Straits Times Index reaching its highest since the global financial crisis in 2008. The economy expanded a record 14.5 percent last year, probably the world’s second fastest after Qatar, based on International Monetary Fund estimates.

Trading and investment income gained because of “stronger market sentiments,” the bank said in the statement. “Amidst a subdued interest-rate environment coupled with massive liquidity and keen competition, interest-margin compression was countered by higher loan volumes and fee income.”

United Overseas shares gained 2.8 percent to S$18.50 as of 2:13 p.m. local time, the most in almost nine months. The stock has advanced 1.7 percent this year, while its rivals DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp. declined.

Fees, Commission

Non-interest income doubled to S$700 million in the period from S$350 million a year ago. Fee and commission income, including for credit cards and fund management, climbed 26 percent to S$310 million.

“Asset quality remains arguably the best amongst all three banks, with more than sufficient provisioning and low non- performing loans,” James Koh, an analyst at Kim Eng Securities Pte, said in an e-mailed note. “However, the same worries also persist, that it is not doing enough to grow, as compared to the other two banks which are being very aggressive on all fronts.”

Net interest income, or the difference between what the bank makes from lending and what it pays on deposits, dropped 3 percent to S$865 million in the quarter. The net interest margin, a measure of loan profitability, narrowed to 1.91 percent from 2.28 percent a year earlier, United Overseas said.

The lower margin was the “main driver for the disappointing net interest income development,” Royal Bank of Scotland Group Plc, which has a “buy” recommendation on the stock, said in a research report today. “On the other hand, commission income was surprisingly strong.”

The bank said its housing loans, which gained 22 percent to S$33.5 billion at the end of the year, was “the major sector” that contributed to its customer loans’ total growth for 2010.

Singapore’s economic growth boosted home sales, driving private residential prices to a record in the fourth quarter, according to government data. The gain also prompted new curbs including limits on loans and higher sales taxes.

For the full year, profit gained 42 percent to S$2.7 billion from S$1.9 billion a year earlier, beating the S$2.5 billion average estimate of 24 analysts surveyed by Bloomberg.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino@bloomberg.net.

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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