UOB — the last child of Singapore Banking
Let’s start with a table that pretty much sums up the story for UOB.
All numbers are as of 2019 FY reports. Market Cap numbers are as of last trading day at the time of publication of this article.
The story of UOB as compared to the other 2 banks is really that of the last child, who tries hard but never seem to be able to measure up with its siblings (i.e OCBC, DBS). In all performance and risk metrics, it is lagging behind OCBC and DBS, albeit just slightly with the exception of growth in Fee Income where DBS is the clear leader. To be clear, UOB’s numbers, in and of itself, are pretty solid. It is just not spectacular.
From a business point of view, UOB derives slightly above 50% of its income from its home market Singapore, with the rest of it coming from key SEA markets (Malaysia, Indonesia, Thailand) and Greater China region. UOB is also ahead of its domestic peers in expansion and presence in the SEA region, especially in frontier markets like Vietnam and Cambodia. UOB thus is well-positioned to leverage on the growth story of ASEAN and China in the years to come. It will also mean higher volatility given the nature of these markets.
Like its domestic peers, the property sector makes up just about half of its loan book’s exposure(taking construction & housing together). This is symptomatic of the wider economy but it does accentuate the highly cyclical nature of their business.
About 25% of its fee income is derived from trading income, while wealth management constitute about 18%. Credit card and loan fees make up the rest of fee income. This indicate a longer runway of growth for the wealth management division.
UOB’s stock is currently trading at ttm P/E of 12. The recent global rally into cyclicals following positive vaccine developments has provided some ballast to the stock price, though it has yet to regain beginning of year levels. This provides an attractive entry point for investors looking to own a piece of a solid banking business.
Looking ahead, the impact of Covid has yet to be felt in most of banks’ loan books given the deluge of fiscal and monetary policies that is masking the true impact on businesses. The months ahead might see bigger loan losses or provisions, which will negatively impact bank earnings. Nevertheless, the business still has strong fundamentals to recover and continue growing.
From a strategic point of view, UOB has the potential to surpass its domestic peers by leveraging on key strengths. It has to recognise that its competitive advantage comes from its bigger presence in SEA region, which is set to become a growth region with its young demographic and rising middle-class. UOB has to focus on being the best-in-class bank in these SEA markets. UOB will need to rely on digital technologies extensively to power its growth in these region from credit underwriting to risk monitoring to product proposition. China also present a huge opportunity for UOB to find a niche and excel in that space. These are the markets that UOB needs to take leadership positions in for it to surpass its domestic peers.