UOB’s S$885 million allowance build-up ‘prudent’ despite Q3 profit hit: analysts

[SINGAPORE] UOB’s S$885 million move to shore up its allowances is a “prudent” step that brings its provision ratios in line with those of DBS and OCBC, analysts said, even as it resulted in a huge one-off hit to the lender’s third-quarter profit.

On Thursday (Nov 6), UOB shocked the market with a 72 per cent drop in net profit to S$443 million for the three months ended Sep 30, from S$1.61 billion a year earlier.

This came after the bank set aside total allowances of S$1.17 billion – more than four times or S$885 million higher than the S$281 million booked the year before.

As the counter fell 2.8 per cent to close at S$33.90, paring back from a larger decline of over 4 per cent earlier in the day, analysts took the provisions in their stride. In general, they did not read the provisioning as a red flag for UOB.

The S$1.17 billion comprised general allowances of S$687 million and specific allowances on loans of S$479 million, the latter up from S$296 million previously.

DBS Group Research analyst Lim Rui Wen said the general allowances came as UOB “(seeks) to increase buffers to be more in line with peers”.

General allowances are broad provisions set aside for potential credit losses in the overall loan portfolio, while specific allowances are made for identified troubled loans.

“I think it’s fair to say that we believe the move is partly to catch up with provisions that peers have made earlier,” said Lorraine Tan, director of equity research for Asia at Morningstar, adding that it is “probably not representative of any specific new deterioration”.

“They do appear to be bowing to investor expectations of growing risks, but at the same time, we think the caution is warranted in light of slowing global growth,” she added.

The increase brings UOB’s performing loans coverage – a measure of how much buffer the bank holds against potential losses from loans that are still current – to 1 per cent as at Sep 30, up from 0.8 per cent at end-June.

In comparison, UOB’s peers have a general allowance coverage of about 0.9 per cent, Tan noted.

Tay Wee Kuang, research analyst at CGS International Securities Singapore, said the additional provisioning exercise was “mostly out of prudence”.

The boost to general allowances will allow for migration to specific allowances if “systemic headwinds within its commercial real estate loan book arises”, he said.

UOB deputy chairman and chief executive officer Wee Ee Cheong and group chief financial officer Leong Yung Chee said at an earnings briefing on Thursday that most of the specific allowances were tied to exposures in the commercial real estate sectors of the US and Greater China.

Tay said lifting its performing loans coverage ratio to 1 per cent also allows UOB to “commit” to its 2026 guidance, which includes total credit costs coming in between 25 and 30 basis points.

UOB and DBS both released their Q3 results on Thursday. OCBC is set to announce its results on Friday morning, before market trading.

At DBS’ earnings call, CEO Tan Su Shan described the bank’s general allowance reserves as “more than adequate”.

As at Sep 30, DBS’ total allowance stood at S$6.4 billion, comprising S$4.1 billion in general allowances and S$2.4 billion in specific allowances.