Not a safe haven: Weak regional operations hit UOB in Q2

UOB may lose out in the Greater China growth game.

Compared to its counterparts, UOB is perceived as a safe haven because of its limited exposure to Greater China. But its weak regional operations could well be the banks’ Waterloo, according to a report by DBS.

The report revealed that UOB’s asset quality weakened in Singapore, Thailand and Indonesia. Singapore non-performing loans (NPLs) arose from mortgages while there was one account in Thailand and two in Indonesia, which are are currently being restructured.

According to DBS, “It was perceived to be the best stock for shelter amid concerns on exposure to
Greater China. But we believe the market has not priced in challenges it is facing in its regional operations. Longer-term, we believe UOB may lose out in the Greater China growth game.”

Here's more from DBS:
Regional operations dented. Thai and Indo operations were significantly weaker q-o-q on NIM compression and higher provisions as well as NPLs. Malaysian operations were also weaker but less compared to Thai and Indo on lower contribution from associates (sale of UOB Asset Management) and lower fees; NIM was however higher q-o-q.

Funding and liquidity in focus.S$ loan-to-deposit ratio hit 100% in 2Q14 but UOB denies facing liquidity constraints. UOB has diversified its funding sources, skewing a little more towards wholesale funding with duration of up to 1 year.

UOB increased its US$ Commercial Paper issuance beyond US$12bn. UOB will focus on raising stable funding sources and selectively remaining competitive in the retail side. NIM would at best remain flat but there could be downside blips, and if so, funding would likely be the culprit.

While NPL ratio went up, provisions were stable. UOB remains the bank with the higher general provision reserve ratio at 1.4%.