Annual Report 2017

Deputy Chairman and CEO’s Report

We build and deepen relationships by focusing on, and supporting the long-term interests of, our customers, colleagues and the community. Our disciplined approach in balancing growth with stability continues to bear fruit as we weather challenges, cycles and change.
The painting on this year’s Annual Report cover depicts the solid foundations that secure and sustain relationships over time. Its theme resonates strongly with UOB as we believe the fundamental strengths of our business model form the bedrock on which we continue to create sustainable value for our stakeholders. We build and deepen relationships by focusing on, and supporting the long-term interests of, our customers, colleagues and the community. Our disciplined approach in balancing growth with stability continues to bear fruit as we weather challenges, cycles and change.
2017 Financial Performance
Over the course of 2017, there were further signs of recovery in the global economy with sentiments picking up and markets hitting new highs. For UOB, it was a good year overall.  
We built on our achievements in 2016 and increased net profit after tax by nine per cent to reach $3.39 billion. We achieved new highs in net interest income and fee and commission income which resulted in our total income rising 10 per cent to $8.85 billion.  
Our net interest income was up 11 per cent to $5.53 billion, largely on the back of higher net interest margin and healthy loan growth. Gross loan growth was broad based and across all territories, up five per cent to $236 billion as at 31 December 2017. Our deployment of excess funds into higher-yielding assets and the benefits from the rising interest rate environment resulted in net interest margin increasing six basis points to 1.77 per cent.  
Our non-interest income rose eight per cent to $3.32 billion. This was the result of robust growth in fee and commission income, up 12 per cent to $2.16 billion, driven by increases in credit card, fund management and wealth management income as we continue to strengthen our product and advisory capabilities. 
Total expenses increased nine per cent over the year to $4.03 billion as we paced investments in people, technology and infrastructure. These investments reflect our continual efforts to ensure we are building the right capabilities for the future. Due to a combination of strong revenue momentum and our continued cost discipline, our expense-to-income ratio was stable at 45.5 per cent.
We made the prudent decision to accelerate the recognition of residual vulnerable exposures as non-performing assets in the fourth quarter, thereby reducing lingering credit risks to the Group. As a result, the non-performing loans (NPL) ratio rose from 1.5 per cent a year ago to 1.8 per cent as at 31 December 2017. Nonetheless, total credit costs were lower at 28 basis points last year as some general allowance was released to offset the rise in specific allowance. NPL coverage remained strong at 91 per cent.  
Despite the reversal in general allowance, the Group continued to maintain a comfortable level of general allowance on loans of $1.96 billion as at 31 December 2017. This amount adequately satisfies the one per cent allowance requirement by the Monetary Authority of Singapore, as well as the expected credit loss requirements under the Singapore Financial Reporting Standards (International) 9, both of which came into effect on 1 January 2018.
We maintained our strong funding position, with customer deposits up seven per cent over the year to $273 billion. Our loan-to-deposit ratio was healthy at 85.1 per cent while the average Singapore dollar and all-currency liquidity coverage ratios for the year were 200 per cent and 147 per cent respectively, well above the regulatory requirements of 100 per cent and 80 per cent. 
While deposits are our main source of funds, we also tapped debt capital markets to build term funding capabilities and to optimise funding costs. In October 2017, we priced our US$650 million Additional Tier 1 securities at the tightest pricing for such offers globally. We also diversified our investor base, with more participation from European investors alongside Asian ones. This success is a testament to the confidence investors have in our strong balance sheet and financial standing.  
Our capital position remained healthy. As at 31 December 2017, the Group’s Common Equity Tier 1 and Total Capital Adequacy Ratios (CAR) were 15.1 per cent and 18.7 per cent respectively. On a fully-loaded basis, the Common Equity Tier 1 CAR rose to 14.7 per cent from 12.1 per cent from a year ago, giving us the capacity to seize growth opportunities. The Group’s leverage ratio was eight per cent, well above Basel’s minimum requirement of three per cent.
