- Singapore bank sets aside provisions for soured debt in Asia
- Rising interest rates widen lender's net interest margin
United Overseas Bank Ltd.’s fourth-quarter profit barely rose as swelling expenses and provisions for bad loans capped gains in income.
Net income gained 0.3 percent to S$788 million ($564 million) for the three months ended Dec. 31 from a year earlier, Singapore’s third-biggest bank said Tuesday in an exchange statement. That matched the average estimate of seven analysts surveyed by Bloomberg.
The company set aside more cash for soured debt as a commodity price slump and the economic slowdown in Greater China and Southeast Asia weigh on the profitability of Singapore’s banks. UOB is the first of the nation’s lenders to report results for 2015, when a rally in domestic interest rates enabled them to charge borrowers more for loans.
“Financial markets will continue to grapple with volatility and uncertainty in 2016, underpinned by ongoing concerns such as the impact of falling oil prices and China’s slowdown on the global economy,” Chief Executive Officer Wee Ee Cheong said in the statement. “Our view is that the risks are largely manageable and the underlying economic fundamentals are strong enough to withstand the shocks even as we enter an environment of slower growth.”
UOB shares fell 1.3 percent to S$17.62 as of 12:39 p.m. in Singapore. The stock has dropped 10 percent this year. The benchmark Straits Times Index declined 8.5 percent since December.
Net interest income grew 9.3 percent to S$1.28 billion, the results showed. The lender’s net interest margin, the gap between loan rates and funding costs, rose to 1.79 percent in the fourth quarter from 1.69 percent a year earlier.
An increase in the three-month Singapore interbank offered rate last year has helped UOB’s interest margins. Sibor more than doubled as the U.S. Federal Reserve raised its benchmark rate for the first time since 2006.
Fee and commission income rose 6.7 percent to S$480 million. Total expenses increased 20 percent to S$964 million as the bank spent more on technology and personnel, it said.
“This quarter’s performance is pretty decent,” even with higher expenses, Yuxuan He, a banking analyst at KGI Fraser Securities in Singapore, said Tuesday in e-mailed reply to questions. “We will be looking for whether the bank can sustain its net interest margin in the coming quarters, since the street has been discounting the probability of a further rate hike by the U.S. Fed.”
UOB’s non-performing loans rose to S$2.9 billion as of December, up 22 percent from a year earlier, representing 1.4 percent of total loans. The bank set aside S$115 million in the fourth quarter as specific allowances for loans with credit risks, 58 percent more than a year earlier.
The transport, storage and communication sector recorded the highest amount of non-performing loans at S$977 million, with the NPL ratio of almost 9.8 percent. Oil and gas shipping loans are classified under this category, which may see higher bad debts further in the year, KGI analyst He said.
Sour loans may rise further in 2016 especially if oil prices stay low, Chief Financial Officer Lee Wai Fai said at a press briefing in Singapore after the results. Non-performing credit may climb to 2 percent of total loans this year, mostly from the oil and gas sector in Singapore, he said. Such an increase would be “manageable” and more of a result of the economic slowdown, rather than any liquidity crisis, CEO Wee said at the same event.
UOB derived about 62 percent of its income from Singapore, where the economy grew 2.1 percent in 2015, the slowest pace in six years. The bank targets “mid-single digit” lending growth this year, CEO Wee said.
He also said the lender will continue to invest in information technology as UOB still foresees growth.
The bank’s directors recommended a one-tier tax-exempt dividend of 35 Singapore cents for 2015, subject to shareholders’ approval, the lender said. In 2014, the bank paid a final dividend of 50 cents and special dividend of 5 cents.
Oversea-Chinese Banking Corp. is scheduled to report earnings Wednesday and DBS Group Holdings Ltd., the nation’s largest lender, will post results Feb. 22.