We  attended the  UOB Corp Day  in Singapore and were briefed  by the heads of various business units. We came out optimistic  on  UOB's plans to  drive  its  core SME  niche  to  the  regional  markets,  as  well  as  its  focus  on  fees  rather  than interest income for the syndicated loan space.  Maintain BUY with TP of S$21.40 pegged to 1.5x 2012 book. Key highlights as follows.

Driving  the  core  SME  business.  The  SME  business  remains  a  core  part  of UOB.  The  strategy  is  to  grow  the  regional  SME  business  to  half  of  commercial banking  PBT  by  2015  (from  current  41%).  UOB  capitalizes  on  its  regional network to improve on its SME lending pricing. UOB will also work on raising the fee to total  income for SME  customers, as SME customer now participate  in the derivatives market, buy life assurance for their key executives, etc.

Capitalizing  on  regional  network  to  capture  corporate  banking  customers. For the corporate banking space, UOB intends to focus  on its niche in mid-caps and  leave  the  big-caps  to  the  global  banks.  UOB  is  aware  that  in  its  regional operations, there are local banks with much lower funding cost. UOB's strategy is to capitalize on  its regional network to  attract corporates  keen on going  regional and this also helps UOB derive better margins.

More wealth management centres to strengthen UOB's wealth management business.  UOB  is  working  to  increase  its  presence  in  the  Affluent  segment, which  is  defined  as  those  with  assets  between  S$350k  &  S$2m.  UOB  believes the sweet spot lies in affluent individuals with assets of ~S$800k, which is nicely served  by  its  privilege  banking  segment.  To  grow  the  wealth  management segment, UOB is  targeting for 67 wealth  management centres by 2015, up from Jun 12's 49 centres.

Wealth management product  sales  have  grown, with  2011  sales being 2.4x that for  2007.  Wealth  management  product  sales  account  for  35%  of  total  global market product sales, up from 2007's 26%. This reflects UOB's growing franchise despite the fallout from the Lehman crisis.

Less  competition  from  foreign  banks  a  positive  for  UOB's  investment banking  business.  On  the  investment  banking  space,  UOB  is  ranked  amongst the  top  three  in  the  syndicated  loans  league  table  (with  a  12.3%  market  share). UOB's  focus  is  on  fees  gathering  and  only  very  selectively  participates  in syndicated  loans  deals.  UOB  has  gained  market  share  from  foreign  banks becoming less aggressive in this part of the business and will work to improve on this.

Lending to SMEs is a core business of UOB. Typically with loan exposure of > S$2m,  Singapore  currently  accounts  for  59%  of  commercial  banking  PBT  (with balance  41%  from  the  region).  UOB  targets  to  have  an  equal  split  of  PBT  from Singapore and the region by 2015.

SME loans offer much better spread than corporate lending, and other banks are also targeting this SME segment. To deal with competition, UOB's strategy is to  use  its  regional  network  to  improve  on  its  pricing.  In  this  respect,  UOB Malaysia has done well in the recent few years. UOB is working hard to grow its SME lending business in other countries such as Thailand, Indonesia and China. However,  UOB  will  continue  to  be  cautious  and  prefer  secured  lending  in  these countries to reduce risk.

Focusing  on  fees  from  SME  customers.  Fee  as  a  percentage  of  total  income has  been  rising  for  the  SME  segment.  UOB  sees  ample  crossing-selling opportunities, especially in bancassurance, which is a growing business.

On  the  corporate  banking  space,  UOB  is  active  in  the  mid-caps,  and  only selectively  competes  with  the  global  banks  in  the  larger-caps  deals.  UOB  is seeing  good  traction  in  cross-border  business  flows,  be  it  Singapore  corporates expanding  overseas  or  foreign  corporate  looking  to  regionalize.  UOB  is  very focused  on  improving  its  fee  performance  and  aims  to  leverage  established regional network to better achieve the Group's target of non-NII contributing 40% to total income by 2015.

