United Overseas Bank Limited (“UOB”) is a leading bank in Asia with a well-established global presence and understanding of Asian markets. Headquartered in Singapore, the bank has over 500 branches and offices in 19 countries and territories across Asia Pacific, Europe and North America. It is rated Aa1 (stable) / AA- (stable) / AA- (negative) by Moody’s/S&P/Fitch respectively.
UOB mainly operates through 4 segments: Group Retail (“GR”), Group Wholesale Banking (“GWB”), Global Markets (“GM”) and Others, which includes corporate functions and non-banking activities such as property and insurance. It offers a wide range of products and services, including consumer and commercial banking, private banking, investment banking as well as treasury services. Through its subsidiaries, the bank also provides asset management and private equity fund management services to its clients. As of 2021, Singapore still remains as a core market for UOB, contributing ~51.8% of its total operating profit.
Proceeds from the new issue will be used for refinancing and general corporate purposes. The additional tier 1 (“AT1”) subordinated bond has an expected issue rating of Baa1/BBB-/BBB+ by Moody’s/S&P/Fitch respectively. The coupon is fixed at 4.25%, and it is first resettable on 4 October 2027 at the 5-year SORA-OIS plus initial spread of 1.47%. Distribution payments may be deferred, and such unpaid distributions are non-cumulative and do not accrue interest.
However, if the issuer decides to skip distribution payments, it shall not redeem or declare any dividends/distributions for its parity and junior obligations. Investors should also take note of its loss absorption feature, where in the event if a loss absorption event has occurred, the accrued distributions shall be cancelled and the prevailing principal amount may be written-down (partial or in full) permanently.
For the first quarter ended 31 March 2022 (“1Q22”), total net profit declined 11% quarter-on-quarter (“QoQ”) to SGD 906m, as market volatilities and geopolitical tensions resulted in lower non-customer-related trading and investment income, coupled with a decline in general allowance write-back. Its underlying bottom-line was impacted by higher impairment charges this quarter (+59% QoQ) as total credit costs on loans normalized to 19 bps in 1Q22.
Nonetheless, its core businesses have held up well, backed by quality loans growth as well as record loan-related fees that jumped 14% from 4Q21 to a new high of SGD 194m. Total operating expenses declined 3% QoQ in line with lower income, resulting in a steady cost-to-income ratio of 44.8%. UOB’s asset quality remained resilient in 1Q22, as its non-performing loan (“NPL”) ratio remained steady at 1.6%, while total credit costs of 19 bps were also in line with its expectations. Going forward, the bank will look to integrate Citigroup’s consumer banking businesses to further strengthen its ASEAN franchise and unlock business synergies.
In terms of its credit profile, UOB still maintains a healthy liquidity and solvency profile as of 31 March 2022. Common equity tier 1 (“CET1”) capital ratio was down 0.4 percentage points (“ppt”) from 4Q21 to 13.1% in 1Q22, largely from higher risk-weighted assets as the Group continues to provide support for its customers to meet their financial needs. Meanwhile, its all-currency liquidity coverage ratio (“LCR”) and net stable funding ratio (“NSFR”) were at 129% and 113% respectively for 1Q22, which remained well-above the minimum regulatory requirements of 100%.
Moving on to relative valuation, we think that the new issue is more attractive than UOB’s existing secondary market bonds. Notably, the Group also issued a 2.550% SGD PerpNC7 bond last year, and the current yield-to-call (“YTC”) is ~3.76% with approximately 6 years left to its first call date on 22 June 2028. Compared to the UOBSP 2.550% Perpetual Corp (SGD), the new issue offers a higher yield with a lower remaining time to call of 5.25 years.
Comparing to other recent AT1 issues, OCBC Bank also priced a 3.900% SGD PerpNC5 that is currently trading ~3.8% YTC with approximately 4.97 years left to its first call date. Even though the UOB new issue has a slightly longer time to its call date, we think that the trade-off is fair, considering that the new issue offers ~45 bps yield pickup over the OCBCSP 3.900% Perpetual Corp (SGD). As such, investors who are looking for SGD AT1 notes may consider the UOB new issue. For more information, investors may refer to the bond factsheet here.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in UOBSP 2.550% Perpetual Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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