SINGAPORE (Nov 4): As Oversea-Chinese Banking Corp grew to become a leading bank in Singapore and the region, it built a web of associate companies in other industries, including property, engineering, construction, vehicle distribution, electronics manufacturing, food and drinks manufacturing, department stores and insurance.
In a sense, the bank was positioning itself to be at the centre of an ecosystem of businesses and industries. OCBC owned stakes in them and provided the funding to grow the different parts of the ecosystem. And where it made sense, these different components traded with one another. Dividends from these associate companies flowed back to the bank. This was a nice self-reinforcing loop — until the Asian financial crisis spooked the government, which moved to compel the local banks to divest their non-bank-related holdings and concentrate on the core banking business.
Two decades on, the dynamics and composition of the economy have changed, and OCBC is keen to build a different kind of ecosystem. The bank has been actively looking for new partners to help build a closer relationship with its tech-savvy consumers. “It is about the ecosystem play,” says Ching Wei Hong, the bank’s chief operating officer, at a recent media briefing.
The partnerships go beyond forming joint ventures to bid for the digital banking licences to be awarded in June 2020. OCBC could have just pushed ahead with offering its products and services in whichever channel customers preferred, be it via a mobile app or physical bank branch. “The mothership will continue to plod along,” says Ching, referring to OCBC, which made a record $4.5 billion in profits for shareholders in FY2018.
The bank is happy, however, to find partners to build its ecosystem over the long term. This is its stance as various parties position themselves for a shot at the digital banking licences to be awarded.
“The attitude we [have] is not to dig a hole in the ground and put our head in it.
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We recognise that there are all these new players coming on board with whom we can work, or we have to build capabilities to compete effectively against them. We are in full recognition of the changes in the marketplace,” explains Ching. “We are in talks with multiple parties. To be frank, we are quite pleasantly surprised that we are getting a lot more phone calls and we are being very open and friendly, talking to most people.”
He is aware that if OCBC gets a digital banking licence via a joint venture, it risks cannibalising some of its existing business, hurting particularly the more price-sensitive customer segments. “Yes, it is tough. The compression of margins will be there. We recognise that. But you can’t sit here in denial and say, ‘I don’t want [to take part],’” he says.
OCBC has reportedly formed an alliance with Singapore Telecommunications to bid for one of the digital banking licences to be given by the Monetary Authority of Singapore. The bank’s officials declined to confirm whether they were indeed in such an arrangement with Singtel.
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Nevertheless, in an announcement on Oct 21, Singtel said it would expand its VIA cross-border mobile payment alliance to include OCBC. By 1Q2020, OCBC customers will enjoy cashless convenience when they travel to Thailand or Japan. They can use their QR code to pay about 1.7 million merchant partners on VIA’s network through the OCBC Pay Anyone app. To avoid unfavourable exchange rates and the hassle of changing foreign currencies, customers can pay in Singapore dollars. Earlier, Thailand’s Kasikornbank had joined the alliance. OCBC is the first Singapore bank to be part of the VIA alliance.
Launched in October 2018, VIA was meant to link up the various mobile payment systems that were already introduced by different mobile operators across Asia-Pacific. The VIA alliance partners hope that by coming together, they can create a critical mass of users, operators, banks and merchants, which can in turn attract more to join this ecosystem.
In October 2017, OCBC announced a strategic partnership with another local telco, StarHub. The two companies intend to collaborate in areas such as cross-marketing and cross-selling their respective products and services. They also announced plans to invest and innovate together. However, a new management team at StarHub has since taken over and its priorities are different. “Our interest in this sort of partnership continues,” says Ching.
Serving customers better
If OCBC is interested in partners, it is “obsessed” with customers. As more transactions go digital, it is a chance for the bank to deliver better products and services. According to Ching, the bank has invested heavily in developing new capabilities so that customers can be better served.
For example, OCBC will tap newly developed artificial intelligence capabilities to better discern what its customers are likely to need in planning their finances at various stages of their lives. The bank is also offering robo-advisory investment services.
While the number of physical branches continues to drop, the bank will be spending $14 million to introduce a new generation of ATMs and digital service kiosks at 35 branches by end-2020. These new machines let customers withdraw cash by using just a QR code, for example.
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On Oct 19, OCBC was named the world’s best consumer bank by US publication Global Finance. However, winning such awards will not make OCBC immune to the external factors affecting the banking business. For example, over the past few years, banks have been competing to attract a greater share of deposits. By doing so, they get a bigger base from which they can lend. One way in which all three local banks compete for deposits is by offering interest rates that increase as customers fulfil a longer set of requirements, which chip away the margins.
In the case of OCBC’s 360 Account, the interest rate can be as high as 3.45% a year, versus a rate of as low as 0.05% offered by plain-vanilla savings accounts. For the banks, such attractive rates were offered partly in the expectation that the US Federal Reserve would start hiking rates. That did not happen. The banks have very visibly stopped open competition for deposits — and customers need to temper their expectations of better rates.
“We are realistic. There is only so much we can give. So, when interest rates were moving, we had to keep pace to reward our customers. When interest rates come down dramatically, we will have to adjust. One thing is for sure: We are not going to add any more to it,” says Ching.
He notes that OCBC’s local mortgage business is “generally good”. But even as property prices remain at peak levels, the country’s economy barely averted a recession in 3Q. At the same time, signs of strain are reported in the employment market.
Ching points out that regulatory requirements regarding the total debt servicing ratio have put a cap on the amount individuals can borrow for their property, thereby reducing the likelihood of defaults by those who overstretch themselves. “If you ask me, there are no surprises here. I think it is not just OCBC but the overall market; it is a pretty good and clean portfolio,” he says. The bank will report its 3Q earnings on Nov 5.
Earlier this year, DBS Group Holdings restructured its retail brokerage business so that it could pay more attention to institutional clients. About 100 remisiers from DBS Vickers joined UOB Kay Hian. Asked whether OCBC is reviewing its securities business as well, Ching says OCBC will not “go down that road”.
He acknowledges that the brokerage business is “challenged”, but it remains a key part of OCBC’s overall offerings. The brokerage business supports not only retail clients but also clients of OCBC’s private banking unit, Bank of Singapore. “The brokerage business will have to evolve. We are looking at alternative models on how to fine-tune [the operating model],” he says.
Capital flow
In any case, OCBC is able to grow its wealth management business steadily. Total assets under management have increased at a compound annual growth rate of 11%, from $163 billion in 2016 to the key $200 billion mark in 2018. This amount comprises the AUM of OCBC Premier Banking, the higher-tier OCBC Premier Private Client, Wing Hang Premier Banking and Bank of Singapore.
Besides Singapore, Hong Kong is OCBC’s other main booking centre. Ching is hopeful that the months-long political unrest in the Special Administrative Region can be resolved eventually. “In Hong Kong, we are facing some issues at the moment because of the protests. But I don’t think that’s going to stay [that way] forever.”
Ching disagrees with some of the recent media reports on huge amounts of capital flow from Hong Kong to Singapore. “I think the smart money moved a long time ago. The ultra-high-net-worth individuals — they all have family offices, they diversified their holdings, their monies across not just Singapore but Zurich, Geneva, London some time back,” he says. Besides his COO role, he is also chairman of Bank of Singapore.
Ching says OCBC has been building its business in Hong Kong for years and, in recent years, there has been a bigger focus on the premier and private banking business. So, the fund flows from Hong Kong, if any, are because of the bank’s efforts over the long term to attract AUM — and not because of capital flight. “Our philosophy is to develop that sort of engagement. We are not just selling the flavour of the month,” says Ching.
