The evolution of UOB’s CFO

When meeting analysts and investors, the CFO is probably second only to the CEO of a bank. When questioned on nuts and bolts, it is usually the CFO who has a ready answer.

Back in February, in a touching eulogy on the eve of the funeral of Singapore’s most famous banker, Wee Cho Yaw, Lee, who joined UOB in 1989, revealed that Wee was his mentor. Based on the timeframe, Lee would have had more than a front-row seat during some of UOB’s major and dramatic acquisitions because he helped identify targets.

Lee joined shortly after UOB completed the acquisition of Industrial and Commercial Bank (ICB) in 1987. Earlier in the decade, UOB had acquired Far Eastern Bank.

Lee recalls: “For the first 18 years, I was working directly with Dr Wee when he was CEO. He was very decisive. He knew we had to expand out of Singapore. During the Asian Financial Crisis, when most people were worried, he was very decisive. He could smell a good deal. He felt that a crisis offers opportunities and he directed us to look for potential targets.”

See also: UOB deepens its regional roots

It was in 1999, in the aftermath of the Asian Financial Crisis (AFC), that UOB stepped into Thailand with the acquisition of a modest-sized bank which became UOB Radanasin.

Yet, Wee would also limit his risk. “He was prepared to walk away. If you are too emotionally attached, no matter how good a deal is, be prepared to walk away if the risk is too high.”

UOB’s largest acquisition was the share and cash offer for Overseas Union Bank (OUB). Back in 2001, fresh from paying 10 times the book value for Dao Heng Bank, the then DBS Bank made an unsolicited and possibly hostile offer for OUB, which was turned down.      

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Lee was tasked with looking at OUB. “When OUB came about, I had to update him with the good and challenging issues. Some OUB shareholders were not after just financial rewards but wanted the acquiring bank to serve SMEs. That made this offer different,” Lee recalls. UOB still prides itself on serving SMEs to this day, despite the higher risk that comes with SME loans.

The early 2000s — from 2000 to 2005 — were busy years in terms of acquisitions. After snapping up OUB in 2001, UOB went on to acquire Bank of Asia in Thailand in 2004 and Bank Buana in Indonesia in 2005. UOB’s philosophy is to privatise the banks it acquires by buying out all the minorities.

Yet, it took another five to six years before UOB had a platform ready to call itself an Asean-focused bank. It did this with the formation of its Foreign Direct Investments (FDI) Advisory Office which was set up in 2011. By then, UOB had built a common platform so that technologically, it became possible to add geographies to a regional banking network.  

With the common platform, UOB was able to connect different markets in Asean as it opened offices in the main commercial centres in the region, including Ho Chi Minh City. In 2017, UOB was the first and, to date, only local bank to be granted a foreign-owned subsidiary (FOSB) licence in 2017.

In 2022, UOB announced the acquisition of Citi’s retail businesses in Malaysia, Thailand, Indonesia and Vietnam. UOB paid $4.9 billion for the Citi franchise. Of this, the net asset value of the business was $4 billion and $915 million was the goodwill. In 2023, UOB completed the integration of the acquisitions of Citi Indonesia and Citi Malaysia while Citi Thailand’s full integration is on track for completion by 1H2024. Vietnam will be the last region to be integrated and this will materialise by the end of next year.

Clarity of purpose

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If what is remembered from the AGM of Oversea-Chinese Banking Corp (OCBC) is its chairman repeating the phrase “financial conglomerate” nine times, UOB’s AGM this year was about clarity of purpose. This includes the growth of its business and its dividend strategy. Group CEO Wee Ee Cheong set a target of being the leading bank in Asean in trade financing by driving Asean connectivity and cross-border trade. His bank is already using the customer base from the Citi acquisition to cross-sell products such as transaction accounts and wealth management products. In the meantime, the bank is doubling down on digitalisation to lower costs.

The Citi acquisition has its detractors. Analysts have questioned why UOB paid almost $5 billion for a card franchise. Perhaps, that is unfair. For one thing, UOB’s wealth assets under management (AUM) rose 14% y-o-y in FY2023 ended December 2023 to $176 billion, including Citi’s customers.

More than that, the bank’s Casa (current account savings account) deposits did not drop. As at Dec 31, 2023, total deposits rose 1% q-o-q and 5% y-o-y while the Casa ratio rose to 48.9%, up 0.7 percentage points q-o-q and 1.4 percentage points y-o-y.

As at March 31, the Casa ratio has risen to 50.6% with customer deposits rising 1% q-o-q and 4% y-o-y to $388 billion.  

