Singapore’s United Overseas Bank is expecting “some upside” in interest income in the next quarter, after the U.S. Federal Reserve announced a fresh rate hike overnight.
UOB’s core net profit jumped 35% to 1.5 billion Singapore dollars ($1.13 billion) in the second quarter from a year ago. Its net interest income for the quarter grew 31% from a year ago — boosted by robust net interest margin that expanded 50 basis points to 2.13% on higher interest rates, the Singapore-based lender said in a statement released early Thursday.
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Net interest margin, a measure of lending profitability for banks, is the difference between interest earned and interest paid.
“We are hopeful that [net interest margins] will stay for the following quarter, with some upside biasness following this morning’s announcement by the Fed,” UOB chief financial officer Lee Wai Fai told CNBC’s JP Ong on “Street Signs Asia” in an exclusive interview Thursday.
Overnight on Wall Street, the Fed raised interest rates by 25 basis points, taking its benchmark borrowing costs to a target range of 5.25%-5.5% — the highest level in more than 22 years.
Financial markets had completely priced in the widely anticipated move. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.
Shares of UOB, one of Singapore’s largest lenders, rose 0.7% to a three-month high on Thursday.
The stock was broadly in line with the benchmark Straits Times Index in Singapore, and slightly below the 1% gain for the MSCI Asia ex-Japan.
“We think that loans will be repriced and that we will be able to manage our cost of funding a lot stronger mainly because of the flight to quality for the Singapore depositors,” Lee said.
Southeast Asia’s third-largest lender said its loan-related and wealth management fees eased as investor sentiments remained subdued. These declines were partly offset by an increase in card fees, the bank added.
On Thursday, UOB lowered its guidance for fee income guidance to a high single digit growth, from a double-digit growth projection at its first quarter earnings announcement.
The United Overseas Bank logo is displayed atop UOB Plaza One in the central business district on February 23, 2021 in Singapore.
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The bank’s projection for low to mid single-digit loan growth remains unchanged.
It now expects credit cost to hit around 25 basis points for the rest of the year, a slight increase from the previous projection of 20 to 25 basis points.
“We are hopeful that despite a challenging first half, second half will be a lot better. And with some of the reopening of the economy, some of the trade-related activities will pick up,” Lee told CNBC.
“We are expecting to see activity coming back, especially now people got used to the high interest rate environment … so we see some of those customers coming back into the market,” he said.
UOB is the first of Singapore’s three major banks to report its quarterly earnings. Singapore’s largest lender DBS will report Aug. 3, followed by Overseas-Chinese Banking Corp. on Aug. 4.
Singapore’s Oversea-Chinese Banking Corporation has set its sights on “longer term opportunities” in Greater China and Southeast Asia and expects the strategy to bring an additional revenue of $2.2 billion by 2025, CEO Helen Wong told CNBC on Monday.
Southeast Asia’s second largest bank announced Monday that it will be unifying its brand across its core markets in Greater China — which includes Hong Kong and Macao — as well as Southeast Asia.
“If you look at macro trends, Greater China and ASEAN together is going to continue to contribute more to the world’s GDP growth,” Wong told CNBC, referring to the 10-nation Association of South East Asian Nations bloc.
“If you look at the trade numbers for the last four years, China and ASEAN — they’re growing at a CAGR of 13%,” she added. Compound annual growth rate is a measure of annualized returns for an investment over a period of time, assuming profits are reinvested at the end of each year.
In a media release, Wong said “the effects of China’s reopening post-pandemic, the rise of ASEAN for the China plus one strategy and other geopolitical factors” have amplified the potential business flows between the two regions.
As such, while the OCBC has seen slowing economic growth in some countries in the region, Wong said she’s confident it will be able to capture growth as it “puts our act together.”
The signage of Oversea-Chinese Banking Corp. (OCBC) at OCBC Centre in Singapore, on Wednesday, Aug. 3, 2022.
Edwin Koo | Bloomberg | Getty Images
This will be done by improving how it deals with customers digitally, as well as improving the way the bank captures customers and businesses, she said without offering more details.
She also pointed out that OCBC and its subsidiaries service the top seven markets in ASEAN, and can rely on a presence in 17 cities in the Greater China region, including Hong Kong, Macao and Taiwan, as well as its partnership with the Bank of Ningbo.
Asked about the bank’s outlook for the next half of 2023, Wong said it will “probably will be quite stable.”
She said the high interest rate environment has helped its interest income, even as income from fees has fallen as investors hold back on investing due to the uncertain economic environment.
But OCBC has other revenue streams that could contribute to growth, such as insurance income, Wong said.
However, she also acknowledged there may be uncertainty as interest rates could potentially remain at current levels or be “a little bit higher.”