We continue to be rated among the world’s strongest banks, with a rating of ‘Aa1’ by Moody’s and ‘AA-‘ from both Standard & Poor’s and Fitch Ratings.
Enterprising with a Far-Sighted Approach
As our 2017 results reflect, we forged ahead on many fronts to achieve our strategic priorities, continuing to invest in the present to help ensure business growth well into the future. 
We continue to focus on building our regional franchise; enhancing our capabilities as we connect individuals and businesses to financial opportunities at home and abroad; harnessing technology to strengthen performance and to improve the customer experience, and developing our people to their full potential for them to stay ahead in this fast-changing world. 
During the year, we made good progress on initiatives that will reshape our earnings mix and balance sheet profile. Two key priorities as part of these efforts are to boost fee income and to tap regional connectivity flows.
Building on Our Regional Franchise
Our well-timed investments over many years have ensured we have a competitive advantage in the region. As a leading bank in Asia with a strong franchise and integrated network across Southeast Asia, we are best placed to seize the immense opportunities being created for business, trade and investment. Our position will be strengthened by our ability to continue to tap the region’s growth drivers in serving the needs of our customers as they increase their wealth and expand their businesses. 
During the year, we deepened our regional franchise when we received a foreign-owned subsidiary bank licence in Vietnam in September. We look forward to deepening our commitment to the country, where we have maintained a branch since 1995, and to helping more Vietnamese companies with both their domestic growth plans as well as cross-border ambitions and to facilitate foreign investment from our regional clients into Vietnam.  
In Greater China, we are investing to ensure we can support our clients as they seize opportunities arising from China’s Belt and Road Initiative (BRI). For example, in November 2017 we opened a branch in Kunming, Yunnan – a strategic node of the BRI which has recorded strong trade and investment flows between Hong Kong and Southeast Asian countries. Our new Kunming branch is well-positioned to help Southwest China’s businesses with their cross-border expansion plans through onshore and offshore solutions. It also complements our operations in West China’s Chengdu and Chongqing.
Connecting Clients to Opportunities
We continued to help our clients tap regional cross-border flows more effectively by connecting them seamlessly across the region and helping them benefit from the ecosystem of partnerships we have been building. We were the first bank in Southeast Asia to set up dedicated Foreign Direct Investment (FDI) Advisory Units across Asia from 2011 to help companies work through the complexities of operating locally and to bridge them to opportunities across the region as they expand overseas and enter new markets. As part of increasing our FDI ecosystem of partners, in June 2017 we signed another Memorandum of Understanding, this time, with the Chinese Chamber of International Commerce, China’s national business association. This adds to our other tie-ups with government agencies and industry partners to support our clients’ long-term regional growth ambitions. 
In reshaping our business for new avenues of growth, we are also helping start-ups grow and prosper through a different ecosystem of partners – one focused on supporting the growth of emerging businesses. In August 2017, the second cohort of start-ups graduated from The FinLab, our innovation accelerator joint venture with SGInnovate. The FinLab has been instrumental in providing practical guidance, resources and mentorship to start-ups as they secure investor funding, sign commercial deals and scale their businesses. With investor funding important to helping start-ups thrive, we continue to provide non-traditional funding sources through UOB Venture Management and our alliances with OurCrowd and InnoVen Capital. We demonstrated the depth and breadth of our start-up ecosystem at the Singapore FinTech Festival 2017 which had more than 25,000 participants from more than 100 countries. As businesses go through various stages of maturity, our wholesale banking solutions provide them with the support they need every step of the way.
Deepening and Widening Our Capabilities
We are sharpening our focus on selected industry sectors where we see the strongest opportunities in trade and investment flows. Through a deeper understanding of our clients’ value chain, using data analytics, risk insights and controls, we are able to address their needs holistically. This in turn deepens the relationship with our clients. For instance, we made good progress in the Financial Institutions segment, increasing total income and generating a higher proportion of non-loan income through the provision of trade financing, cash management and Global Markets solutions. 
