United Overseas Bank Braces for Potential Losses in Hong Kong and US Property Markets
United Overseas Bank (UOB), the third-largest bank by assets in Southeast Asia, has decided to set aside its largest ever loan provision of S$615mn (US$470mn). This is a strategic move made in anticipation of potential losses in the Hong Kong and US property markets. The bank’s decision reflects its proactive approach to managing its portfolio in challenging economic conditions, as reported Here.
Identifying “Troublesome” Areas
UOB has its roots in Singapore’s Chinese community. In a recent review of its portfolio, the bank identified certain “troublesome” areas in its Hong Kong and US commercial property loans. “We conducted a thorough review of our portfolio,” said UOB’s Chief Executive, Wee Ee Cheong. He added that the bank had identified a “few accounts” that required close attention.
Proactive Measures to Enhance Provision Coverage
Highlighting the bank’s proactive approach, Wee Ee Cheong stated, “We proactively set aside general allowances to significantly enhance provision coverage, backed by our strong capital base.” Such forward-thinking measures are aimed at cushioning the impact of any potential losses.
Impact on UOB’s Third-Quarter Net Profit
The bank reported a significant 72% drop in its third-quarter net profit, which fell to S$443mn compared to the previous year. The bank attributed this to a “challenging environment marked by narrowing interest margins and market volatility”. This has led to a 5% drop in shares in the bank on Thursday, although some of these losses were later pared. Since the start of the year, the group’s shares have fallen by 7.5%.
Hong Kong’s Commercial Property Sector
The commercial property sector in Hong Kong has been underperforming since the Covid-19 pandemic. Rising US interest rates and a weaker local economy have resulted in dampened demand. Property developers in the city, known for having some of the most expensive real estate in the world, have written down the value of their portfolios by billions of dollars. This has left banks holding a significant amount of non-performing loans.
Challenging Conditions in the Property Market
HSBC, another major bank, also reported last month that Hong Kong’s commercial property sector was enduring “challenging” conditions. It set aside $1bn against expected credit losses, including from Hong Kong and UK commercial property loans. “Commercial real estate conditions remain challenging in Hong Kong and mainland China,” the bank said. “In Hong Kong, weak demand and oversupply of non-residential properties continued to put downward pressure on rental and capital values.”
Signs of Revival
Despite the challenging conditions, the revival of the territory’s capital markets this year has spurred hope that the property market might be bottoming out. Major rental transactions, including by Jane Street and Hong Kong Exchanges and Clearing, are indicators of potential recovery.
