OCBC: Extends Clout with Regional Franchise

OCBC Bank is Southeast Asia's second largest bank. (Photo: Company)

To Samuel Tsien, the maxim of learning from one’s mistakes has become more than a cliché.

Its relevance in today’s world is more pronounced than ever – progress necessitates exploration and exposure to new things, which invariably lead to mistakes sometimes, says the Group Chief Executive Officer of OCBC Bank.

Tsien believes adopting a more tolerant attitude towards mistakes would be helpful in promoting innovation, creativity, and eventual success.

“I would go beyond encouraging people to learn from their mistakes. I would rather put it this way – be more tolerant of mistakes, from yourself as well as others. In this respect, we as a nation can do more to cultivate such a mindset,” said the affable Shanghai-born career banker.

Other principles that form the backbone of his management philosophy include honesty and gratitude.

“In my dealings with friends and colleagues, being sincere is very important,” he said. “You want to be your true self, and you want the other person you interact with also to be their true selves.”

Showing appreciation is also essential. “You may take many things for granted, but a lot of effort could have gone into the work or service that you received,” he added.

Sound, practical advice from a man who has more than 30 years of banking experience, with a good number at the helm. Tsien, 60, joined OCBC in 2007 as head of its global corporate bank before being appointed Group CEO in April 2012. Prior to that, he was President and CEO of Bank of America (Asia) and China Construction Bank (Asia) Corporation respectively for 12 years.

When asked about the prerequisites of success, Tsien highlights two essential qualities – self-confidence and determination.

Referring to OCBC’s acquisition of Hong Kong’s Wing Hang Bank, Tsien said, “Any acquisition will have uncertainties, as they did in the Wing Hang case. You cannot foresee or plan for all the issues that may arise, but you must have the confidence and determination to address, and deal with them, as they come up.”

If an acquisition supplements our franchise in our core markets, we will definitely look at it. If it is simply to enter a new country outside our core markets, then that’s not our preferred route.

- Samuel Tsien
Group CEO

OCBC Bank
(Photo: Company)

OCBC’s acquisition of Wing Hang Bank – the largest takeover of a Hong Kong lender since 2011 – was attractive in terms of both funding and earnings diversification, Tsien said.

“Wing Hang’s deposit franchise is primarily in Hong Kong dollars – which is US dollar-linked – and US dollars. The franchise substantially increases our US dollar funding base, which is the most dominant currency for international trade and capital flows.”

Wing Hang’s contribution also diversifies OCBC’s earnings base. With its inclusion, the Greater China region accounted for 20% of Group pretax profits at the end of the third quarter, whereas a few years ago, it was single-digit, he added.

The Hong Kong lender also serves as a springboard for OCBC to pursue its Pearl River Delta strategy.

With 12 of its 32 branches in China located in the Pearl River Delta, the combined OCBC and Wing Hang franchise has a strong foothold in this region.

Tsien believes the Pearl River Delta holds significant promise, and is likely to receive increased attention from the Chinese authorities as an economic zone.

As one of China’s growth hubs, it overtook Tokyo to become the world’s largest urban area in size and population as early as 2010, according to a recent World Bank report. The size of its economy is on par with that of Indonesia, Southeast Asia’s largest economy and the world’s fourth-most populous country.

The megacity encompasses a large swath of China’s manufacturing heartland –Shenzhen, Guangzhou, Foshan, Dongguan – and has a population of 42 million.

Shenzhen, in particular, boasts a thriving culture of innovation that focuses on high-tech consumer gadgets like smartphone keyboards and screens. The city’s gross domestic product growth has also been trending way above the national average.

“OCBC has done well in northern China, but prior to the Wing Hang acquisition, we were not as strong in the south, with only one branch in Guangzhou,” Tsien noted.

Boosted by Wing Hang’s branch network in the Pearl River Delta, OCBC will pursue opportunities with customers – from Guangzhou to Shenzhen to Zhuhai, and across to Hong Kong and Macau – who have cross-regional banking and financing needs, he added. This lends OCBC a strong competitive edge, as most foreign banks are better-established in northern China, but have a smaller presence in the south.

Meanwhile, loans growth for the Group is likely to come in at a “low to mid single-digit” figure this year, as loan demand is “pretty soft”, Tsien said. Loans growth in 2015 will also probably be in the low single-digit range, he added.

“If we just rely on Singapore’s domestic activities to drive loan demand, it’s going to be quite weak.”