As a result, OCBC will have to pay attention to whether its credit portfolio may be impacted by prolonged high interest rates. Also, if rates continue to be high, customers are likely to be “a little bit on the sidelines as to their investment activities,” Wong pointed out.
As a regional bank — Southeast Asia’s second largest — OCBC also saw some money come in from the collapse of regional banks in the U.S. earlier this year.
“Whenever there are some changes, some weakness in certain parts of the industry, there is a flight to quality. So being a highly rated bank, sitting in Asia, we do see some of that new money coming in,” she said.
However, the objective is not only to have the money come in, but keeping the money with OCBC.
To that, Wong highlighted that the bank has to ask itself: “Is there any lesson learned? How does that actually impact customers? Are we equipped to serve the customers as money comes in as well?”
OCBC shares are higher by nearly 9% in the last 12 months, and closed at 12.30 Singapore dollars on Monday.
But despite the downsizing, Singapore is still investing heavily in tech skills. Efforts at hiring and cultivating tech talent — in both the country’s tech and non-tech sectors — continue to be robust.
Singapore banks OCBC, DBS and UOB have each developed programs that train technology staff and prepare students to enter the tech industry. OCBC, for its part, announced in 2022 plans to hire 1,500 tech employees over the next three years.
And STLogistics announced last year it would invest 1.7 million Singapore dollars ($1.2 million) to encourage employees to pick up digital skills like software robotics. Singaporean telecommunications company M1 launched a program to equip undergraduate students with skills like cloud infrastructure support, it said on its website.
Demand for those skills isn’t going away anytime soon — in the tech sector and beyond.
Tech jobs have become increasingly popular in recent years.
In 2022, nearly seven in 10 of all vacancies in information and communications were new positions, which a report by the Ministry of Manpower showed was the highest level across all sectors for the third consecutive year.
Across job vacancies, technology talent like software developers and applications managers continued to be highly sought after, the report added.
That level of demand is expected to remain as the economy digitalizes, said Terence Chia, cluster director at Singapore’s Infocomm Media Development Authority (IMDA).
“This has been a consequence of tech companies anchoring and growing their higher-value tech development and corporate functions here,” he said.
On top of that, demand for individuals in “specialized tech areas” such as artificial intelligence and cybersecurity isn’t limited to the tech sector, Chia told CNBC. Such tech workers are needed across multiple industries such as finance, manufacturing, logistics and professional services, he said.
In finance, technology is the engine that “powers all the big banks,” said Donald MacDonald, OCBC head of group data.
“We want everyone in the bank to … at least have foundational data literacy,” he said.
OCBC designed a program that equips employees with basic data skills and teaches them how data can be used in their jobs, he said.
According to MacDonald, the bank uses data to understand its customer profiles and personalize each customer’s experience.
Data also plays a part in reducing risk — OCBC scans every transaction to detect scams and uses algorithms to figure out “who to lend to and … how much to lend,” he said.
Another data analysis program trains employees in divisions like finance and risk management, MacDonald said. It has trained about 400 employees to use advanced data analysis skills like Python, which MacDonald said will help them “move beyond” using Excel and other simple tools.
“I see Singapore establishing [itself] as a kind of regional hub for A.I. and deep tech,” MacDonald said.
IMDA’s plans are broader in scale: It has trained morethan 15,000 Singaporeans and placed them in specialized tech jobs, said Chia. The jobs span a range of industries, including financial services, wholesale and retail trade, and education, he added.
Those jobs often have steep learning curves but, Chia said, program participants receive “on-the-job training and classroom learning” to pick up specialized skills.
One of IMDA’s programs puts non-tech professionals through an “intensive, bootcamp-style experience” that helps them develop into tech professionals, he said.
Higher education is no exception. Chia said “many leading companies” support IMDA’s joint initiative with the Ministry of Education to train and create job opportunities for tech students in vocational institutes.
“There continue to be many opportunities in the digital economy for Singaporeans,” Chia said.
Singapore’s new digital retail banks are offering lower fees, more incentives and waiving minimum account balances to win over customers from traditional banks. But how viable is this in the long run?
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SINGAPORE — Digital retailbanks in Singaporeare pulling out all stops to win new customers.
Trust Bank and GXS Bank — two online retail banks launched last year — are offering lower fees, more incentives and waiving minimum account balances to win over customers from traditional banks.
But how viable is this in the long run?
“It is tremendous returns, but there’s no way that is sustainable. It has to be subsidized in some way,” Zennon Kapron, founder and director of research and consulting firm Kapronasia, told CNBC.
Unlike traditional banks — like DBS, OCBC and UOB — which operate physical branches and automated teller machines, digital banks operate entirely online.
