UOB deepens its regional roots

Wee is applying the same mindset to the way he runs the bank. As the most conservative of the local banks, UOB can be said to be re-energised by the first major acquisition since he took over as the CEO in 2007.

In January 2022, when investors were still coping with the economic impact of the pandemic, UOB surprised the market with its announcement to acquire Citigroup’s (Citi) retail businesses in Malaysia, Thailand, Indonesia and Vietnam (Asean-4). This was part of a wider retreat by Citigroup in more than a dozen retail markets by the US bank.

The net asset value of the target entities was around $4 billion with a generated income of $0.5 billion in 1HFY2021 ended June 30, 2021. UOB paid a premium of $915 million, which translates into a P/B of 1.23x, with expectations that the transaction would be immediately EPS and ROE accretive, excluding one-time costs.

To date, UOB has completed the acquisition of Citigroup’s Malaysia, Thailand and Vietnam retail entities since “Legal Day 1” (LD1). UOB aims to achieve “Operational Day 1” or OD1 for Malaysia in 3Q2023 and for Thailand in 1Q2024. Malaysia is UOB’s largest non-Singapore market while Thailand is its second largest.

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The difference between LD1 and OD1 is costs. Once the four markets are at the OD1 stage, they will be integrated into UOB’s banking platform, designed in such a way that the IT operations from the bank’s main markets across Asean can “plug and play”. This means UOB is able to integrate Citigroup businesses from Malaysia and Thailand at speed.

Groundwork and opportunity

The banking industry is often described as the most regulated in many jurisdictions, with strict rules in place for not just how banking activities are to be conducted but also who can have the right to own what. These issues are made more complex when foreign entities are involved.

See also: Banks in Singapore can withstand multiple shocks: MAS

Citigroup was selling the businesses and customers, but not the banking licence. As such, the buyers have to be financial institutions with the licences to operate in those markets, which UOB has.

The reason why UOB can acquire at one go all four Citigroup retail businesses in four different markets can be attributed to the groundwork already done years ago. UOB can trace its presence in Malaysia to as far back as 1951. It obtained the banking licences for Indonesia and Thailand during or right after the Asian Financial Crisis (AFC). And in 2017, UOB became the first (and to date only) Singapore bank to be granted a foreign-owned subsidiary bank licence in Vietnam. It has since increased its physical presence in Vietnam with eight offices and branches. “I think it’s good we planted the seed,” recalls Wee.

As markets become more mature, organic growth can be rather glacial. As such, the bank has always been keeping its eye open. “At UOB we build for the long term. We want to be ready for the opportunity,” says Wee.

When the acquisition of Citigroup’s businesses was announced, most companies were trying to survive the pandemic. Few had the appetite to make big acquisitions. As it turns out, the crisis provided a chance for UOB to put the portfolio offered by Citigroup through an acid test, to validate the quality of the portfolio. The behaviour of the accounts turned out to be better than anticipated.

“During that period, we were all fearful. In hindsight, people said I did a good deal, but when I made that decision, the environment was a lot less certain. We went through Citi’s book. A crisis is a good opportunity for us to observe the book. It turned out to be ok. Citi had 50 years of banking relationships with these customers in these countries,” Wee figures.

Ships are meant to sail

UOB, under former CEO Wee Cho Yaw, is an old hand at acquisitions. The largest and most transformative deal was in 2001 when as part of the big wave of consolidation, UOB bought over OUB for $10 billion. Back then, it was Singapore’s largest-ever M&A deal. Smaller, earlier acquisitions of local rivals over the years included Lee Wah Bank, Far Eastern Bank, Chung Khiaw Bank, and the Industrial and Commercial Bank.

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Just like the other two Singapore banks, DBS Group Holdings and Oversea-Chinese Banking Corp (OCBC), UOB made inorganic moves outside Singapore too. In 1999, in the wake of the AFC, it acquired Bank Radinasin in Thailand. In 2004, UOB bought 96.1% of the much larger Bank of Asia also in Thailand. Subsequently, UOB merged the two Thai banks and delisted Bank of Asia.

Similarly, UOB acquired an initial stake in Indonesia’s Bank Buana in 2004 and raised its stake to around 61% in 2005. UOB then set about acquiring the remaining stake in Bank Buana it did not own, and delisted it in 2008. In 2010, Bank UOB Indonesia was merged with the unlisted Bank UOB Buana.

In contrast to the time before Wee took over as the CEO, the pace of acquisitions had visibly slowed to non-existent. The Citigroup deal was his first major acquisition, whereas he has been previously hesitant because of the potential costs of doing so.