Our wealth management business also remained strong with our organic growth strategy bearing fruit. In the regional markets, our ground presence continues to give us an edge in client engagement and convenience. By the end of the year, our assets under management had reached another milestone in exceeding $100 billion, with strong momentum seen in the high net worth segment. There is much more potential to be realised as we serve the increasing number of affluent customers in Asia and strengthen our one-bank approach across our extensive network and client segments.  
We also built upon our progress in developing banking solutions specifically for our millennial customers. We were the first in Singapore to create a tailored banking suite to help these young professionals start building their wealth from their first jobs and have now extended the award-winning UOB YOLO credit card to Malaysia and Thailand. We also launched a new product, the KrisFlyer UOB Debit Card and Account, in Singapore.
Keeping Our Customers at the Heart of All We Do
In a world where the lines between the physical and virtual are blurring, we believe in integrating digital and traditional channels to give our customers a truly rounded, consistent and cumulative experience across all products, services and touchpoints. We ensure the experience is not only borderless, intuitive and efficient through economic cycles and across markets, but that it is also safe and reliable for our customers. We recognise the important role technology plays in ensuring these. 
For us, meeting the needs of our customers is always the first premise when we consider how best to use technology. While we innovate and keep pace with advances in technology, we do so with a clear purpose of making banking smarter, simpler and safer, and always wrapped in the warmth of the human touch.
The outcome of our approach is best demonstrated in the development of our all-in-one mobile application (app) UOB Mighty. We launched UOB Mighty in Singapore in 2015, when the ubiquity of and reliance on the mobile phone were already apparent. We wanted to ensure optimal use of the limited space on the mobile screen in fulfilling our customers’ banking, payment and lifestyle needs, yet making their experience easy and intuitive. Hence we designed the single, unified mobile app. This has seen UOB Mighty win the Excellence in Mobile Banking award from Retail Banker International for three consecutive years. We continue to provide a clean, clear, consistent and uncluttered experience for our customers even as we introduce new features via the app.  
In July 2017, we integrated PayNow, the peer-to-peer payments service in Singapore based on an individual’s mobile number or identification number into UOB Mighty. In another industry-leading move, we partnered The FinLab graduate PayKey to launch MyKey which enables the use of PayNow within any social media messaging service. Other banks across the region have since followed suit, integrating payment services within social media platforms.  
For our corporate clients, we also used technology to help them achieve sustainable business growth through new revenue streams, process improvements and productivity gains. For example, we launched the UOB Virtual Payment Solutions suite to help more small- and medium-sized enterprises (SMEs) gain greater control and transparency in managing their cash flow, an essential factor for a business’ success. It also automates much of the manual processing, thereby freeing up the SME’s resources for business development. More than 1,300 of our small business customers are now using UOB BizSmart, a cloud-based integrated solution to help them manage inventory, payroll, accounting and data protection. In late 2017, we became the first Asian bank to partner SAP, a market leader in enterprise application software, to offer SAP Business One solution, an enterprise resource planning tool, to small businesses through BizSmart. 
Core to the development of our digital capabilities is our people. Given the influence of technology in shaping the lives and preferences of our customers, we have invested more than $21 million in training programmes to ensure our people are equipped with the relevant skillsets and agile mindsets for the future. One such programme is the Professional Conversion Programme, which was designed to deepen their digital skills in areas such as design thinking, customer journey design, channel management, and scenario analysis and planning. In November 2017, we rolled out the first phase of the programme to 900 of our customer-facing employees in Singapore and are expanding it across the organisation. 
Caring for the professional and personal growth of our people is part of our employee value proposition, UOB+you. Building on UOB’s values of Honour, Enterprise, Unity and Commitment, UOB+you is the promise by which we attract, engage and retain the right individuals and teams to take us forward.
