Singapore banks smashed new highs in wealth business amid bad-debt fears

Singapore

THE focus on Singapore banks' debt relief impact in the year of Covid-19 might have obscured how they hit new records in the area of wealth management in 2020.

This business will continue to be a key growth driver for the Singapore-listed banks, and puts the trio in good stead as rising rates will provide a much-needed boost to their interest income as well.

Fee income is likely to expand on improved sentiment and growing momentum of business activities, with potential for wealth management, in particular, to make up a bigger percentage of the pie as digital wealth tools become mainstream in banks.

The banks cracked new highs last year amid buoyant markets. DBS' full-year wealth management fee income touched a record S$1.43 billion, up 11 per cent from a year ago. OCBC's wealth management fees also hit a high of S$1.13 billion, up 9 per cent, while for UOB, it grew 11 per cent to a record S$710 million.

Wealth management was one of the few segments within fee income to grow in 2020, with investment banking, card fees and trade-related fees all down.

With interest income falling in line with Fed rate cuts, the wealth business gave banks a much-needed lift. Lenders were also hit on overall earnings after raising their credit loss allowances in anticipation of bad debts brought on by a global health crisis.

Wealth management was already the biggest contributor of Singapore banks' fee and commission income prior to Covid-19, but it did more of the heavy lifting in FY2020.

The business segment contributed 47 per cent for DBS, 56 per cent for OCBC (partly attributed to its insurance arm Great Eastern) and 36 per cent for UOB in FY2020. This is up from 2019: it was 42 per cent for DBS; 49 per cent for OCBC, and 32 per cent for UOB previously.

In terms of assets under management (AUM), DBS's AUM rose 7 per cent to S$264 billion, while UOB's AUM went up 6 per cent to S$134 billion. These two banks include retail flows in their figures. Meanwhile, OCBC's AUM from its private banking arm Bank of Singapore went up 3 per cent to US$121 billion.

Fees earned on AUM are the most lucrative for banks; charging even a small percentage in fees can generate significant income.

Singapore's persistent shine in wealth management has to do with its position as a regional hub and safe haven, attracting wealth flows from neighbouring countries and all over the world. Moreover, Asia is seen as the epicentre of global wealth, with the highest number of millionaires and the largest share of global assets.

Analysts point out that there is room for wealth management to progressively account for a larger percentage of fee income. While it is a competitive space, it is a growing one that can accommodate more players.

UOB's relatively smaller wealth management franchise compared with its peers is due to its organic wealth management expansion strategy. DBS acquired ANZ's wealth and retail banking business in several Asian markets back in 2018 as well as Societe Generale's private banking business in Asia back in 2014.

OCBC acquired Barclays' wealth business in Hong Kong and Singapore in 2016 through the Bank of Singapore, and National Australia Bank's private wealth business in Hong Kong and Singapore in 2017.

UOB chief executive Wee Ee Cheong said at its fourth-quarter results briefing that the bank will rebalance its business to focus on wealth management services, adding more wealth management products in its UOB Mighty banking app.

While wealth management will be a focus for all three banks, there are some differences in their strategy and strengths.

DBS and OCBC are more tilted towards Greater China flows with Singapore, while UOB is aimed more at Asean connectivity. DBS and OCBC have a deeper presence in Hong Kong, as well as presence in the Middle East and the United Kingdom - giving them more global exposure.

Thilan Wickramasinghe, head of research and head of regional financials research at Maybank Kim Eng, flagged governance risks from know-your-customer checks and fair dealing requirements. The acceleration of fintech is also democratising access to personalised financial services, while lowering access costs, he said.

The three Singapore banks have all sharpened their digital tools, including wealth management, as a result of Covid-19.

Banks have seen a surge in retail interest in investments through its digital channels since last year. For instance, on digital wealth sales, OCBC saw 2.5 times growth, with S$350 million worth of digital wealth sales in 2020. This includes unit trusts, RoboInvest and blue chip investment plans. About 30 per cent of those who had invested digitally were first-time investors.

DBS chief Piyush Gupta said in December that enabling underserved groups to grow their money will amount to a "billion-dollar business" in three to five years' time for the bank, with earnings accumulated from fees the bank collects when helping customers make investments.

As for UOB, it saw a 180 per cent year on year increase in volume and value of investment products purchased online. Unit trusts saw the strongest growth with a 260 per cent jump in subscription volume.

While this is not likely to be a game changer for bank earnings anytime soon, this will be the way forward for banks. This makes wealth products more accessible for retail investors, and caters to the wants of young, digitally-savvy investors who expect processes to be seamless and instant.

These customers are likely to move up the wealth spectrum eventually, which could generate more returns for the banks as they follow customers on their financial journey.

CGS-CIMB analyst Andrea Choong noted that while digital wealth management tools may not move the needle for wealth management income now, there could be a shift further down the road. As younger investors grow up, mindsets may change.

The wealth management is a capital-light, high return-on-equity business, but challenges come in part from improving productivity of relationship managers (RMs), noted Jefferies analyst Krishna Guha.

If the transition for retail wealth is done right, banks would enjoy lower cost of acquisition and servicing expenses. It is likely that banks would also tackle the high cost of RMs. In time and with better technology, expect assets managed per RM to increase - keeping wealth management a viable business segment.