As a family-owned and managed bank, UOB’s strategy was to take full control of the banks it acquired, instead of being happy with a strategic albeit minority stake. DBS made inroads into Thailand by acquiring a 50.3% stake in Thai Danu Bank during the AFC. However, in 2004, a three-way merger between Thai Danu, Thai Military Bank and Industrial Finance Corporation of Thailand diluted DBS’s stake in the combined entity to 21%. DBS subsequently divested its stake in the enlarged Thai Military Bank.

In contrast, UOB’s total control over the banks it acquired, coupled with delisting the listed entities, ensured that it would not lose control of these banks. “There are many smaller opportunities which I have forgone. We felt we should wait for a big opportunity to come before we make a move,” Wee reveals.

And thus, when the chance to do the Citigroup deal came about, Wee did not let it slip away. “I told myself if I don’t do the Citi transaction, I could only continue to imagine and I would never jump,” he says.

After all, such regional deals are necessary if UOB is to generate better growth. “A ship in the harbour is safe. Singapore is a safe harbour but this is not what ships are for. Ships are meant to sail,” he muses.

Asean and China link

Voyages can be profitable, but they take time, and the process is not always smooth sailing. For decades, Singapore’s banks have kept up a steady tempo of activities up north. After all, the volume of trade and the depth of the business ties between the economies of Southeast Asia and North Asia can only grow.

In 2014, UOB was said to be in the running for the acquisition of Wing Hang Bank which was eventually acquired by OCBC for the equivalent of US$4.95 billion or 2x book. DBS got a foothold in the Hong Kong market in 2001 after acquiring Dao Heng Bank for $10 billion or 3x book.

Market observers continue to point out that HSBC and Standard Chartered remain the incumbents with as much as 60% of the Hong Kong market, tussling with some of the Chinese banks for market share.

The rationale for a Singapore bank having a presence in Greater China — that is Hong Kong, Macau, mainland China and Taiwan — is to facilitate the flow of monies, investment, wealth and business between Greater China and Asean.

Even then, both OCBC and DBS have acquired private banking and wealth management businesses since the Global Financial Crisis (GFC) while UOB sat it out. DBS acquired the private banking business of Societe Generale and the retail business of ANZ. OCBC acquired ING’s private bank, which was renamed Bank of Singapore, and Barclays’ wealth management business.

Before the China+1 mantra, along with onshoring, near-shoring and friend-shoring, China itself had promoted the idea of the maritime silk road as part of its Belt and Road Initiative (BRI) back in 2013. Focus around the BRI is currently muted. Projects attributed to the BRI have caused significant debt problems for economies such as Pakistan and Sri Lanka with both approaching bilateral creditors including China and the IMF for debt restructuring.

The China+1 arena is not about in-country physical infrastructure but the global supply chain for parts including chips, smartphones, electrical vehicles and batteries, which is led largely by the private sector. In China+1, manufacturing facilities, along with parts of the global supply chain, are moving to Malaysia, Thailand and Vietnam.

In 2011, before BRI, UOB had already understood the potential of Asean and it launched its Foreign Direct Investment (FDI) Advisory unit whose purpose is to provide holistic solutions for companies from outside of Asean investing in Asean. Loans and wealth management are not the only solutions UOB offers. UOB has tied up with legal and accounting firms, and government agencies to offer a holistic solution to companies investing in Asean.

“Our FDI Advisory, which was started long before China + 1, prepared us for the long term. This is how we want to grow our Asean franchise. And it was made possible by standardising our IT platform,” Wee says. “I’d say 40%-50% of FDI Advisory’s business comprised Chinese companies coming to this region.”

Isn’t Wee worried that other banks may try to copy UOB’s FDI advisory strategy? “A lot of people may want to copy us but at the end of the day, it’s the relationship and the track record that we have that can’t be readily replicated. The system has to be institutionalised,” he says.

In FY2022 ended December 2022, UOB’s cross-border income rose by 12% y-o-y and accounted for 28% of group wholesale banking income of $6.2 billion, which was up 23% y-o-y. In 2022, UOB reported a 27% rise in wholesale banking operating profit to $4.67 billion.

Malaysia and Thailand

With the legal completion of Citigroup’s Malaysia, Thai and Vietnam businesses, acceptance is “very high” from a customer standpoint. “We are already cross-selling. Citigroup focuses on unsecured businesses, including credit cards. For UOB, we have a holistic approach. We have mortgages, we take in deposits. To us, deposits are key. We also have wealth management. We’re using the 2.5 million customer base to see how we can cross-sell,” Wee says.