Leverage  on  regional  network  to  propel  corporate  banking  segment.  In  the past, UOB targets Singapore corporates that are expanding overseas. Now, there has been some switch to targeting foreign corporates eg Indonesian ones looking to regionalize. UOB's strategy is to target more on fee income, instead of interest income.  It  may  be  difficult  for  UOB  Indonesia  to  compete  with  the  larger Indonesian banks which enjoy lower cost of funds. However, UOB can assist the corporate to regionalize, as UOB has a better-established regional network.

UOB  aims  to  earn  fees  from  origination  of  loan  syndication,  and  generally  does not  participate  in  syndicated  loans  originated  by  competitors,  unless  in exceptional cases.

Rising  rich  an  exciting  segment.  For  the  wealth  management  space,  the Affluent segment ie with wealth in excess of S$350k, is a fast growing space with rising  regional  affluence.  UOB  also  has  a  privilege  reserve  segment  catering  for clients  with  wealth  in  excess  of  S$2m.  UOB  believes  that  its  sweet  spot  lies  in affluent individuals with assets of ~S$800k.

UOB  targets  67  wealth  management  centres  by  2015,  up  from  Jun  12's  49 centres.  For the affluent space, the target AUM is S$100b by 2015, up from the current S$59b. The intention is to achieve the target organically.

Mass  market  accounts  for  bulk  of  wealth  management  earnings.  Industry-wide for high net worth clients, the return to AUM ratio is ~30 bps. UOB is able to achieve ~100-120 bps on an overall basis, due to wider margin from the Affluent segment  of  >S$350k.  This  is  a  segment  that  the  bank  believes  offers  much growth  potential.  UOB's  strategy  is  for  its  RMs  to  focus  on  offering  customers only relevant products.

For  Global  Markets  &  Investment  Management  (GMIM),  the  bulk  of  corporate product  sales  are  still  derived  from  Singapore  (73%  share),  with  another  16% from  Malaysia.  Whilst  structured  products  (with  maturity  of  ~5  years)  sold  well
prior  to  2008,  investors'  interests  have  since  switched  to  products  with  shorter maturity (1-3 month).

Wealth  management  product  sales  have  expanded  faster  than  corporate products.  Wealth  management  products  share  of  total  global  market  product sales  now stand at 35%,  with the  balance 65% attributed to  corporate  products. This  compares  with  2007  when  wealth  management  share  was  26%,  with corporate products at 74%. This reflects the strong growth of wealth management product sales, despite the drastic fall in demand for structured products after the Lehman crisis in 2009.

For  the  investment  banking  business,  UOB  is  one  of  the  Top  3  lead arranger for syndicated loans in 1H12 (with a 12.3% market share). UOB cited the example of Las Vegas Sands Corp (LVS), which UOB enjoys a good working relationship  and  has  since  2008,  leveraged  its  strong  regional  network  and balance  sheet  to  partner  LVS  in  three  consecutive  landmark  deals.  In  the  past, the  US  and  European  banks  were  aggressive  as  lead  managers  for  syndicated loans.  We  feel  that  competition  is  somewhat  abating  now  and  the  three  local banks have overtaken as the key players.

UOB is creating scale through an integrated regional IT platform. Substantial IT  consolidation  has  taken  place  eg  for  credit  cards  for  the  Singapore,  Thailand and  Indonesia  markets.  Instead  of  relying  on  an  external  party  to  process  UOB Indonesia  credit  cards,  the  processing  is  carried  out  in  Singapore,  with  UOB deriving significant cost savings. UOB also has the IT set-up for its ground home mortgage staff to utilize the iPad to determine the eligibility of potential home loan applicants  for  housing  loans  '  and  this  gives  UOB  an  advantage  versus  its competitors.

UOB  continues  to  explore  avenues  to  offshore  more  backroom  services  to neighbouring countries in  its drive to lower costs, whilst  maintaining control  over its operations.

On  transactional  banking,  UOB  offers  a  total  solution  to  clients,  including cash  management,  trade  services  and  delivery  platform.  On  cash  management, UOB helps companies manage their receivables and payables, and this helps to generate  foreign exchange fees, as  in  general,  majority  of  trade  is  denominated in US$. UOB's regional presence is also a big plus in supply chain financing.

Source: OSK