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OCBC set to rejig branch network strategy as pandemic drives digital banking

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In an early sign of how the Covid-19 pandemic could change the banking scene as we know it, Singapore's second-largest bank said it expects to rejig its branch network strategy post-pandemic.

Singapore

IN an early sign of how the Covid-19 pandemic could change the banking scene as we know it, Singapore's second-largest bank said it expects to rejig its branch network strategy post-pandemic.

As branch traffic looks to be permanently diverted with the virus outbreak, OCBC's chief executive officer Samuel Tsien told shareholders and observers this at the bank's virtual annual general meeting (AGM) on Monday, pointing to the rising adoption of digital banking services.

With 22 of its 46 branches islandwide temporarily shut to comply with safe distancing measures here, OCBC saw a broad-based surge in digital transaction volumes in many services such as online trading, loan applications and PayNow transactions in the first quarter ended March 31.

Against that backdrop, the bank will continue to invest in technology and digitalisation efforts in the areas of customer interaction, customer experience, internal processing, and infrastructure built, said Mr Tsien.

He told shareholders that the bank expects the increased adoption of digital services to translate into higher net operating profit in the longer term, due to reduced manpower costs and fewer physical branches and offices in future.

"We do expect that the cost increase will be managed and the cost- to-income ratio of the bank would continue to improve," he noted. OCBC's cost-to-income ratio stood at 44.5 per cent in Q1.

But to be clear, there have been no overhead cost savings so far due to the temporary closure of branches, as OCBC's full network of ATMs remains operational and all affected branch staff have their full pay intact.

Given the challenging revenue outlook, Citi analyst Robert Kong expects banks to keep their operating expenditure flat - or low single-digit growth - but without retrenchment or base pay cuts in 2020. "The promise of a digital transformation is that, after an initial few years of cost-heavy investment, moving to a digital platform will generate more higher per unit customer revenue while reducing back office, processing costs for long-term higher cost-income ratio," said Mr Kong in a research note on May 11.

Singapore's "circuit breaker" measures have arguably accelerated the use of digital banking services by both individuals and corporates, away from brick-and-mortar services, Mr Kong added.

In Q1, the number of small and medium-sized enterprises (SMEs) accounts opened digitally with OCBC grew 2.4 times compared with a year ago. PayNow Corporate transactions jumped seven times, while SME loans applied digitally stood at 49 per cent, up from 30 per cent a year ago.

As for consumer banking, the number of accounts opened digitally grew 1.9 times year-on-year in Q1.

OCBC's peers DBS and UOB also reported a surge in digital banking adoption in Q1. UOB had a 406 per cent increase in the online purchase of its investment products in the first quarter versus a year ago.

Janet Young, UOB head of group channels and digitalisation, told The Business Times: "We are focused on providing our customers with products, services and solutions that are smarter, safer and simpler."

DBS has put out data suggesting that a digital customer generates twice as much revenue as a traditional customer. The cost-to-income ratio of DBS's digital segment stood at 33 per cent in FY2019, 20 percentage points below the traditional segment's 53 per cent. Return on equity of the digital segment was at 36 per cent, up from 32 per cent in FY2018.

DBS head of consumer banking Jeremy Soo said the bank will continue to "transform our network to best serve our customers' evolving needs", in response to queries from BT about its branch banking strategy post-pandemic.

OCBC is the first bank here to put on record its expected branch strategy rejig after the crisis.

At the bank's virtual AGM on Monday, Mr Tsien also outlined six mega trends that the bank believes will impact its future growth.

These trends are: the continued rise of Asian wealth, increasing dominance of China in the region, growing silver segment in OCBC's core markets, digitalisation and cybersecurity risks, threats from rising protectionism and populism, and sustainability.

Amid the virus fallout, several concerns were raised about the bank's business and dividend outlook for the year. OCBC chairman Ooi Sang Kuang told shareholders that the bank expects recovery to be unlikely until 2021 "at the earliest".

"This crisis is more pervasive than previous crises. It is likely to impact our earnings (through to FY2021)," added Mr Tsien, who guided for further net interest margin compression once the full effects of interest rate cuts set in.

OCBC posted a 43 per cent slump in net profit to S$698 million for its first quarter, dragged down by non-operating losses in its insurance unit and higher provisions.

To mitigate the impact from the economic fallout, the bank will focus on asset composition and continue building up its current and savings account deposits, said Mr Tsien. As at March 31, nearly 80 per cent - or S$314 billion - of its funding base is derived from customer deposits.

As to why there were no scrip dividends in FY2019, Mr Tsien said the decision to apply scrip dividend is reviewed at each dividend payment period by the board, taking into consideration the bank's capital adequacy and return to shareholders.

"As at end-2019, our CET1 (common equity tier one) ratio was 14.9 per cent, which was significantly above the regulatory requirement needed to run our business. Therefore, the decision was made by the board not to apply for the scrip dividend for the final payment."

The bank pays dividends on a semi-annual basis. It has not guided directly on how its payout this year will be impacted by Covid-19.

Shareholders also raised queries about the bank's share buyback scheme earlier this year. OCBC had spent nearly S$20 million on share buybacks in March but has since suspended the exercise.

Mr Tsien said the share buyback exercise was to fulfil the bank's obligations under its employees share option scheme, adding that the bank's level of capital remains comfortable.

OCBC is the second Singapore bank to hold its AGM after DBS. UOB will convene its AGM on June 5.

Shares of OCBC closed trading at S$8.80 on Monday, up 0.8 per cent.

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