Instead, OCBC’s flows business, which comprises trade and cross-border investments, has been instrumental in maintaining “reasonable growth” in its loan book. Its Singapore loan book, for instance, comprises both onshore and offshore activities booked in the city-state, including trade in goods that may or may not have physically transited the country.

“This phenomenon will probably extend into 2016,” he added.

With the slowdown in regional economies, lower demand from China and higher interest rates, non-performing loans (NPLs) have come under scrutiny.

But Tsien remains unfazed. “We need to put this into the right context. NPLs have been extremely low by any standards.”

“So even if they were to rise, we need not panic as they are, in a way, normalising, and this is not unexpected. Nonetheless, I don’t expect NPLs to increase to a level of grave concern.”

NPLs are unlikely to hit levels seen during the Global Financial Crisis, which means they would be much better than during the period of the Asian financial crisis, he added.

The Group had a non-performing loan ratio of 0.9% at the end of the September quarter, matching that of DBS and compared with 1.3% for UOB.

OCBC’s customers have stronger fundamentals now than before, which would boost their ability to survive a downcycle like this, he added.

“The other factor is that in previous cycles, central banks had been less active.

Now, central banks are not only more active in ensuring a sound domestic banking system, they are also coordinating with one another to ensure the country, region and economic bloc are able to withstand shocks.”

To improve its net interest margin (NIM), OCBC is targeting a higher loan-to-deposit ratio (LDR) of between 85% and 90%, Tsien said. As of end-September 2015, its LDR stood at 83.5%, versus 89.7% for DBS and 81.6% for UOB.

“On the lending side, there are fewer opportunities than expected. We have a lower LDR, because our deposits have grown faster than our loans,” he said.

“We would like to see a higher LDR, but we need to manage the deposits carefully as we don’t want to disrupt our deposit franchise, and weak loan demand – at low single-digits – is a short-term phenomenon.”

Both future domestic demand, as well as export requirements from emerging Asian economies, will drive loan demand back up again. In the meantime, the bank will carefully manage its LDR and NIM, as a lower LDR typically drags down the NIM, he added.

OCBC’s NIM – a measure of lending profitability – is expected to hover at the current level of 1.66% or rise slightly, but not by much, because funding costs are increasing, he noted.

“The battle for deposits has been quite fierce, particularly towards the end of last year. The NIM will improve, but you will not see the same magnitude as the increase in interest rates.”

As at the end of the September quarter, DBS’s NIM stood at 1.78%, while UOB’s was 1.77%.

Comparing NIMs on an absolute basis across banks, however, may not be meaningful. “Each bank’s portfolio composition is different, and a different portfolio composition would mean different NIMs,” Tsien said.

As for its capital strength, OCBC is progressing well on building up its Common Equity Tier One (CET1) ratio in line with Basel III norms, which will take effect on 1 January, 2018, Tsien said.

CET1 measures a bank's core equity capital compared with its total risk-weighted assets, and excludes any preferred shares or non-controlling interests. Basel III – aimed at raising bank capital requirements by increasing liquidity and decreasing leverage – was developed in response to deficiencies in financial regulation as revealed by the 2008 financial crisis.

“Typically, we are looking at about 12% range for CET1, and we have been gradually building up to that. We’re progressing very well, better than expected.

“We should get close to 12% pretty quickly,” he added.

As at end-September, OCBC’s fully-loaded CET1 based on Basel III rules stood at 11.4%. Based on Basel III transitional arrangements, its CET1 ratio of 14.5% was highest among the three local banks, with 12.9% for DBS and 13.6% for UOB.

OCBC’s capital adequacy ratio (CAR) had been impacted by the acquisition of Wing Hang Bank, which was only partially financed by equity, and Basel III’s treatment of non-bank investments in the case of its shareholding in insurer Great Eastern Holdings. Stricter rules on capital aside, nothing has fundamentally changed, with both subsidiaries remaining profitable, Tsien added.

The Group was named the third-strongest bank in the world, behind Hong Kong’s Hang Seng Bank and Japan’s Norinchukin Bank, in a July 2015 ranking by Bloomberg Markets magazine.

People need to come together and share information very unselfishly, even if it means embarrassing yourself by telling the world you have been attacked. In return, you hope that when someone else is attacked, they would also share that information with you.

- Samuel Tsien
Group CEO

OCBC Bank

• Against a more uncertain and challenging operating environment, OCBC will continue to be focused and prudent as it grows its franchise across key markets.
• OCBC will maintain its strong capital position, remain disciplined in cost management and set aside an adequate level of allowances.