Two digital full bank licenses went to Grab–Singtel‘s GXS Bank and Sea Group‘s MariBank which serve retail customers. The other two digital wholesale bank licenses were bagged by Ant Group’s ANEXT Bank and Green Link Digital Bank, catering to small-and-medium enterprises and other non-retail segments.
GXS Bank currently offers its service to customers and employees by invite only, while MariBank is only available to employees of Sea Group.
Trust Bank, on the other hand, did not have to jump through the hoops to apply for a separate digital full bank license as it’s backed by banking giant Standard Chartered, which secured an additional full bank license to establish a subsidiary to operate a digital bank.
A partnership between Standard Chartered and Singapore’s largest supermarket chain FairPrice Group, Trust Bank appears to be making some headway since its Sept. 1 launch.
It is useful for a short-term customer acquisition story but it will be a big challenge to keep these customers coming back.
Zennon Kapron
director, Kapronasia
Trust Bank claims to have reached more than 450,000 customers and achieved 9% of banking market share in Singapore within five months, based on data shared with CNBC.
New credit card customers receive vouchers worth 25 Singapore dollars ($18.80) to spend at FairPrice supermarkets, and can continue to accumulate reward points when they purchase groceries there. During their first month of launch, Trust gave out almost 60 tons of rice and over 11,000 breakfast sets – each worth more than S$2, according to the bank.
The bank wouldn’t divulge its customer retention rate nor profit margin to CNBC.
“While it is common in the market today to offer high-ticket and big rewards which are either complex to understand or have a poor experience, Trust offers simple, easy to understand rewards which are always tangible, which help bring down the cost of living and importantly, are in real time,” Dwaipayan Sadhu, CEO of Trust Bank, told CNBC over email.
“It is useful for a short-term customer acquisition story but it will be a big challenge to keep these customers coming back,” Kapron from Kapronasia said.
Trust Bank does not charge any annual fees or fees for foreign transaction, cash advance nor card replacement to credit card customers. It also does not require a minimum balance for its savings account, unlike traditional banks.
Its rival GXS Bank also does not require minimum balances for holders of savings accounts, currently the only product the bank is offering. GXS is a consortium between ride-hailing and food delivery giant Grab and Singapore’s largest telco provider Singtel.
The company says it targets the “underserved segment” — which includes the gig economy workers, self-employed entrepreneurs and those new to the workforce.
The bank has removed certain fees,such as fall-below fees that are usually charged when the balance drops below the minimum daily average.
The bank has “a low cost of acquisition and low cost to serve,” its CEO Charles Wong told CNBC.
“As a digital bank, we are unencumbered by the cost of maintaining a physical network such as branches or physical ATMs, resulting in cost savings on our overheads,” Wong explained.
In addition, Grab and Singtel have a combined customer base of over 3 million and the bank is “leveraging on [the] two giants for retail customers.”
“We also don’t provide gifts for customers. When you sign up, you sign up because it’s relevant to you or you are a Grab or Singtel customer and it is going to make it easy for you to make payments,” said Wong.
“Yes, you get additional rewards as you spend which makes sense because you’re spending within the ecosystem.”
GXS Bank, however, expects its bottom line to be largely driven by interest income, said Wong.
I think it’s going to be difficult for these banks to really have an impact, especially in the retail [banking] space on the Singapore market.
Zennon Kapron
director, Kapronasia
A 2022 analysis by Simon-Kucher revealed that 25 of the largest neobanks, also commonly known as digital banks,found out that only two of them — less than 10% — have achieved profitability. It also showed a majority earning less than $30 in annual revenues per customer.
Kapron said that traditional banks offering credit card products give out welcome gifts, like travel luggage or Apple watches, becausethey expect to be profitable after a certain period.
Those banks have already worked out how much they have to spend to gain a customer, and expect to recoup the costs when the customer starts missing payments or incurring interest, he explained.
Observers have previously raised questions about the need for digital banks in a largely banked population, where only 2% do not have bank accounts.
There’s also strong competition among the more established traditional banks.
I think the digital banks would have a higher rate of success if we were in a severely underbanked place like the Philippines.
“If you look at DBS Bank, it’s not like their digital offerings are [lousy],” said James Tan, managing partner of Quest Ventures, a VC company headquartered in Singapore.
Tan said he signed up for Trust Bank to see how different it will be to traditional banks. “I found no difference,” he told CNBC, adding that he eventually closed his Trust Bank account.
“I think the digital banks would have a higher rate of success if we were in a severely underbanked place like the Philippines,” said Tan.
Kapron added that it is going to be difficult for these banks to have an impact, especially in the retail banking space in the Singapore market.
“The market is just over-banked and the differentiator of these new digital banks doesn’t really move the needle much in terms of what they are offering.”
“Until that happens, you are having bags of rice, high promotional discounts or rewards, which are useful for acquiring customers but then, how do you keep them coming back?” asked Kapron.
