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SINGAPORE (BUSINESS HOURS) – United Overseas Bank (UOB) on Wednesday (May 6) saw a 19 percent drop in first quarter net profit due to declining margins and an increase in impairment charges, taking their profits to the lowest level in just over two years.
Still, the bank’s first-quarter net profit of $ 855 million, down from $ 1.05 billion a year ago, beat analyst estimates of around $ 739.3 million, according to Refinitiv data.
Jefferies analyst Krishna Guha said that while credit costs were much lower than the guideline by 36 basis points, the bank built preventive reserves on the balance sheet to worsen asset quality. “Margins were weaker than expected. The key bright spot was rates that grew sequentially and over the year,” he said in an early note.
UOB said that at the end of March 2020, outstanding oil and gas (O&G) loans totaled $ 10.2 billion, which represents 3.6 percent of total loans compared to 4.7 percent at the end of June 2018. Three-quarters of O & G’s exposure is to middle traders and operators, of which 70% are national oil companies (NOCs) and global companies. The remaining exposure is primarily short-term structured exposure.
Hin Leong was not mentioned, the oil trader widely reported that he collapsed amid staggering debt. Most banks in Singapore, including the local trio, are exposed to Singapore’s oil trading giant.
According to unidentified sources, UOB was reported to have allowed Hin Leong to withdraw more than $ 100 million in early April. The three big banks in Singapore have a total exposure to Hin Leong that supposedly exceeds $ 600 million.
As for its remaining 25 percent exposure to the upstream O&G segment, UOB’s exposure is primarily to NOCs and international oil companies.
The bank said vulnerable accounts in the O&G segments were already classified, with their guarantee values reduced by up to 90 percent by the end of 2017.
UOB revealed that its 15 percent exposure to small and medium-sized businesses in the first quarter of 2020 remained stable during the quarter. Incremental loans in the first quarter of 2020 from a quarter ago were driven by large corporations and world-class clients in developed markets, with half of their loan portfolio comprised of large corporations. The remaining loans are for individuals.
First-quarter net interest income held steady at $ 1.59 billion year-over-year as asset growth was offset by margin compression, the lender said in a statement. The net interest margin (NIM) was 1.71 percent, 5 basis points (bp) a quarter ago and 8 bp a year ago.
Total credit costs increased 12bp to 36bp from the previous quarter due to “some major accounts not working,” UOB said. On an annual basis, total credit costs increased 17 bp. The loan delinquency rate was higher, at 1.6 percent, 0.1 percentage points more than a year ago.
This occurs when the bank’s impairment charges increased to $ 286 million in the first quarter, from $ 93 million the previous year. An additional $ 260 million reserve was also earmarked through the regulatory loss reserve reserve to strengthen coverage amid macro weak conditions, UOB said.
Non-financial income for the first quarter fell one percent to $ 813 million, down from $ 819 million a year ago.
Net commission income grew 8 percent to $ 515 million largely thanks to wealth management, while trade and investment income fell 17 percent to $ 224 million amid increased market volatility, UOB said.
Total revenue for the first quarter was $ 2.41 billion, unchanged from a year ago.
At 11:31 a.m., UOB shares were trading at $ 20.03, an increase of $ 0.13.
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