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UOB Reduces European Exposure, Seeks More Key Asian Market Opportunities

By Jared Heng

The United Overseas Bank Group (UOB) posted after-tax earn- ings of S$1.302 billion in the first half, up 48.0 per cent year-on- year. In the second quarter, after-tax profit increased 27.9 per cent from the same period last year to reach S$602 million.

UOB attributed the first half performance to robust contributions from fee and commission income, as well as a reduction in impair- ment charges as the quality of its assets remained sound. Net interest income was stable amid the declining interest rate environment, and was underpinned by an increase in interest bearing assets. However, volatile financial markets resulted in lower trading and investment income during the second quarter.

Speaking at UOB’s First Half 2010 Briefing Tuesday, Wee Ee Cheong, Deputy Chairman and Chief Executive Officer of UOB, said: “We delivered a set of results consistent with the Asian economic recovery story, with our first half results driven by strong fee income and lower credit costs.”

Overall, net loans increased 4.6 per cent from end-2009 as the Group reduced its exposure to the European sovereign debt crisis, while growing corporate loans selectively by avoiding participation in finely priced loans. UOB said that it remained a key player in housing loans, adding that it would strengthen cross- selling efforts and fee income to offset competitive pressures on loan margins.

“We do not have any capital constraints in any countries, and we are selective by targeting better credit customers,” said Lee Wai Fai, Chief Financial Officer of UOB. “We also want to ensure that we get adequate returns for the risk we are taking.”

The Group’s capital position remained strong, with core Tier 1 capital and Tier 1 capital adequacy ratio strengthening further by another 1.1 percentage points to 13.0 per cent and 15.1 per cent respectively, compared with end-2009.

Net interest income decreased 3.9 per cent year-on-year to S$1.784 billion, with net interest margin declining 19 basis points to 2.19 per cent in the first half. The lower net interest margin was attributed to limited gapping opportunities and the replacement of higher yielding bank debt securities with lower yielding corporate debt securities in anticipation of the new Basel requirement. Intense competition also weighed on loan margins.

Non-interest income registered S$984 million in the first half. Excluding the one-time gain from the sale of UOB Life Assurance Limited, non-interest income dropped 8.5 per cent year-on-year due to lower trading and investment income.

“We are confident of achieving a mid- to high-single digit loans growth for 2010,” Wee said. “Our priority is to ensure balance sheet strength especially in view of global volatility.”

Wee noted that the “challenging trading environment” following the European debt crisis has led to a decline in trading and invest- ment income. Cost to income ratio increased in the first half as UOB invested in “strategic areas” such as IT and HR, he said, adding that UOB has maintained discipline in managing costs as it continues to invest in its regional franchise. UOB’s loans in regional countries expanded 11.7 per cent from end-2009.

Wee said that UOB is still reducing its exposure in the European market, while focusing more on key Asian markets. “Singapore is already a fairly mature market. I think there are big opportunities

for growth in places like Malaysia, Thailand, and Indonesia,” he said. “By improving our infrastructure and sales force, I believe we can expand our market share in these areas.”

The CEO believes that “concerted policy responses should minimise risks of a double-dip recession for the global economy,” adding that “barring major shocks to the system, Asia should continue to be a bright spot.”

Wee said that wealth management is a key area that UOB is focusing on, with some offshore centres set up to target less affluent markets. “We will also continue to grow our market share in the SME segment,” he said.

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