2017 was a good year for banks. Improvements in the oil and gas sector, higher interest rates, and an improving market for housing loans were all drivers of growth.
Consequently, United Overseas Bank Ltd (SGX: U11) benefitted from the positive economic tailwinds to post a 9% increase in net profit after tax in 2017. But, there are in fact many more positives about UOB’s business performance in 2017 that shareholders of the bank should be pleased about.
Fee and commission income up 12%
UOB breaks down its income into three components: Net interest income; fee and commission income; and other non-interest income.
Net interest income essentially comes from the interest earned from the loans that UOB makes, while fee and commission income is earned from the variety of services the bank provides, such as wealth banking, credit cards, investment banking, and more. The other non-interest income category incorporates all other income earned from other sources such as trading.
In 2017, UOB’s fee and commission income grew 12% to S$2.16 billion. In addition to diversifying the bank’s income mix, the fee and commission income segment also has much lower capital requirements and are generally high-return businesses. Growth in this segment could therefore improve the bank’s overall profit margins and returns on equity.
Net interest income grew 11% in 2017
At the same time, UOB’s core business of making loans grew admirably in 2017, judging from the 11% increase in interest income in the year.
Driven by broad-based growth over most markets and industries, UOB’s loan volume rose 5% in 2017. Furthermore, with an overall positive outlook for Singapore’s economy and improving sentiment toward the local residential property market, loan volume is expected to increase for UOB again in 2018.
A 6-basis points increase in UOB’s net interest margin from 1.71% in 2016 to 1.77% also contributed to the growth in the bank’s interest income. The bank’s management attributed this to an “efficient deployment of liquid assets.” Another factor that contributed to the wider net interest margin was the higher interest rate environment. With the US Federal Reserve expected to raise interest rates another five to six times in total in 2018 and 2019, UOB’s net interest margin will likely be able to continue increasing in the next few years.
Robust balance sheet and strong liquidity position
Notably, UOB achieved its stellar set of results for 2017 while maintaining a robust balance sheet and a strong liquidity position.
A common metric to assess if a bank has the means to withstand sudden market-wide shocks is the liquidity-coverage ratio (LCR). Banks should typically have a LCR of at least 100%. During the fourth quarter of 2017, UOB had an average LCR of 170% for Singapore dollars, and 135% for all currencies.
Not to mention, UOB also had a Tier 1 Capital Adequacy Ratio (CAR) of 16.2% at the end of 2017. The CAR is a risk-weighted measure of the bank’s capital as a percentage of its credit exposures. In Singapore, the Monetary Authority of Singapore requires banks to have a minimum Tier 1 CAR of 8%. Once again, UOB is very well covered in this respect.
The Foolish bottom line
2017 was a good year for UOB as it took advantage of positive macro-economic conditions to grow both its loan-related and non-loan-related businesses. With its strong balance sheet and stellar track record of growth, UOB is certainly well placed to benefit from any growth in the local and regional economies over the next few years.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of United Overseas Bank. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.