THE recent credit market turmoil has come home to roost at United Overseas Bank (UOB), which yesterday reported a 14 per cent drop in its third-quarter net income to $501 million from the previous quarter.
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Unlike rival DBS, however, UOB did not take its heaviest hits directly from higher provisions to cover a fallout from risky debt holdings. Instead, it suffered from a lower trading and investment income, triggered indirectly by the United States sub-prime mortgage crisis.
UOB's third-quarter net profit was still 19 per cent higher than a year ago, helped by robust loans growth as individuals and developers snapped up properties in Singapore.
The results, however, were lower than the average net profit estimate of $506 million by seven analysts polled by Dow Jones Newswires. That sent the shares down 50 cents in afternoon trade to close at $21.50.
UOB's treasury operations took a hit, with its foreign exchange, securities and derivatives income falling from $97 million to $26 million.
The bank blamed its lower trading and investment income on 'mark-to-market losses' - a slide in the market value of securities it held as at the end of last month.
Investors are jittery about the extent of risky and complex assets held by financial institutions. They are demanding much higher premiums to compensate for the higher risks they perceive in lending to funds in the commercial paper market.
This has, in turn, widened credit spreads - the difference in yield between a riskier corporate bond and a relatively risk-free government bond.
Meanwhile, UOB's holdings of collateralised debt obligations (CDOs) - products packaged from risky mortgages in the US - remained unchanged from the previous quarter at $388 million. None are in default.
UOB said its more subdued trading and fund management performance prompted it to lower provisions for staff bonuses, which accounted for the bulk of the roughly $17 million cut in its total operating expenses for the quarter.
However, UOB did make a $20 million provision for its CDO portfolio in the third quarter. This brought its total provision so far to $55 million.
As a further conservative step, UOB took another $46 million provision for mark-to-market losses to its reserves.
In comparison, DBS set aside $70 million as provisions against risky debt assets and also marked down $42 million against its exposure to a vehicle that invests in CDOs.
The volatile market conditions also squeezed UOB's net interest margins by 0.11 of a percentage point to 1.93 per cent, as the bank shifted more funds to shorter-term good quality investments. These are relatively less risky but have a lower yield.
UOB chief executive Wee Ee Cheong said in a statement issued yesterday: 'The market is undergoing a volatile period, but the impact of the credit volatility on our core business has been minimal, and our core business remains strong.'
UOB's main business of lending recorded a 15.6 per cent rise in total net loans to $85.2 million as at the end of September.
This lifted its net interest income, which is what it earns from borrowers after paying interest to depositors, to $714 million from a year ago.
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