“One of the biggest tests for us is Casa. The Casa ratio has gone up and Casa for retail didn’t drop in 2023. We were hit badly in 2022 when we raised our fixed deposit ratio. But we are now quite happy,” says Lee in reply to the card franchise question.  

During integration, a Citi customer in Malaysia had complained about the service of UOB’s card franchise although he subsequently admitted the issue had been resolved. Lee says the reason UOB had issues in Malaysia was because the call centre was not significantly staffed. “We shifted domestic resources to protect this.” UOB also deployed a “win-back strategy”.

To date, the percentage of Citi customers on UOB TMRW is 85% in Malaysia, 73% in Indonesia and 51% in Thailand because the integration has not been completed. “For the next two months, we are at the tender-loving-care stage to ensure no one complains,” Lee says. So far, the income per customer has not dropped. After that comes the win-back strategy and then the enhancement strategy.

Banking in Asean is increasingly going cashless. PayNow, Singapore’s payment gateway making use of mobile numbers which are connected to transaction accounts, is linked regionally to DuitNow and PromptPay via Project Nexus.

Although cash is still used in Asean, digital penetration rates are high. According to Antara, internet penetration in Indonesia is at 79.5%; DataReportal says digital penetration in Thailand is 88% while Malaysia’s is 97.4%.

Nonetheless, when UOB introduced TMRW, it was first tested in Thailand followed by Indonesia. “When we understood the challenges, we shifted to Singapore and then Malaysia,” Lee says.

As he sees it from UOB’s experience, in Malaysia, people want services but are not willing to pay for them. Malaysia is one of the last countries in UOB’s geography to introduce a digital bank licence. In that sense, the Thais, Indonesians and Vietnamese are ahead.

However, Vietnam is still a small market for UOB although its physical presence has grown to five branches. “Digitally, Malaysia and Thailand are well established. To get Vietnam right, we need to get the digital strategy right,” Lee says.

The advantage of UOB TMRW is that it acquires customers without an expensive branch network. In 2023, UOB said its retail customer base had grown to more than 8 million, of which 76% were acquired digitally. Of these, UOB acquired 1 million new-to-bank customers in 2023, of which 53% were acquired digitally.  

Truly regional, more dividends

From the way Lee discusses the Citi acquisition and the bank’s strategy to build on it, it is clear that the CFO role is very different from what it was 30 years ago. Back then, finance managers were bookkeepers who recorded financial data. External auditors and the likes of Acra ensured that financial institutions reported within the international financial reporting standards (IFRS) of the day.

“We used historical data to generate reports, even for budgeting. In hindsight, the finance role was like driving a car using the rearview mirror. Today the role is very different. We are expected to be a valued business partner and work with various teams in the organisation to develop strategies for better returns and efficiencies,” Lee says.

He sees his role not just in the financial arena but in other parts of the business as well. “I find my role is to be a good negotiator and to help challenge the business and break down the silos. We are driven by KPIs but sometimes this is not good for the entity. More importantly, historical insights will have to be integrated from transactional and market data to enhance the forward-looking capabilities and improve decision-making.”

CEO Wee often refers to UOB’s focus on Asean connectivity. This has been partly enabled by UOB Infinity, an e-banking platform for wholesale banking, which includes cash management. This technology has been introduced to the bank’s regional subsidiaries and enables UOB to compete with domestic banks within Asean.

Cash management mandates are important for trade. As an example, Lee cites how a company from Europe with manufacturing capabilities in Thailand and suppliers in Malaysia can benefit from Infinity’s platform. “We can give the company a consolidated view. By 2024 or 2025, we should see an improvement in our trade financing and cash management mandates. The days of idle cash are over. If companies keep an operating account with us, the opportunity to increase wholesale Casa is greater,” Lee says.

According to Lee, UOB’s previous ecosystem was “vertical”, much like domestic banks in Malaysia and Thailand. Now, with the Infinity platform, UOB can be “horizontal”. The bank can offer “sector solutioning”. “I have an anchor in one place and a supplier in another place. If we can connect this and if Asean grows, we can capture some of the markets because it is quite fragmented,” Lee says.

At the AGM, Wee had said the bank’s ambition is to clinch a 5% share of the US$3.8 trillion ($5.14 trillion) trade financing in the region. Lee says this is a combination of Asean-China, Asean-EU and intra-regional trade flows. “With our geographical presence, technology, and sector solutions, we hope to capture this business,” Lee confirms.  

