Oversea-Chinese Banking Corporation

Okay, good morning.

Welcome to OCBC's 3rd Quarter Results Briefing. We have today with us Mr. Sembuchen, our CEO, and Darren Tan, our CFO. I'm going to let Darren take us through the slides, and then after that we will take questions. Please press hash 1, star 1, sorry, if you want to ask questions, and we will call your name, and then you can ask your questions. Okay, Darren, please.

Okay, thank you, Ching-Ching. Good morning and thank you for joining us. We are pleased to report the net profit of S$1.028 billion for the third quarter. While net interest income continued to decline on the back of a lower interest rate globally, our non-interest income franchise in wealth management and insurance was able to generate a relatively robust performance. This demonstrated yet again the benefit of having a diversified portfolio of businesses and hence multiple sources of revenue. With the phase opening of the various markets, we had also been able to engage our customers and grow our wealth management and insurance franchise further. Consequently, total wealth management income rose 4% from the previous quarter. Bank of Singapore asset under management also expanded 3% to $116 billion, supported by continued growth of net new money and positive market valuations. Great Eastern's total weighted new sales increased 51%, while new business embedded value was 47% higher. We continue to monitor and tighten our expenses. We also remain vigilant to the resurgence of COVID-19 infections and the risk of renewed disruption to the various economies. Further, we want to brace ourselves for any delayed impact arising from the pandemic when the various support measures were gradually withdrawn. Consequently, we set aside total allowances of $350 million for the third quarter 2020 including an additional management overlay of $150 million. This in turn raised our MPA coverage to 109%. We further fortified our balance sheet with a 75% participation rate in our script for the interim dividend and together with the profit retained for the quarter 2020, our common equity tier one had increased to 14.4%. Our liquidity and funding remains strong with all currency liquidity coverage ratio and net stable funding ratio higher at 128% and 122% respectively. I will now highlight some of the key financials before handing the floor over to Sam. Turning to page 7, net profit for the third quarter was 41% higher quarter-on-quarter at $1.028 billion. Operating profit before allowances was $1.59 billion as compared to $1.68 billion in the previous quarter. Higher fee income and customer flow treasury income were more than offset by the decline in net interest income. On slide 9, you can see that for the nine months of 2020, the group's net profit was 32% lower at $2.46 billion as compared to $3.63 billion a year ago. The low profit was mainly due to the significant amount of allowances that we set aside, particularly in the first half of this year, to buffer against any pickup in credit losses. Moving on to slide 12. Net interest income for the third quarter declined 4% to $1.42 billion from $1.48 billion in the second quarter, mainly from a six basis point contraction in our net interest margin to 1.54%. We continue to strive in this case to optimize our balance sheet by lengthening the duration of our loan portfolio and also increasing the proportion of our less expensive deposits. Now in terms of non-interest income on slide 13, non-interest income for the third quarter was $1.12 billion, 6% higher year-on-year, but 2% lower than the previous quarter. Going to slide 14, our wealth management franchise remains strong. Total wealth management income for the third quarter rose 4% to $938 million and now constitutes one-third of the group's income. For the third quarter, net fee and commission rose 14% quarter-on-quarter to $501 million. in particular, wealth management and brokerage fees were higher and had recovered to pre-COVID-19 level. I'll move on to our allowances on slide 18. For the quarter, total allowances were lower at $350 million as compared to $750 million in the previous quarter. We have set aside lower allowances of $148 million for impaired assets and a prudent amount of $202 million of allowances for non-impaired assets in the quarter, specifically allowances for impaired loans in the third quarter were not concentrated in any particular geography or sector as compared to the additional allowances that we made for the offshore support vessels MPL in the second quarter. Now on slide 19, you can see that as a result of the additional allowances, total MPA coverage was further strengthened to 109%. Now in terms of asset quality on slide 20, The credit quality of our loan portfolio remained healthy, with NPR ratio unchanged at 1.6%. On slide 21, you will notice that total non-performing assets was $4.25 billion, 2% lower than the $4.35 billion a quarter ago. The decline was mainly attributed to recoveries and upgrades of $200 million and write-offs of $91 million respectively. This more than offset the new MPA formation of $270 million in 2021. the quarter. In comparison, new MPA formation was $496 million in the previous quarter. Moving on to slide 22, customer loans grew 2% year-on-year and 1% from the previous quarter to $269 billion. The growth came mostly from Singapore, Australia and the UK. On slide 23, you will notice that our loan portfolio remained well diversified. Oil and gas sector constituted 5% of our loan book including 2% in the OSB sector. Specifically, our OSB exposures net of specific provisions were now only about 0.2% of our total loan portfolio. Our exposure to the commodity sector was about 5% of total loan, and in the transportation sector, loans to the shipping sector, excluding OSB, was 2% of total loan, of which the aviation sector remained at less than 1%. Now, in terms of deposits on slide 24, customer deposits were $307 billion, up 3% year-on-year and then changed from the quarter before. Current account and savings account deposit rose to a new high of $182 million, with CASA ratio now at 59.2%. We also allow the higher cost fixed deposit to gradually run off. Now, with this, I'll end my presentation and pass the floor to Sam. Thank you. Good morning, everyone. Welcome to this session.