Before the Citigroup deal, UOB has 45 existing branches in Malaysia, giving what Wee estimates a market share of 4.5%–5%. With the deal completed, UOB has added the 10 Citigroup branches to the network and Wee expects the market share to increase. “Overall, it is a good mix, with consumer-related balances slightly above 50% of the balance sheet in Malaysia with the remaining portion in wholesale banking,” Wee describes.

UOB’s strategy in Malaysia is to improve its presence in both wholesale and retail banking. On the wholesale portion, UOB Malaysia is targeting large family-owned businesses and SMEs. “We can provide solutions to family-owned businesses with plans to expand overseas,” Wee says.

UOB as a group across the region is bigger than the domestic banks in the markets it operates. However, within each individual market, UOB is much smaller than the local players it competes with. “We can only partially participate in domestic projects. I will never be able to build a meaningful relationship. The only way I can build it is, if those big customers who have aspirations of going out of their country, then I can be the overseas bank for that customer,” he figures.

Already, UOB serves large family-owned groups in both Thailand and Malaysia. In Thailand, for example, it supported the Chirathivat family, owners of the Central Group and partly financed the retail empire’s expansion in key European markets over the past decade via a string of acquisitions. Most recently, on August 2022, the Central Group completed the takeover of Selfridges Group of the UK from previous owners, the Weston family.

“This is where we want to support them and hopefully, they’ll give me a piece of action in the domestic market. This is where standardisation and connectivity are very important. I don’t use capital in the individual countries, I can use capital from the head office to support their overseas expansion,” Wee says.

Growing the retail book

Relative to commercial and wholesale banking, where one can do well servicing a handful of large accounts, retail banking is a lot more challenging because it comprises a large number of small accounts and operating efficiently has a direct bearing on profitability. “Consumer banking requires heavy lifting. You need scale. Now Citi has given me the scale,” Wee points out.

Hence, the Citigroup portfolio made sense to UOB. It accelerates its regionalisation targets bringing them forward by five years, adding 2.5 million customers within the Asean-4.

“Although 80% of the Citi book comprises unsecured customers, this unsecured book performed as well as our own unsecured portfolio. This shows that the quality and selection process of Citi is good. Because it is unsecured, margins are better. Meanwhile, with Citi, our ROE will improve. For UOB, the region now looks even more promising,” Wee says.

With the newly-acquired businesses from Citigroup, UOB will double its regional customer base to 5 million. “It was a tempting portfolio. For UOB to grow organically it would be more challenging because we would have to take market share from incumbents. The incumbent banks would take steps to protect their good customers especially if they have been with these banks for 50 years,” Wee says.

In the immediate term, integration costs may keep total costs high for UOB. However, after integration is completed, including porting all the Citigroup customers to UOB’s platform, costs (and cost-to-income ratios) should fall.

“We’re still using Citi’s platform for our Citi customers. This is why for this year, our expenses are likely to be high. Hopefully, after this year, everything will be back to normal,” he adds, referring to integration costs. In FY2022, UOB announced a one-time charge of $240 million for the consolidation of Citigroup’s Malaysian and Thai businesses with around $200 million being stamp duty paid to the Malaysian regulator.

Although the customers are on Citigroup’s system now, UOB has accelerated its own IT build to ensure that customer satisfaction is maintained when they convert to the UOB system. “The last thing you need is for customer attrition when you cannot fulfil the value proposition. Once we convert the systems, costs should fall with the synergies,” Wee says. “We are targeting $1 billion of additional income in 2023 and further cost synergy in 2024.”

During the 1QFY2023 results briefing on April 27, Wee indicated that the 10% expected attrition rate of Citigroup’s customers did not materialise. Instead, UOB gained 3% more customers after the merger. Part of the gain could be because of the ease of use of UOB TMRW and its personalisation abilities.

As Citigroup customers are ported over to UOB’s platform, they will be introduced to UOB TMRW, a digital bank. It can be as simple or as complicated as its user deems fit. UOB TMRW was introduced four years ago as a digital-only bank in Thailand and then Indonesia. It was merged with UOB Mighty in Singapore, and all UOB’s digital retail customers are now on UOB TMRW.

“We are using TMRW to make sure we are able to digitally enable some of these Citi’s customers. Citi’s customers are more affluent generally. Acceptance levels [for TMRW] are quite high and it blends into our digital strategy. There is no point in being a digital bank if you don’t have a customer base. Now with a bigger and ready customer base, my digital bank is going out to serve them,” Wee says.

