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Bank CEOs have to juggle smart, says OCBC chief
[SINGAPORE] The chief executive of OCBC has likened the running of a bank to being a juggler.
Samuel Tsien, speaking in Hong Kong at a banking conference on Tuesday, said the bankers of today do not only have to meet the expectations of their immediate stakeholders in the delivery of services and in results, they must also pay attention to the increasingly-strident demands of communities, netizens and politicians.
Bankers thus "have to reshape the bank's organisational culture to meet the highest demands of trust, honesty and integrity, fair dealing, corporate governance and social responsibility", he said.
Add to this the jump in number of regulations since the 2008 global financial crisis (GFC), compliance with which runs up costs. Because not all such costs can be passed on to customers, shareholders might get hit in the form of reduced returns, he said.
And related to compliance with the new battery of rules is the trend towards in-sourcing aspects of operations, because cross-border out-sourcing creates difficulty in supervision.
In OCBC alone, there has been a more than 35 per cent growth in resources channelled towards control and compliance work each year since the GRC, he said.
Referring to the task of tackling all these demands competing for the attention of top bankers, he said: "This is not easy, and only a smart juggler can do it."
He added that banks have seen the rise of what is effectively "de-globalisation", given the rise of greater ring-fencing of local liquidity, local incorporation and subsidiarisation of retail operations.
There are sound reasons for such practices, because some otherwise-healthy domestic financial systems had come under threat during the GFC, he said.
Of bank customers, he said they now have "zero tolerance" for service disruptions, and along with regulators, have no tolerance for the compromising of data confidentiality.
"Further, with the pervasive multiplier effect of social media these days, banks are exposed to much higher reputational risks; public sentiment regarding any such incidents can be influenced through carefully-framed and sometimes malicious social media postings.
"What starts off as a blip that could dent a bank's reputation can quickly escalate into a full-blown crisis, with enormous financial and regulatory impacts," he said.
Mr Tsien thus had this one question to ask: "Is banking therefore at risk of becoming an unattractive business to invest in from a returns perspective?"
A study of the world's 200 biggest banks by EY found that the average return on equity (ROE) in 2013 was only 9.74 per cent, marginally above the average cost of equity.
"To achieve the typical bank management's target ROE of 12 to 15 per cent, the average bank would have to cut costs by as much as 65 per cent - or increase revenues by 40 per cent," he said.
He added, however, that the lower returns on capital have, fortunately, not dealt Asian banks too hard a blow:
"Due to the sustained growth in our real economies throughout Asia (including China), banks in Asia have generally been able to avoid the painful process of deleveraging during the GFC, and have continued to generate adequate returns for their shareholders."
OCBC achieved a healthy annualised ROE of 14 per cent for the first half of this year, he said.
"Nevertheless, the challenge of depressed banking returns will continue to intensify, potentially reducing capital flows to the sector. This in turn could curtail the ability of banks to play the vital role of financial intermediary for society," he said.