The reluctance of United Overseas Bank (UOB) to follow its local rivals in making huge bets on China looks to be paying off in the wake of the mainland’s economic slowdown

UOB’s cautious China policy paying off

Saturday, Jun 21, 2014

Rennie Whang

The Straits Times

SINGAPORE – The reluctance of United Overseas Bank (UOB) to follow its local rivals in making huge bets on China looks to be paying off in the wake of the mainland’s economic slowdown.

UOB took a cautious approach to the mainland despite the hype surrounding its rapid growth and opted instead to expand its presence in the fast-growing ASEAN region.

Investors have endorsed the strategy by driving up UOB shares. They hit a six-year intraday high of $22.82 last week and closed at $22.46 yesterday, 5.74 per cent ahead since Dec 31.

The contrast with local peers DBS and OCBC, which have both expanded aggressively into China, is striking. DBS shares closed at $17.06 yesterday, down 0.23 per cent for the year, while OCBC stocks ended at $9.70 yesterday, a fall of 4.9 per cent since Dec 31.

Analysts said the main reasons for UOB’s outperformance are its limited exposure to China while its niche foothold in booming South-east Asia is paying dividends.

Greater China contributed 35.6 per cent of pretax profits at DBS in the first quarter of this year, 11.9 per cent at OCBC and 11.4 per cent at UOB.

Ms Fiona Leong, bank analyst at RHB Research Institute, said many investors question the sustainability of DBS’ and OCBC’s trade loan business in China, given an apparent slowdown in the country.

“There are also concerns of asset quality due to talk of shadow banking,” she added.

Greater China loans amounted to 36 per cent of total lending at DBS Bank as at March 31 and 17 per cent at OCBC. Such lending comprised just 7 per cent of UOB’s loan book.

CMC Markets analyst Desmond Chua added that the withdrawal of government stimulus in China would have affected the business and loan books of banks in the country.

OCBC’s proposed $6.2 billion acquisition of Wing Hang Bank is also scaring investors.

Buying Wing Hang will require OCBC to undertake some form of equity issuance and that could mean too much stock hitting the market too fast, pushing prices down, said Mr Kenneth Ng, CIMB research head.

Mr Chua said: “The acquisition seems on the expensive side. If OCBC is unsuccessful in its attempt to take Wing Hang private, it would be forced to release the required balance back to the open market, of which it’s unclear if investors will still value Wing Hang at the premium that OCBC paid for it.”

Investors also like UOB’s ASEAN niche, he noted. For example, in Thailand, where UOB has a greater presence than DBS or OCBC, the equity market is on the rise despite the ongoing political crisis, he noted.

“ASEAN appears to be better sheltered from the recent turmoil in global equity markets, and has an emerging affluent class that might be a source of growing loans,” he added.

Maybank Kim Eng noted last week that UOB’s share price outperformance is likely to continue this year. Its relative price-to-book value valuation to DBS and OCBC “remains modest from a historical standpoint”, it noted.



About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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