UOB lags local peers in managing ESG risks: report

UOB has some catching up to do on the green banking front, said Maybank-Kim Eng analysts, with the bank lagging its peers on its environmental, social and governance (ESG) financing portfolio and certain diversity metrics.

Maybank-Kim Eng's analyst Thilan Wickramasinghe said in a report that as a bank with a wide regional footprint, UOB is exposed to multiple ESG risks - directly and through its clients.

Environmental as well as governance risks, money laundering, and corruption risks are particularly relevant for the bank, wrote Mr Wickramasinghe in a report dated September 18.

This comes as just 14 per cent of the bank's incremental lending in 2019 were for sustainable uses, falling behind peers who averaged 35 per cent. UOB's total sustainability portfolio is around 2 per cent of its total loans.

To be sure, the bank has established an ESG committee that reports to the management executive committee, although this sits one notch below board level.

The group has had several reported mis-selling incidents in the past two years, which raises fair dealing and governance risks, the report said. Five UOB personal bankers were jailed or sanctioned - or both - between 2018 and 2019 on separate cases of mis-selling and cheating.

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As a lender to a wide base of small and medium-sized enterprises (SMEs) in Singapore, Mr Wickramasinghe pointed out that UOB is also "particularly exposed to social risks" in terms of balancing shareholder returns while supporting small business owners, against the backdrop of the Covid-19 pandemic.

About 36 per cent of UOB's corporate loans at the end of 2019 were provided to businesses classified as SMEs.

"This creates notable social risks, given this is among the most impacted segments under the current economic backdrop," he said.

These risks are elevated as small business owners emerge from Covid-19 loan moratoriums. Some 16 per cent of UOB's loans are currently under moratoriums, a bulk of which are set to expire between the third and fourth quarters this year. This situation may increase the risks of non-performing loans in the near term.

From a diversity standpoint, women make up just 10 per cent of UOB's board membership - the lowest amongst Singapore banks - and 35 per cent of senior management, as at the end of 2019. Mr Wickramasinghe also noted that compared with its local peers, UOB is "marginally below average" in disclosures in terms of adhering to ESG standards.

To be sure, the analysts believe that UOB's ESG risks are typical for a systematically important bank with regional presence. "UOB displays no exceptional risks that are not typical for a large, regional D-SIB (domestic systemically important banks) for ESG," Mr Wickramasinghe wrote. He kept a "hold" recommendation and a target price of S$20.79 on the stock.

Tighter net interest margins and softer growth may further erode earning visibility, Mr Wickramasinghe flagged. Still, UOB is offering a dividend yield of 4.1 per cent even after taking into account dividend caps imposed by the authorities, he noted.

As at 2.01pm on Monday, UOB shares were trading at S$19.33, up S$0.12.