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United Overseas Bank (UOB)

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Once upon a time in Singapore’s banking fraternity, there were four local “Heavenly Kings” – Development Bank of Singapore (DBS), United Overseas Bank (UOB), Overseas Union Bank (OUB) and Oversea-Chinese Banking Corporation. They are all household names and I believe most Singaporeans have experiences with their bank products or services.

On looking back, the devastating effect of the Asian Financial Crisis in the nineties and the industry liberalization brought forth by the new Monetary Authority of Singapore (MAS) regulations changed the banking landscape forever. Through the years, UOB has staved off these challenges and emerged as one of the most powerful forces among its peers.

Among the four “Heavenly Kings”, OUB was the smallest player and was founded by the late Lien Ying Chow. In the early 2000s, the local banks were under pressure by the government to consolidate. This was because Singapore government wanted to reduce the number of local banks to pave the way for bringing in more foreign banks.

UOB

The vision was to shape Singapore into a global financial centre with strong presence of international banks that can bring in investments and thus create high value banking jobs for Singaporeans.

Being the smallest bank, it was no surprise that OUB was the target of a bidding war between DBS and UOB. In June 2001, DBS launched a hostile takeover for OUB by tabling a bid of $9.4 billion. It should be noted at that point of time, DBS had acquired POSB in 1998, another government-linked bank. So, the move by DBS was viewed as being aggressive among the smaller players.

DBS’ move led to a bid of $10 billion from UOB, which ultimately won the race after gaining more than 90% in shareholder acceptance in September 2001. The victory was widely regarded as one of the most epic corporate battles in Singapore stock market and propelled UOB to the largest local bank in Singapore, with total assets worth about an eye-popping $115 billion.

The acquisition of OUB had also sealed reputation of Mr Wee Cho Yaw, Chairman Emeritus of UOB, as a “merger wizard”. Prior to the acquisition, Mr Wee is a banking veteran who had acquired many banks in Singapore, such as Far Eastern Bank, Industrial and Commercial Bank and Chung Khiaw Bank. Given his vast experience, winning the battle was an expected outcome. Many analysts deemed that the acquisition of OUB by UOB as being “friendly”, with support from shareholders and the founder, Mr Lien.

$10 billion was a lot of money back in 2001. Even by today’s standard, it still is. So, did UOB overpay for OUB? In my point of view, not really. UOB current market capitalization stands at $38 billion. Through the years, the merger had provided an opportunity to scale operations in both domestic and overseas, optimized branches and ATM, cross-selling of bank products and created synergies in backroom operations. So in my opinion, the money is well-spent and should be seen as a piece of master-stroke by Mr Wee Cho Yaw.

As of 1QFY17, UOB’s capital and funding position remained strong. Common Equity Tier 1 Capital Adequate Ratio (“CAR”) was 13.2%, Tier 1 CAR was 13.8% and Total CAR was 17.3%. This set of metrics was comparable to arch rival, OCBC with CET Tier 1 CAR of 13.3%, Tier 1 CAR of 14.2% and Total CAR of 16.5%.

Since the OUB acquisition, UOB has morphed into a different animal altogether. Total assets grew from $253 billion in 2012 to $340 billion in 2016. However, return on Equity (ROE) had been declining from 12.4% in 2012 to 10.2% in 2016. ROE measures how efficient the management deploy shareholders’ fund to generate income. Compared to the banks in the United States, UOB’s average ROE over the past years still outperformed. Thus, I am not concerned about the declining ROE.

Interestingly, arch rival OCBC Bank had been acquiring strategic assets like Barclays’ Asia wealth management, Hong Kong’s Wing Hang bank and recently National Australia Bank’s wealth management. Against this backdrop, one wonders whether UOB’s merger wizard is tempted to strike again.

To this end, Mr Wee Cho Yaw is playing it cool. He reckoned that in today’s market context, it is not easy to engineer growth through merger and acquisition approach. Hence, it is likely that mega acquisitions like that of OUB would be rare in Singapore going forward.

On the other hand, Mr Wee Cho Yaw could be focusing on consolidating its existing three property firms – UOL Group, United Industrial Corp (UIC) and Haw Par Corp. In the mid-2000s, the veteran banker faced great challenges when MAS mandated banks to sell off non-core assets. Somehow, Mr Wee managed to overcome the challenges and went on to build a formidable investment fortress for UOB with UOL, UIC and Haw Par Corp among its stable. However, the new housing measure, Qualifying Certificate rule, may be the straw that broke the camel’s back.

Under the Qualifying Certificate rule, housing developers with non-Singaporean shareholders or directors are required to obtain the Temporary Occupation Permit (TOP) for their developments within 5 years and to sell all units within two years from the date of TOP. Failing to do so would lead to forfeit of banker’s guarantee worth 10 per cent of the land purchase price. In addition, unsold united may also be force sell by the government.

Developers can apply for extension of the deadline by up to three years but the fees may rake up to hundreds of millions. To circumvent this onerous rule, the only way out for listed property developers is to seek privatization. This is because technically, a listed company would have foreign investors.

Through delisting, a private developer with Singaporean directors and shareholders would avoid having to pay penalty fees to the government. This explains the slew of privatization of listed property developers in Singapore stock market. UOB’s property firms, UOL Group, UIC and Haw Par Corp are also affected.

In conclusion, I don’t foresee UOB making big money acquisitions like what OCBC had been carrying out for the past few years. Instead, UOB could be more focused on consolidating its property developer units to minimize the impact of the Qualifying Certificate Rule. Currently trading at Price/Book Value of 1.13 and P/E ratio of 12.5, UOB share price is not considered over-valued. However, I will continue to monitor this counter due to heightened risks of economic downturn and US Federal Reserve interest rates hikes.

Read the following articles relating to UOB:

  1. $500 profits from UOB Gold Savings Account
  2. BullionStar versus UOB
  3. UOB Gold/Silver Savings Account
  4. UOB Gold Saving Account
  5. Passive income from investing in UOB Gold/Silver Savings Account

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