During the quarter, we have observed that there is increased customer activities, which is also reflected in the increased fee income that Darren mentioned. This includes our wealth management fee, our credit card fees, as well as our customer-related treasury flows and insurance banker sales. On the other hand, the bank continued to manage its cost very well. You will notice that our cost in the third quarter was lower than the previous quarter, and the previous quarter was even lower than the prior quarter. So this is the third consecutive quarter of our expense management. Having said that, it is important to point out that our investments in technology and digitalization continued. As a matter of fact, our technology expenses as a proportion of our total expenses continue to rise over the past three quarters, despite the fact that our overall expenses is controlled and they declined quarter by quarter. On the portfolio quality side, it is well managed and the new MPA formation is actually quite low. The net MPA is reduced as compared with the previous quarter as a result of upgrades and recoveries. We're currently fairly prudently covered in terms of allowances, which is at 109% of our total MPA. I would like to talk about the economy in general. I think what we have observed is that the increased business and customer activities is a good reflection that the economy is stabilizing. At this point in time, I think I would not say that it is already on the recovering mode because there continue to be pressures both locally as well as from overseas. As you would appreciate, Singapore being a hub economy depends very much on the well-being and the growth of our neighbouring countries as well. We see that some of our neighbouring countries continue to be affected by the spreading of the virus and therefore has resulted in the clamping down of activities in their economies, which is going to be reflected in Singapore economy as well. But on the other hand, I think we are learning to live with the virus and the, generally speaking, the strategies and the policies taken by the government here is very effective and taken by governments overseas are also very practical. So as a result of that, I would say that the economies are indeed stabilizing. I would also like to talk about the relief program, which is gradually maturing with one of our key markets, Malaysia's relief program having ended at the end of September. So as a result of that, as was reflected in my update, we saw the total amount of our loans, which is under the relief program, to have reduced from the last time when I met with you for the second quarter briefing, it was at 10%. At the end of September, this is before Malaysia's exit from the relief program, it has come down to 9%. and after the exit of the relief program in Malaysia, by far the majority of that did not reapply for the continuation of the relief, which as a result of that, by the end of October, our total loans under relief program is reduced to now only 5%. The other observation is that the exit of the relief program in Malaysia has seen a majority meaning 90 plus percent of our customers have been able to revert to its original repayment schedule. Having said that, I would also like to caution that this is based on their first and second repayments. The sustainability of repayment could be affected by the continued imposition of some restriction and movements in Malaysia as a result of the spreading of the virus. So this first and second months of repayment experience may not be as sustainable as we are currently seeing, but by looking at the first two payments, it shows that there is resilience in the portfolio in Malaysia, and therefore our view is that the exit from the relief program is probably better than what we had originally expected. Looking ahead, I think what we currently see as challenges in the economic environment will continue, but it will stabilize. There are new areas of customer activities of which we are pursuing, and this includes in sectors of sustainability and renewables. We are also following closely the supply chain transformation, and there are quite a number of acquisitions, customer acquisitions, restructuring, and overseas diversification of which we are involved. We have a strong capital, we have strong liquidity, but at this point in time, we do not have any merger and acquisition plans under review. Going forward, the way that we will continue to manage the bank is to maintain strong capital, strong balance sheet, and although I said the economy is stabilizing, there could still be headwinds that we need to face. As a result of that, This strength that we have been able to preserve very well as reflected in our capital and funding and liquidity and diversification will continue to service us well. On the digital front, we will continue with our investments. As a matter of fact, because of this virus, we are in a way happy to see that the customers take-up rate of the digitalization offers that we have made and we have invested so substantially in the past have now started to reap results. During the third quarter alone, the new sign-ups on our digital channels increased by 50% over that of the prior quarter. In terms of the credit cost, although we saw that customer activities have increased and business momentum started to pick up, we are currently maintaining our credit cost estimate at 100 to 130 basis point for the two years, this year and next year. combined and MPL ratio could rise to 2.5 to 3.5%. And this is basically based on our view that some of the customers after the relief program may have to continue to apply for continued relief, in which case we may have to classify them as MPL. We will continue to be as accommodating as reasonable to make sure that we will help our customers right through this storm. a relatively healthy state. With that, I'll open up to any questions.