United in Our Efforts to Strengthen Community Bonds
Our care and commitment for people extend to the communities in which we operate. We believe that through our steadfast support of art, children and education we can help open minds and hearts and thereby strengthen societal bonds. In 2017, we contributed holistically to these community causes through philanthropy, partnerships and employee participation in the areas of visual arts and art therapy programmes, financial literacy initiatives and the nurturing of future banking talents. 
Across Asia, our people volunteered more than 61,000 hours to support local community activities. One of these was our annual UOB Heartbeat Run/Walk held in six countries on the same day. This year’s fundraising event saw more than 14,000 clients, colleagues and community partners participating to help improve the lives of children with financial difficulties or special needs.  
We also use payment innovation to enable people to participate in social causes. We were the first and only bank to extend the use of PayNow to raise funds nationwide in support of people with special needs through our ‘PayNow for a Cause’ campaign in Singapore.  
We were recognised for being a trailblazer in corporate giving when we were given the Champion of Good award by the National Volunteer and Philanthropy Centre Singapore.
2018 Outlook
In 2017, we saw the broadest improvement in global economic recovery since 2010 and this upswing is expected to continue.  Asia’s growth will be anchored by the stability in China, which recorded its first growth pick-up in 2017 since 2010, even as the region grapples with the impact of protectionist trade policies from the US. We remain optimistic about ASEAN’s growth prospects, driven by the region’s vast and growing consumer market, substantial intra-regional trade volume and continued investment inflows. Trade and investments in ASEAN are also set to benefit from the BRI, which will continue to underpin the expansion of business opportunities and connectivity for the region.
Committed to Sustaining Our Growth Responsibly
While Asia, with its increasing cross-border flows and rising consumer affluence, is set to ride on the global economic recovery, it does so amid lingering geopolitical tensions and uncertainties brought on by policy shifts. In steering through times such as these, we stay anchored to our founding principles, upholding our values of Honour, Enterprise, Unity and Commitment, as we persevere in pursuit of our goals, whatever the weather or terrain.
Just as the rocks on the cover of our Annual Report represent the strong foundation on which our business is built, we can be sure-footed in our journey ahead. The groundwork we have laid for our regional franchise sets a strong base for us to seize the rising business opportunities. We will continue to balance growth with stability, supported by our sound balance sheet and targeted investments for the future. 
Knowing that our ultimate purpose is to deepen the trust our stakeholders place in us, we always consider the long-term impact our decisions might have on society and the environment. We are committed to developing and to providing sustainable and responsible financial solutions that enable our customers to make a difference. We know it is also our duty to develop professionals whose principled actions are always guided by our time-tested values. We never forget that as we continue to build our business, we have a responsibility to strengthen community bonds and to give back to the communities in which we operate.
This year marks yet another milestone in the history of UOB as Dr Wee Cho Yaw retires from the Board at the 2018 Annual General Meeting.
From his very first days at UOB in 1958 through to his role as Chairman Emeritus, he has placed the long-term interests of, and what is right for, UOB at the heart of all he has done. His contribution to our success has been enormous and he has built a legacy that will last. On behalf of the team at UOB, I thank him for his wisdom in guiding us over many decades. We will continue to honour the values he has passed on to us and to build on the role UOB has come to play in the lives of our customers, colleagues and the community. 
2018 also marks the retirement of Hsieh Fu Hua, who joined us in 2012 and became Chairman in 2013. I thank him for his support of Management over this time and his efforts in promoting the best interests of UOB.  
To the UOB Board, my Management team and the wider family of UOB colleagues, I thank you for your dedication to doing what is right for our Bank, and for the good results we achieved as a team in 2017. To our valued customers and investors, thank you for your continued confidence in, and support of, UOB.
Wee Ee Cheong
Deputy Chairman and Chief Executive Officer
February 2018