UOB’s strategy is to serve its customers through a combination of physical branches and a digital bank. The digital bank lowers the cost-to-serve, especially in geographically expansive countries where setting up a branch network, especially in rural areas is expensive. Indonesia comprises more than 18,000 islands; geographically, Peninsular Malaysia and East Malaysia are separated by 640km of sea.

“We focus on omnichannel. We have a combination of physical branches and a digital bank. We will continue to reshape and re-purpose our branch network, for example, converting into wellness centres to cross-sell. For wealth management, we have to ensure it is an open architecture, and also make available face-to-face opportunities for complex transactions,” Wee says.

Technology and talent investment

Citigroup, together with the likes of HSBC, were categorised as “universal” banks, with a global footprint and brand recognition to boot. They serve the breadth of customers from ultra-high-net-worth tycoons to student loan applicants; their investment banking arms help advise billion-dollar M&A deals and their retail units hawk credit cards and take deposits too.

When Jane Fraser became CEO of Citigroup in March 2021, she set in motion plans to divest Citigroup’s consumer businesses in 14 markets, including Australia, India, Europe, the Middle East and the four Asean markets.

Citigroup sold its India consumer business including credit cards, retail banking, wealth management and consumer loans to Axis Bank, and it transferred 3,200 employees to the latter. Citigroup entered India in 1902 and started its consumer banking business in 1985. Citigroup’s Taiwan operations were acquired by DBS.

Fraser had said that Citigroup didn’t have the scale to compete in the markets it divested. “While the other 13 markets have excellent businesses, we don’t have the scale we need to compete,” she added. “We believe our capital, investment dollars and other resources are better deployed against higher returning opportunities in wealth management and our institutional businesses in Asia.”

Now, some bankers reckon that Citigroup had underinvested in technology. Secondly, the speed by which Citigroup’s staff is willing to join UOB probably indicates that they are likely to be just as content or even happier at UOB.

Indeed, the acquisition is not just about new customers and a bigger market share, it is also about bringing onboard people from Citigroup. According to Wee, he has always admired Citigroup from afar, to the extent of attracting ex-Citigroup bankers to UOB. For instance, Eddie Khoo, head of group retail banking, was a former Citibanker as is Susan Hwee, head of group technology and operations. Jacquelyn Tan, who heads group personal financial services, is also a former Citibanker.

Succession planning

For Wee, there are two key elements in ensuring the long-term growth of the bank, which has a market cap now of around $50 billion: Succession planning and going regional. He wants to achieve this by balancing his risks and his opportunities, drawing upon his resources and working around his constraints.

UOB’s home market, Singapore, is triple-A rated and the bank itself is double-A, says Wee. This helps UOB build a strong capital base. Its common equity tier 1 (CET1) ratio is kept above 12.5%. Even after incorporating Citigroup’s Malaysia and Thai businesses — the two larger markets of the four acquired — CET1 stood at 13.3%. As at March 31, CET1 had rebounded to 14%.

With this strong capital, UOB can then better fund its bid to capture new growth in other parts of emerging Asean. “We know our playground is outside of Singapore and that improved opportunities also come with challenges and risks because the operating environment is different. That is always something we keep in our minds,” Wee says.

In the same vein, Wee makes sure the bank is staffed by a good mix of seasoned older executives and younger colleagues with newer and fresher perspectives. The bank’s philosophy is not to retire staff when they get beyond a certain age. Wee needs “old guards” such as CFO Lee Wai Fai, who has been with the bank for more than three decades.

Yet, he is willing to give the younger colleagues, who still enjoy the luxury of a longer runway, opportunities to shine. He wants everybody to be engaged so that collective wisdom can be distilled. “You have the combination of both,” reasons Wee.

A question that cropped up in the interview with 70-year-old Wee is the board’s view on succession planning. UOB’s nominating committee and its board are focused on succession planning, Wee indicates. Some market watchers observe that there is banking talent in the nominating committee itself. Besides chairman Wong, Wee, there is also non-independent director Michael Lien, grandson of Lien Ying Chow, who founded OUB. Having sold their OUB stake for UOB shares back in 2001, the Liens are the second-largest shareholders with 5.18%.

The largest shareholder, of course, is the Wee family’s 18.43%. Wee’s grandfather Wee Kheng Chiang — whose bust stands proudly in the office reception area on the 6th floor of UOB Plaza 1 — founded the bank in 1935. “I have skin in the game. Yes, succession planning is important but you must know how to grow your timber and execute and do the right thing, and ensure stewardship. We want to grow our own timber and take in regional talent. We want our talent to understand Asean,” says Wee, who knows every trek starts with a single step and every bonsai needs to be uprooted occasionally.

— with additional reporting by Felicia Tan