Any questions? You can press one star, star one. Jania.

Hi, Sam. Congratulations on the good sets of earnings that we estimate. and also noted that you mentioned no M&A plans, but as your wealth management franchise doing so well, what's your plan to grow the wealth sector further? Second question, the U.S. presidential election seems quite indicative of a Biden win. What's your expectation of this on the global economy and Asia?

Okay, thank you. Good morning, Chania. Good to hear your voice. On the wealth management side, we will continue to deepen our wealth management presence across the region and also on a selective basis outside of this region. We believe that from an infrastructure perspective, in terms of our coverage, market coverage, in terms of our relationship managers, in terms of our research, in terms of our system capabilities to do good reporting to our customers. Those are already in place. With that, we will probably be able to deepen in the markets that we're already in, including establishing more domestic presences in the overseas countries. So far, as you know, we do quite a bit of wealth management from Singapore, from Hong Kong, from Dubai, from London. But in some of the Southeast Asian countries, we do not have a direct presence yet. Under the Bank of Singapore name, we will consider establishing direct presences in some of these countries, of which we are doing business with them on an offshore basis, but domestic private banking is also coming up strongly.

So we will look at... Could you please say which Southeast Asian countries that you are looking to establish onshore presence?

We already have an onshore private banking presence under OCBC NISP in Indonesia that was set up a few years ago. It is not under the Bank of Singapore name because we use the OCBC NISP name to pursue private banking there. Other countries that are good countries in terms of wealth development would include countries like Malaysia and some other Asian countries So we will be looking at that to establish wealth management offices in those countries What about my country, Thailand? All of the countries will be under review We will continue to look for opportunities to establish a domestic presence there but we believe that from an infrastructure perspective, we already have adequate infrastructure to pursue those domestic activities without an M&A activity in mind. With respect to a second question on the US, we as observers are observing that, very interestingly, the final result, I think, will still have to be seen. But as a general statement, US has a well-established political architecture. In terms of their importance to ASEAN and to Asia, it will continue to be very high. The political leadership change will probably only impact policy changes gradually, but I don't think the policies that has been established over the past few years will be abruptly changed. So we will continue to observe that. I do not think that there will be any particular risk that we need to be cognizant of, but the continued follow-up on the final result will be something that we will pay very much attention to.

Thank you, Sam. Sorry, can I just clarify one point during your presentation? I think you projected NPL ratio Could you repeat that, and has that changed from your previous guidance?

No, it has not changed. At the onset of the crisis, we looked at the depth of the crisis and assessed the implications on the portfolio. We believe that on a gross NPL basis, not on a net basis, we report our net NPL. For example, the 1.6% that we reported is the net NPL. Net NPL in terms of We have the total NPL and then we reduce it by write-offs. So on a gross basis, we think that it will be in the range of 2.5 to 3.5% at its peak during this two-year period. But if we write off some NPAs, of course this ratio is going to come down. But before write-off, it may go up to 2.5 to 3.5%. Now with the observation that economies are stabilizing, and recovery is probably some time away, but it will come. We believe that we will probably be looking at the lower range of that, lower end of that range of 2.5 to 3.5%.

