Is United Overseas Bank Limited A Better Investment Than OCBC?

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Earlier this month, I wrote an article on OCBC where I had revisited its financial results and assess its investment potential with several valuation tools. I found:

OCBC’s Key Statistics (1 December 2018):

Stock PriceP/E RatioPEG RatioP/B RatioDividend Yield
S$ 11.2610.351.031.203.29%

I ended my article with a question: ‘Is this a good time to buy OCBC?’. I believe, the answer lies in a comparison between OCBC with both DBS and UOB. Hence, I did a study on UOB and would like to share my findings in this article.

Therefore, here are 7 things to know about UOB before you invest.

#1: Asset Quality

For the last 10 years, UOB has increased its portfolio of customers loan from S$ 99.8 billion in 2008 to S$ 232.2 billion in 2017. Initially, the bank has achieved a gradual fall in non-performing loans (NPL) Ratio from 2.20% in 2009 to 1.10% in 2013. However, since then, its loan portfolio was affected by the downturn in a few industries namely oil & gas service sectors and shipping. Thus, its NPL Ratio has increased from 1.10% in 2013 to 1.80% in 2017.

Source: Annual Reports of UOB

Overall, the growth in UOB’s loan portfolio has offsetted the increase in its NPL Ratio over the last 5 years. As such, UOB has generated steady growth in its net interest income, up from S$ 3.58 billion in 2008 to S$ 5.53 billion in 2017.

Source: Annual Reports of UOB

#2: Non-Interest Income

UOB has derived bulk of its non-interest income from fees & commission arised from wealth & fund management, trade-related, loan-related, credit cards, and service charges. The remainder of non-interest income consists of income from interest income, trading gains, and net foreign exchange income.

Overall, UOB has reported steady growth in non-interest income from S$ 1.68 billion in 2008 to S$ 3.32 billion in 2017.

Source: Annual Reports of UOB

#3: Long-Term Profitability

Growth in both net interest income and non-interest income has resulted in its continuous growth in total income. Hence, UOB has reported steady increment in total income from S$ 5.25 billion in 2008 to S$ 8.85 billion in 2017.

Source: Annual Reports of UOB

For the last 10 years, UOB has reported a slight increment in its cost-to-income ratio, up from 38% in 2009 to 46% in 2017 and has recorded higher impairment losses from S$ 474 million in 2010 to S$ 727 million in 2017. They had offsetted UOB’s growth in total income during the 10-year period. Thus, its shareholders’ earnings had risen from S$ 1.94 billion in 2008 to S$ 3.01 billion in 2013 before plateauing at S$ 3.0 – S$ 3.5 billion from 2013 to 2017.

Source: Annual Reports of UOB

#4: Latest Financial Results

Figures in S$ Million unless stated otherwise

PeriodQ4 2017Q1 2018Q2 2018Q3 2018Total
Total Income2,3072,2312,3422,3279,207
Earnings8559781,0771,0373,977
EPS (S$)0.5130.5870.6460.6222.367

Source: Quarterly Results of UOB

For the past 12 months, UOB has broke through the S$ 3.0 – S$ 3.5 billion levels for its shareholders’ earnings. This is contributed from its stable growth in total income and substantial decline in impairment losses in its loan portfolio mainly in Singapore, Indonesia and Thailand. It reported S$ 9.21 billion in total income and S$ 3.98 billion in shareholders’ earnings or S$ 2.37 in earnings per share or EPS over the last 12 months.

#5: Balance Sheet Strength

As at 30 September 2018, UOB has reported total capital adequacy ratio (CAR) of 17.4%, net stable funding ratio of 110% and liquidity coverage ratio of 142%.

Thus, it has reported ratios above their minimum regulatory requirements. This means, in Q3 2018, it has maintained a strong funding and capital position. As I write, UOB was granted ‘Aa1’ credit rating from Moody’s and is ranked seventh in the World’s Top 50 Safest Commercial Banks by Global Finance in 2018.

#6: Relationship between UOB’s Profits and Stock Price Performance

Source: Annual Reports of UOB

Source: Google Finance

Based on the two graphs below, I found that UOB’s stock price performance is one that has reflected upon its consistent growth in shareholders’ earnings for the last 10 years. Thus, consistent growth in profits led to consistent growth in its stock price over the long-term.

#7: Stock Valuation

Here, I’ll share a few metrics to value UOB at S$ 24.64 a share.

(1) P/E Ratio:

In Point 4, I have calculated that UOB had made S$ 2.367 in EPS for the past 12 months. Its current P/E Ratio is 10.41, below its 10-Year Average of 11.94.

Key Statistics (11 December 2018):

10-Year P/E Ratio Range: 10.11 – 16.55

10-Year P/E Ratio Average: 11.94

Current P/E Ratio: 10.41

(2) PEG Ratio:

UOB has achieved CAGR of 6.4% in shareholders’ earnings per year for the past 10 years. Hence, its PEG Ratio is 1.62. In a glance, PEG Ratio is above 1.0, which indicates that it is overvalued. From my views, I find the PEG Ratio is less useful as a valuation tool due to UOB’s lack of speed in terms of earnings growth over the last 10 years.

(3) P/B Ratio:

In Q3 2018, UOB has net assets of S$ 23.64 a share. Its current P/B Ratio is 1.04 which is below its 10-Year average of 1.22.

Key Statistics (11 December 2018):

10-Year P/B Ratio Range: 1.02 – 1.56

10-Year P/B Ratio Average: 1.22

Current P/B Ratio: 1.04

(4) Dividend Yields:

UOB has paid out S$ 0.95 in dividends per share (DPS) over the past 12 months. Thus, its dividend yield is 3.86% based on its stock price of S$ 24.64, well above

its 10-Year average of 3.19%.

Key Statistics (11 December 2018):

10-Year Dividend Yield Range: 2.02% – 4.64%

10-Year Dividend Yield Average: 3.19%

Current Dividend Yield: 3.86%

VIA’s Verdict

Overall, UOB has delivered stable financial results to its shareholders. This has been reflected on its stock price over the long-term. When we compare OCBC with UOB, I realised that there is very little between them to choose from. For instance, UOB is cheaper in terms of P/B Ratio and pays better dividend yields than OCBC. OCBC edges out in terms of earnings growth as it has a lower PEG Ratio. There is nothing between them in terms of P/E Ratio.

StockP/E RatioPEG RatioP/B RatioDividend Yield
OCBC10.351.031.203.29%
UOB10.411.621.043.86%

So, where do we go from here? Let’s do DBS and then, you can decide between the three banks for yourself.

Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

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