We attended United Overseas Bank Limited’s (UOB) Corporate Day 2019. Theme: Focus on fundamentals and not lose sight of UOB’s primary objective of achieving sustained long term growth balanced with stability in three ways.

1. Regional connectivity – UOB seeks to acquire banks across SEA to create an integrated regional network with a standardised platform to deliver a seamless experience for all customers. The multiplier and network effect across franchises will allow the faster roll-out of solutions around the world, but first, UOB will start by laying groundworks in SEA. ASEAN is the 5th largest economy in the world with a population of 640mn, and its GDP is expected to double by 2050. ASEAN also has the largest technologically savvy population. As global trade tension escalate, UOB expects more business suppliers to diversify their assets into SEA and its regional network to assist these businesses. More than 40% of operating profit comes from outside Singapore. Of which 80% comes from ASEAN and greater China.
2. Creating an ecosystem – UOB’s approach is an Omni-channel strategy, physical and digital. As well as forging ecosystems and marketplaces with Grab, Singtel, property agents and car dealers to offer services to customers. UOB also launched a mobile-only Digital Bank in Thailand called “TMRW”. Digitally is no longer the only way customers want to be served.
3. Strong balance sheet – Only by having a robust balance sheet can UOB support its customers through economic cycles. Significant investment has been and will continue to be made in technology and people to achieve growth.

Customers

UOB visualises its future customers to come from its ASEAN franchise, which has a rising young population. Around 60% of the ASEAN population is under 35 years old, and 52% of the population owns a smartphone. As customers’ needs evolve, there’s a need for both digital services as well as physical branches. When it comes to higher value transactions such as mortgage loans, wealth management and SME transactions, less than 25% (Figure 1) of UOB’s customers are willing to transact online because of the sense of security of having someone to talk to before making a decision.

Figure 1: Who wants to buy financial products/service online?

Source: UOB

Omni-Channel Experience

Despite intensive digitalisation efforts, offline channels remain crucial in UOB’s customer engagement journey. Digitally is not the only way customers want to be served, more than 56% of UOB’s customers prefer physical interaction for wealth, deposit and loans transactions (Figure 2) when making purchasing decisions. Online channels are preferred in gathering information during the run-up before the actual application stage.

Figure 2: Channel Preferences Vary across Engagement Journey and Products

Source: UOB

As per Figure 3, the percentage of UOB’s customers using both traditional and digital platforms increased the fastest. These customers are called Omni-channel customers. Omni-channel customers became the most significant contributor in FY18 at 49% of total revenue as compared to 44% in FY17, when traditional customers were still the major contributor at 48% (Figure 3).

Figure 3: Omni-channel is rising in customer engagement and revenues

Source: UOB

Digitalisation – “TMRW”: ASEAN’s first mobile-only Digital Bank

UOB shared its designs for customer-centric solutions by making banking simpler with digitalisation. The newly launched digital bank called “TMRW” in Thailand targets the middle-affluent, mobile-savvy millennials who want to be continuously engaged. Products offered at the moment consists of payments, deposits and unsecured credit. Authentication can be completed within 10 seconds with a match of chip to government data. The steady CIR of TMRW is approximately 35%.

Figure 4: First Bank with 500 Kiosks in Bangkok

Source: UOB

Figure 5: TMRW App

Source: UOB

Figure 6: Making Savings as Fun as Playing Mobile Game

Source: UOB

Figure 7: Using Insights to Engage Customers – Examples

Source: UOB

Ecosystem Partnerships

Examples of ecosystem partnerships include bancassurance with Prudential, strategic alliance with Grab and partnerships in property and car ecosystems. M1 is the first telco in Singapore to offer paynow as a mode of payment. PayNow allows people to transfer money through their bank’s mobile or Internet banking service to a registered recipient with just their mobile phone number, NRIC or FIN. Scoot will also be the first airline in Singapore to provide paynow as a mode of payment, which means lower booking fees for customers.

Target

Revenue mix outside Singapore to increase to close to 50%. As of 1Q19, the proportion of UOB’s profit before tax from outside Singapore stands at 40.8%.

Cost-to-income ratio to decline close to 42% in 3 years. UOB’s CIR as of 1Q19 was at 44.6%. Improvement of productivity will start from Singapore where processes can be improved easily by reducing costs to acquire, serve and engage with digitalisation, before rolling out in the region.

ROE targeted to reach closer to 13%, depending on how fast UOB scales up its regional operations.

Market volatility in 2019

The main contributors to market volatility in 2019 will likely come from geopolitics, global trade tensions and a synchronised global slowdown in sentiments. 

Trade war – With the resurgence of trade war concerns, there seems to be a growing sentiment amongst corporates (with business in technology and electronics) to shift their supply chain out of China into ASEAN (Figure 8). A shift in the supply chain does not happen overnight, and many corporations are exploring the idea for now. A natural consideration would be countries such as Vietnam, Thailand and Indonesia where labour is cheap. UOB is well positioned with a wide SEA footprint to serve both suppliers and distributors.

Figure 8: Shifting Investments and Supply Chain to Southeast Asia

Source: UOB

Key market – South-east Asia (SEA)

SEA is the third largest population globally after China and India with a young demographic (384mn people below 35 years old). Indonesia, Thailand and Malaysia are UOB’s key markets. UOB’s Greater China proportion of spoke distribution reduced over the years with a broader focus on SEA (Figure 9).

Figure 9: Diversifying from Greater China into Southeast Asia

Investment Actions

Maintain ACCUMULATE with an unchanged target price of S$30.90 based on the Gordon Growth Model. We maintain our existing earnings forecasts.

Valuation: Gordon Growth Model