Thank you, Sam. Good to hear your voice too.

Thank you.

Okay, thank you, Shania. The next up would be Gula.

Hi, can you hear me? Yeah, congratulations. I think the results were better than I expected and better than everyone else expected. Sorry, can you hear me? Yes, very clearly. Okay, great, great, great. So can I just ask, have we seen the worst of the credit costs for these two years? I know you mentioned 1.3% overall. And is your credit quality tracking better than your 2Q expectations? And could there be a right back next year? That's one question. and the second question, of course, is in terms of dividend. How much did dividend add to capital and what are your likely plans for FY 2020's dividend, if you could, and is there any likelihood of reversing to higher levels in FY 2021? Thank you.

Thank you. I'll take the first question. I'll ask Darren to comment on the dividend and the capital outlook. On the credit cost, I would say that from a economic perspective, we probably have seen the trough in the second quarter and third quarter stabilizing and gradually improving. And this is consistent with the economic forecasts that are given by international agencies, including ourselves. However, we have to recognize that credit cost usually lacks the economic recovery. So when you see the trough, in terms of economic performance, the credit cost typically has got a lag of somewhere between three to five quarters is the normal observation. So in that sense, we are therefore not changing our credit cost of 100 basis point to 130 basis point for the time being. but it looks likely that we will end up again just as the MPA ratio that Chania mentioned earlier at the lower end of that range of 100 to 130 basis point. With respect to the right back of the credit provisions, it really depends on the economic development. If the economic recovery is gradual but it's not fluctuating, which is a better sign than a fluctuating recovery. If it's gradual and it's not fluctuating and it trended towards the recovery side, our current prudent stance on creating allowances for our portfolio may provide us some room for future positive adjustment, meaning it may not be as high as we currently see. You notice that in our provision, we have created what is called a management overlay, and this amount totaled at $450 million at the end of the third quarter. This is, again, on a forward-looking basis. We are expecting that there might be a portfolio deterioration which will result in the future requirement for credit allowance. Because we do see that as a possibility, we have created that management overlay on top of the forward-looking ECL provision that we have made. So Darren, on your question.

In terms of dividend, actually payment of dividend is a subtraction. So I believe what you're referring to is the recapture of the dividend by a script. And in this case, we're talking about roughly about $527 million or so. And that translates to about 0.2% of CT1. Thanks. Yes.

What about the outlook for dividends?

In terms of which aspect of it?

Well, in terms of next year, you know, in FY 2021, because MAS has given some sort of guidance as to how much you can pay for this year, but would you be able to have a bit more leeway to set your own dividend levels next year in FY 2021? So that will be... when it's paid in the second half?

We do not have the answer to that question at this point in time. But if you were to look at when the decision has to be made, it's probably for the interim of next year. Because as you know, MAS has already guided for this year, interim and full year, to apply the cap of 60%. So in that sense, that question will probably have a bit more visibility by probably what, you know, July, August next year. And I guess one trend that we should monitor is obviously the debate on this matter in other jurisdictions. Obviously, we also hear of, you know, read about reports about other banks in other jurisdictions, you know, sort of proposing and potentially discussing with their regulators in terms of the limitation on their dividends. So that's something that we are monitoring as well. But, you know, more specifically to ourselves, we probably would be, we would better get a better view by, you know, sort of the middle of next year.

Okay, thanks.

Okay, thanks, Gula. Next we have Natalie. Natalie from Business Times.

Hi, Sam and Darren. Congrats on the results. I just have one question. Are you expecting a new wave of moratorium requests in Singapore following the new extended credit relief support?

