UOB offers lowest dividend yield amongst local banks. Switch to DBS?

What happened?

Many investors have been wondering what to do with Singapore bank stocks recently.

In particular, someone in the Beansprout community asked if it might make sense to sell UOB and buy DBS with the upcoming bonus share issue by DBS.

We have previously shared our thoughts on the DBS results and OCBC results.

Financial Horse also recently did a comparison of which of the Singapore Bank stocks he would buy.

As part of the SIAS Corporate Connect, we got to speak to the investor relations of UOB recently. You can find the presentation deck here. 

We thought it is worth sharing what we learnt from UOB’s recent results and investor webinar, and what it means for UOB’s share price prospects relative to DBS and OCBC. 

What you need to know about UOB’s earnings

#1 –  Mixed results for the fourth quarter of 2023

UOB reported a record net profit of S$5.7 billion in 2023, supported by an increase in its net interest income and enlarged customer base following the acquisition of Citigroup’s Malaysia, Thailand, Vietnam and Indonesia consumer banking business. 

This profit included a S$350 million one-off integration expense relating to the integration of its Citigroup consumer banking division.

Excluding this amount, UOB’s net profit would have surpassed the S$6 billion mark, a record achievement for the bank.

However, just looking the fourth quarter earnings of UOB paints a more mixed picture.

UOB’s core net profit in the fourth quarter of 2023 was at S$1.50 billion, representing a 1% increase compared to the previous quarter and 7% increase compared to the same period last year.

While UOB’s profit benefited from an increase in fee income, this was offset by weak loan growth and a decline in net interest margin.

Investors appear disappointed with the earnings, with UOB’s share price declining to about S$28.00 from S$29.50 following the announcement. 

#2 – Higher fee income accompanied by robust spending

One of the bright spots of UOB’s earnings in the fourth quarter of 2023 was the increase in fee income, which rose to S$569 million from S$485 million a year ago

The key contributor was credit card fees that surged by 69% year on year to S$125 million because of higher spending on an enlarged regional base of customers.

This larger base is the result of UOB’s acquisition of Citigroup’s consumer banking business in Indonesia, Thailand, Vietnam, and Malaysia back in January 2022.

Back then, Citigroup had around 2.4 million retail customers in the four markets.

Wealth fees also saw a slight recovery, going from S$125 million in the fourth quarter of 2022 to S$151 million in the recent quarter.

The higher fees were accompanied by a 14% year-on-year rise in the bank’s total assets under management (AUM) to S$176 billion.

Recently, UOB’s head of private bank Chew Mun Yew said that the bank plans to double its private AUM by 2026.

Because of continued inflows of wealth assets from countries such as Hong Kong, China, and elsewhere, he believes that UOB is well-positioned to capture such flows to increase its private AUM.

#3 – Net interest margin declined further  

UOB’s net interest margin (NIM) has been trending down in recent quarters.

Its net interest margin declined to 2.02% in the fourth quarter of 2023 from a peak of 2.22% in the fourth quarter of 2022.

As 2023 passed, stiff competition from other banks caused loan rates to soften, thus contributing to the quarter-on-quarter NIM decline.

UOB’s loan growth was also weak with total loans staying flat year on year at S$321 billion.

It would seem like high interest rates dampened demand by businesses to take on more debt.

With the slowdown in loan growth and decrease in net interest margin, UOB’s net interest income fell to S$2.40 billion in the fourth quarter of 2023 from S$2.56 billion in the fourth quarter of 2022.

#4 – Hiking its 2023 dividend

UOB declared a higher final dividend of S$0.85 per share, an increase from the final dividend of S$0.75 per share in 2022. 

This would take UOB’s total dividend in 2023 to S$1.70 per share, up 26% year on year.

The bank has maintained its dividend payout ratio at around 50% except for the pandemic year (2020) when the payout ratio fell to 45% as the Monetary Authority of Singapore mandated that banks reduce their dividend payments.

Since 2020, UOB has been steadily increasing its dividend per share in tandem with its improved results.

Find out how much dividends you would have received as a shareholder of UOB in the past 12 months with the calculator below.  

Learn more about UOB dividend history and dividend payment dates 

#5 – Positive growth expected in 2024

UOB’s management expects the company to see positive growth in total income in 2024.

The company aims to achieve this with a low single-digit loan growth along with double-digit fee income growth.

This is expected to be further supported by the integration of Citigroup Thailand which is on track to complete by the second quarter of this year.

CEO Wee Ee Cheong remains upbeat on Southeast Asia despite a weak global economic outlook.

He believes that domestic demand, coupled with a tourism recovery and strong investment flows, should benefit the region and help the bank to grow its franchise further.

At the same time, asset quality is expected to remain healthy with credit costs at the lower end of 25 to 30 basis points. 

With concerns around the exposure of banks towards commercial real estate, UOB shared that office exposure is about 7.5% of its total loan book.

Of these, about half of the exposure is in Singapore. Their overseas exposure is backed by strong sponsors and largely secured by class-A office properties, which may help to limit the amount of non-performing loans with a downturn in the sector. 

What would Beansprout do?

Like the other Singapore banks, UOB faces a more muted outlook in 2024.

As we have seen from its fourth quarter results, the net interest margin has been declining in recent quarters. This may remain under pressure with the Fed expected to cut interest rates this year. 

The weakness in interest income may be partly offset by the growth in fee income, which is expected to grow at a double-digit pace. 

Against this backdrop, we would still look at the Singapore banks more for their dividend yields rather than expectations for better earnings prospects in 2024. 

UOB is expected to offer a dividend yield of 5.9%, above the dividend yield on the Straits Times Index. 

However, this is below DBS’ dividend yield of 6.8% and OCBC’s dividend yield of 6.3%. 

DBS also has the strongest commitment to an increase in dividend payout with its guidance to keep its dividend per share of S$2.16 applied over the enlarged share base post the bonus share issue. 

Hence, DBS may appear to be a better option compared to UOB if we are looking to hold on to the Singapore banks for their dividend payment. 

Read more about DBS here. 

Related links: 

• UOB dividend history and upcoming dividend dates
• DBS dividend history and upcoming dividend dates
• OCBC dividend history and upcoming dividend dates

Join the Beansprout Telegram group for the latest insights on Singapore stocks, REITs, bonds and ETFs.