The Financial Integration of Asean and Singapore United Overseas Bank

The Financial Integration of ASEAN and Singapore United Overseas Bank

1.        Introduction

ASEAN Financial Integration Framework provides an access to the liberalization and communication initiative for banks in Southeast Asian countries. Singapore, as an important financial center, plays a significant role in the regional financial industry. This report, therefore, will center on one of Singapore’s leading bank UOB and discuss how the banking sectors in Singapore, Thailand and Malaysia are influenced by the financial integration. It will then analyze and explain UOB’s changes of performance on a country basis, and compare outcomes with other ten banks of ASEAN via illustrating financial ratios such as ROE, NIM, CIR, NPL and CAR over last 5 years and finally provide an evaluation of ASEAN Financial Integration Framework.

2.        Financial integration and banking sector in Singapore, Malaysia & Thailand

Since the financial crisis in Asia, ASEAN financial systems and banks have performed well and made a great progress in improving their macroeconomic architectures and mutual cooperation, which also stimulated a further development in financial integration. The Banking sector is likely to become the frontrunner of ASEAN financial integration (Almekinders et al., 2015). According to Wihardja (2013), Financial integration delivers many economic benefits to countries in Southeast Asia such as Singapore, Malaysia and Thailand. It plays a positive role in inducing more competition and establishing efficient and effective financial approach to decrease constraints that hamper investment and consumption (Pongsaparn and Unteroberdoerster, 2011). Moreover, in respect of economic diversification and distribution efficiency, financial integration facilitates a tendency in which cross-border banks ensure productive capital flowing into the most competent companies in order to minimize risks and promote overall performance (Wihardja, 2013). It also activates an ongoing progress in the development of local currency bond markets and strengthens the linkage of stock markets in Singapore, Malaysia and Thailand. Furthermore, especially in Singapore and Malaysia, the pension funds and investment funds witness a great stride.

3. Financial performance of UOB

Table1 ROE, NIM, CIR, NPL and CAR in UOB in 2012 to 2016

[pic 1]

(Source: UOB, Orbis database)

[pic 2]

(Source: UOB, Orbis database)

Return on equity (ROE) is a financial ratio that used to indicate how much return the bank has generated using the equity capital invested by shareholders. For UOB, Shareholders' equity increased 6.8% from a year ago to $32.9 billion in 2016, due to retained earnings and strong shareholder take-up from the scrip dividend scheme in UOB (UOB annual report, 2016). Meanwhile, the ROE decreased about 0.89% from 2015 to 2016.

  [pic 3]

(Source: UOB, Orbis database)

Net income margin (NIM) measures the effectiveness of equity investment of a bank when comparing to the expenses on the same investments. According to Chia (2017), typically, a Net Interest Margin of between 3% and 4% is healthy and sustainable. UOB’s net income margin decreased to 1.67 percent in 2013 and decreased again in 2016, because of the loan related fees was higher (Yahoo finance, 2013). To sum up, the average level of this ratio is not as much as the expected, this could result from the NIM pressure which UOB facing with.

[pic 4]

(Source: UOB, Orbis database)

Cost to income (CIR) is a ratio equals operating expenses divided by its operating income. It is meaningful while it measures how costs are changing in relation to incomes. For example, from 2014 to 2016 UOB's CIR was remained to raise, due to costs are rising at a higher rate than the interest income, which could suggest that the changes in this ratio would highlight the operation fact.

[pic 5]

(Source: UOB, Orbis database)

UOB’s capital position still remained healthy as the chart showed. Capital adequacy ratio (CAR) is a measure of a bank’s ability to protect them against insolvency. As the annual report states that UOB group adopted the Basel III framework for its CAR computation in accordance with the revised MAS requirement (UOB group, 2016). The CAR in UOB shows a downward trend in 2012 to 2016, however it still maintained the right position in the MAS minimum requirement with Common Equity Tier 1 and Total CAR at 13.0% and 16.2% respectively (Orbis, 2016).

[pic 6]

(Source: UOB, Orbis database)

Non-performing loan (NPL) is the ratio of the proportion of the nonperforming loans in the total outstanding loans the bank holds. Typically, the ratio is smaller, the performance is better. For UOB, the UPL raise from 1.1% to 1.5 during 2013 to 2016, although the ratio was increasing, it still stood at a safety position that did not engage in high bank failures. This showed that UOB’s asset quality of their portfolio was stable (UOB annual report, 2016).

To sum up, combine these five ratios, UOB group had a steady financial result during the 5-year period. Despite there were some waves of change in the ratios, it was still creating value for the shareholders and giving support to the customers. Moreover, UOB remained their position as the giant bank in Singapore and be the top-rated bank with a good performance in the word.

4. Explanations for changes in UOB’s performance

From the analysis of relative financial information such as ROE, NIM, CIR, NPL and CAR ratios over the last 5 years, it could be drawn that UOB exhibits a comparatively stable performance with no abrupt fluctuations, which suggests a relatively robust and adequate asset and capital, as well as a fairly low level of operating risk. The steady performance level benefits from Singapore’s unique characteristics of country conditions and banking system. Firstly, Singapore is a developed country and considered as a significant financial hub in Asia with world’s safest banks (Almekinders et al., 2015). Additionally, it is exposed to strict and sound financial regulations and mechanism, complete and favorable supervision system, which contributes to financial industry favorably. Furthermore, its advantageous geographical location, stunning environment, advanced infrastructures and convenient transportation considerably fosters communication and flow of financial talents and players, and therefore, brings more opportunities and enhances performance in the banking industry (Monetary Authority of Singapore, 2016).