Analysts keep faith with UOB's organic wealth management play

AMONG the Singapore banks, UOB is generally seen to be more conservative in its wealth management (WM) pursuits, with a considerably smaller - and organically built - franchise when compared against its peers.

But industry observers say differences are not significant enough to warrant a strategy overhaul for now, particularly at a time where capital conservation should be UOB's top priority amid the pandemic.

Overall, UOB's WM fee income in Q2 makes up 16.5 per cent of its non-interest income for the quarter. This was 21.4 per cent for DBS.

OCBC captures significant wealth income from its insurance arm as well. Stripping that out for comparison sake though, OCBC's pure WM fee income stood at 17.8 per cent of total non-interest income.

CGS-CIMB analyst Andrea Choong told The Business Times that UOB's wealth franchise is mainly catered to the mass affluent market in South-east Asia, compared with DBS and OCBC which target more high net worth clients given their deeper roots in Hong Kong and Greater China.

"UOB's client segment generates less trading activity, and thus less fee income for the bank," she said.

DBS and UOB - which include retail flows in its WM asset base - reported assets under management (AUM) of S$251 billion and S$129 billion respectively as at June 2020.

OCBC, which focuses on flows for its private banking arm, Bank of Singapore, posted a S$113 billion AUM that thus excludes retail flows.

Amid lockdown restrictions, UOB's second-quarter WM fee income slumped 34 per cent to S$133 million from the previous quarter. DBS's fell 24 per cent over the quarter to S$305 million, while OCBC's Q2 WM fee income was down 30 per cent from a quarter ago to S$205 million.

Of the trio, UOB was also the only one that posted weaker non-interest income in Q2.

But Phillip Securities research analyst Tay Wee Kuang said UOB's weaker performance in Q2 is not significant enough for the bank to start pursuing more inorganic growth via mergers and acquisitions (M&As), especially if it's for the purpose of tiding through a sluggish short-term business outlook.

Patience is a virtue here. The wealth franchise across the three banks is expected to recover over time as economies gradually reopen.

Instead, short-term differences in WM performance across the sector may be attributed to factors beyond the size of the franchise, such as a stronger digital presence.

DBS Group Research analyst Lim Rui Wen added that UOB has stepped up its WM efforts in recent years.

In 2019, the bank renewed its bancassurance deal with Prudential for S$1.15 billion for 15 years. This compares with DBS and Manulife's 15-year partnership from 2016, where both partners will co-fund up to S$100 million, said Ms Lim.

M&As also come with higher costs of integration that may offset the benefits of stronger income, especially as a result of a "hasty" business decision, said Phillip Securities' Mr Tay.

Private banking

DBS's private banking segment has benefited from inflows from its traditional markets such as Asean and Greater China, and is also seeing inflows from Europe and the US, as reported by BT earlier this month. The bank is looking to expand further in Thailand and the Philippines.

OCBC, via Bank of Singapore, has been steadily expanding its wealth business across Asia, the Middle East and Europe.

While the weak interest rate environment and lower fee income do make a "more compelling" case for UOB to try boosting its WM income, a hurdle to this could be the bank's perceived conservative culture - as seen in its targeted customer segment and stable trading income - and challenges in finding a franchise that is of a "similar fit" to the bank, said CGS-CIMB's Ms Choong.

The need to conserve capital in the current pandemic is also a limiting factor to banks' M&A capacity at this juncture, she noted.

Likewise, Maybank Kim Eng's head of research Thilan Wickramasinghe told BT that banks' immediate focus should be on capital preservation and maintaining robust Common Equity Tier 1 (CET1) ratios. UOB's CET1 ratio stood at 14 per cent as at the second quarter this year.

Given "significant" macro uncertainties and potential non-performing loan risks, acquisitions for wealth management, or otherwise, would be "premature", he added.

Given the renewed focus on digitsalition amid a pandemic, Phillip Securities' Mr Tay said the three banks should continue to bulk up their WM business with more digital services.

"Focusing on strategies such as digitising the business that the three banks have all pursued may be more impactful in building a more resilient WM business," he said.