I think the answer is no. The Singapore government is very proactive but they also recognize that there is a limit as to how much the government guidance can do for the private sector. So as you would have noticed from the press releases, we are working on an extension of a support scheme, but it will not be on the blanket basis. It will be more targeted this time, vis-a-vis that was introduced in the second quarter of this year. So we do not expect that there will be a blanket moratorium request that will come out. Neither do we think that the local economy requires a blanket moratorium because it's all sector-based and we are therefore, as was noted in this latest scheme that was announced, very targeted and we will continue with that.

Okay. So for the targeted support, is there a particular industry or sector you're expecting maybe more requests?

Yes, I think the general industry that are under more severe impacts include the hospitality industry, the tourism industry, the airline industry and aviation related industries So this is the first order sector and we do have customers in that sector and we do have more importantly consumers who are customers of ours who are working in that sector So we will be focusing on that sector to provide the assistance that may be required.

Okay, thank you. Okay, thanks, Natalie. Anshuman, you're next.

You mentioned that the credit cost could be at the lower end of estimates. What's the biggest challenge that OCBC faces to resume growth in these markets? Thanks.

The growth has to be consistent with the economies. So at the present time, we see that the economic activities and business activities, customer sentiments have stabilized. But I would not classify that as having recovered on a strong recovery growth at all. So as a result of that, we think that in terms of the demand for loans will continue to be subdued. Having said that, however, in areas such as the wealth management area, we continue to see opportunities for us to deepen. Because the liquidity in the economies continue to be very strong, and I would say the what we internally call the premier sector which is the sector who has accumulated a bit of wealth on their own as a result of their past savings have a desire to have a higher yield on their accumulated wealth and they also wanted to have more advice that the banks can provide them so that their return can be more sustainable and this can take care of their future retirement as well. So we are pursuing quite a bit of activities in that end. I would like to emphasize that when we talk about wealth management, it is not only private banking that we have in mind. We make significant amount of income and provide significant products to our customers below the private banking level. and we do do that. This would include, for example, unit trust sales. This includes banker insurance, which contains both investment component as well as protection component. So these are the areas of which we would like to continue to deepen as was reflected very positively in the third quarter. In the second quarter, you understand that the clampdown has resulted in us not being able to effectively meet the customers. As a result of the digitalized channels that we have established and we have invested significantly in the past, the customers are now more used to contact us through the digital channels. Plus the gradual opening up of the economy, we are both able to contact them via the digital channel as well as to meet them in person. So these have all combined to the fact that our effectiveness of providing our advices to the customer has resulted in their accepting some of the products that we offer them. So once again, wealth management is not only for the private banking sector, it's also across the board, and Singapore does require these products for their own enhancing the yield, as well as for their preparation of retirement. And we are focusing on this trend which resulted in the results that we are able to deliver as you see in the third quarter.

I appreciate the answer, Sam. So in terms of the wealth management you mentioned, has this been the bright spot for OCBC and the banking sector overall in the last couple of months or has this trend accelerated over the past quarter? Thanks.

If you just look at the OCBC results, the contribution and the momentum in the wealth management sector has actually accelerated. You see, our group wealth management income for the first nine months of this year is actually a record high. Again, our products, which we call customer flow treasury products, which are those structured products that we do for our customers, again was a record high. They rose by 12% year-on-year for the first nine months of this year. So these are in the, beneath the private banking sector, we are able to see strong growth and accelerated growth, both the wealth management income and the treasury income from the customer products rose to new record highs. In the private banking sector, it also rose. The AUM hit $116 billion, and I would like to point out that $116 billion is only $1 billion below the peak private banking AUM that we had achieved, which was in December of last year. Our highest AUM was $117 billion, but at the end of the third quarter, we hit $116 billion. And this is an increase over the prior quarter, as well as increase in the previous quarter. in the previous year as well. And the equity market at the end of 2009 was much higher than what we are currently seeing. But we are only $1 billion away from the peak that we saw at the end of last year. So this evidenced the activities in that sector. The bank's results is very much helped by the wealth management and the fee-income growth that we are able to achieve. Thanks, Ashim.

Okay. Do we have any other questions? Because if we don't, we will want to thank everyone for your time. Okay. Thank you very much.

Thank you very much for participating in this broadcast.

All right. Goodbye.

Thank you. Stay healthy.