More than that, UOB is looking to gain market share with the excess capital from the bank’s transition to Basel IV (see sidebar). UOB is likely to gain 1.5% more common equity tier-1 (CET-1) capital during the transition period before capital floors kick in.  

“We have said we are not paying this out in dividends. If I pay it out now, and I need capital five years later, will shareholders be willing to inject capital? We’ve said we will use this excess capital for short-term loans,” Lee says.

As he sees it, UOB will give up some margin (net interest margin or NIM) to focus on trade financing. Trade loans are short-term in nature and self-liquidating. Trade loans work as fully revolving credit facilities, to fund a business from the time an entity has to pay for the purchased goods and the time when it receives funds from the sale of the goods.

“We can focus on short-term trade loans during the transition period. We may get more total profit although NIM could ease. But if we make more profit, and pay out 50% in dividends, dividends will increase,” Lee points out.

He readily acknowledges that UOB needs a special unit to step up its trade financing prowess. “Our people know which ports can be trusted and which ports can be used in terms of letters of credit (LC). Certain commodities pass through certain ports,” Lee says.

One of the most well-known fraud cases is related to warehouses in the port of Qingdao, where a firm financed the same metal cargo multiple times from different banks using different LCs. Lee is confident that UOB has the expertise to increase Asean trade financing.  

In a report in July last year, S&P Global Market Intelligence says foreign direct investment (FDI) data and anecdotal evidence show Southeast Asia’s increasing importance as a China+1 destination for mainland Chinese and foreign companies. “Notable examples include investments to build a chip-testing and packaging factory in Malaysia, a mines-to-manufacturing electric vehicle supply chain in Indonesia, and an expansion of consumer electronics production facilities in Vietnam,” the report says.

“The Asean-six (Malaysia, Thailand, Indonesia, Philippines, Vietnam and Singapore +Brunei) are part of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF). The IPEF aims to lower non-tariff barriers to the US and facilitate greater US investment in member countries through regulatory harmonisation,” S&P says.

“We built a capability around Asean. If you look at trade flows from China to Asean and vice-versa, and to the EU and US, and if you believe Asean will be the next manufacturing hub, we have a big advantage and we have the branch network to do this. The other area is technology,” Lee says.

What’s next?

As a commercial bank, UOB’s premise is it has to be relevant to the economy, and hence it must support corporates, SMEs and retail customers with loans and deposits. “The philosophy is quite clear, to ensure our customers are ok. Then we are ok,” Lee says.

UOB has guided a 50% dividend payout. If the bank can sustain 8%–10% profit growth a year, coupled with a CET-1 ratio of around 13%, 14% ROE, and assuming no increase in the number of shares, dividends per share should increase by 8% a year.

“If there are opportunities, we can beat that. But that is the base model and a predictable model. There are times when the economy is not so good. But if Asean is going to grow by around 5% a year, for the bank to grow by 2%–3% above GDP growth is realistic.

“Our priority is on franchise growth and to support loans. We have customer loan yields of 2+%. The rest of the assets are securities including high-quality liquid assets and what we invest with excess funds,” Lee says. For a securities portfolio, banks like UOB are not likely to go “down” the credit curve to riskier credits. Hence they can only use duration. Currently, short-term securities offer higher yields than longer-term ones as the yield curve remains inverted. Most probably, banks are likely to juggle between longer-term and shorter-term securities with a mix of the two.  

More Asean

In terms of geography, there is more to Asean than the five countries UOB has a presence in. Two relatively large Asean countries by population — but not yet by GDP or GDP per capita — are Myanmar and the Philippines.

UOB has a foreign banking licence in Myanmar, but foreign banks are taking a back seat because of the country’s political problems. The one large Asean country that UOB does not have a meaningful presence in, is the Philippines. In 1999, UOB acquired Westmont Bank but divested it to BDO Unibank after almost six years of losses possibly due to legacy loans. In 2014, UOB applied for a commercial bank licence from Bangko Sentral ng Pilipinas when the Philippines government liberalised its banking sector further and opened its Manila branch in 2016.  

“Dr Wee was a man of great integrity. There were cases where I said don’t do the deal. But he said he had given his word. His integrity and honour were more important,” Lee says. He declines to name which deal except to say it was not OUB.

Although many employers may remember the late Wee as a tough boss, Lee remembers him as a dedicated and caring boss. “His empathy for his staff left a profound image on me and moulded my own management style. I don’t think we will see another like him. He advised us to think long term; what’s good for customers and employees in the long term will be good for the bank.”