This article first appeared in The Edge Malaysia Weekly on August 23, 2021 - August 29, 2021

FOREIGN banks have always been limited by the number of branches they can open in Malaysia. And in banking, a branch distribution network is often tied to customer acquisition and service.

But that game has changed. This is especially evident in the past 1½ years, with the Covid-19 pandemic accelerating the digital shift as customers shy away from physical branches.

OCBC Bank (Malaysia) Bhd recognises this “new norm in the banking scene”.

“We have decided that going forward, we can grow without necessarily opening new branches, if possible,” OCBC CEO Datuk Ong Eng Bin tells The Edge in an exclusive interview.

He is quick to add that this is, of course, “without minimising the necessary role of branches”, which are still needed as many customers prefer banking at a branch, for more complicated transactions, and for carrying the OCBC brand.

“We studied a few places and we decided that with digital, we won’t need to open any more branches because we found that in some of the branches that we open, the footfall is low partly due to the pandemic but also the growing trend towards digital,” says Ong, who entered his seventh year as OCBC’s CEO this month.

In fact, the banking industry has been consolidating branches.

In the past nine years, the number of commercial bank branches nationwide has been reduced by 11% or 229 outlets from 2,055 in 2011 to 1,826 in 2020 (see chart).

Today, OCBC has 42 branches in Malaysia, of which 33 are conventional and nine Islamic.

Ong admits that as a bank with limited branches, OCBC had always found it a struggle “to grow the customer base without opening branches in the past but this has changed with digital banking”.

“We realised that one of the key things is to be able to have a bank that can operate on the go … where customers can set up their bank account and do transactions without necessarily visiting the branch and only when they really need to.

“Ultimately, it’s to have the ability to connect with customers ... You can be ready, but customers don’t come to you. One of the most important things is to have connectivity with other players, especially those who have an ecosystem of customers to tap on,” he says.

Ong notes, for example, that some of these other players are the ones that have a big customer base.

“For example, we tied up with BookXcess. During that time, we got a lot of customers — thousands! We realised that when we open one branch, it takes you one year to get those numbers. If you tie up with the right platform partner and work with them, you can get a lot of customers in one go and you can also have more targeted segments.

“The other thing we may do is rationalise branches. If we find that a particular area has big potential, we may move a particular (existing) branch there,” he says, assuring that any branch rationalisation exercise will not involve job cuts as OCBC believes in “leaving no one behind”.

Banking analysts concur that the pandemic has proved that banks do not have to rely too much on branches to grow.

“It is all down to service and technology. This is clear as a lot of branches were closed during the pandemic and some had shortened operating hours but banks continued to function as customers moved online. Jobs are still safe as although the need for branches is less, there is still a need to service customers digitally.

“This is also a more cost-efficient way moving forward as banks will save on rental expenses and fixed costs such as utilities,” says an analyst at a foreign house.

A full-fledged branch costs RM2 million to set up, depending on size and location, and the break-even point can vary from 20 months to up to two years, according to another banking analyst from a foreign bank.

“The savings on cost is a compelling reason, especially now when customers are shifting online at a faster pace due to Covid-19. Because of that, banks are either looking to shrink the number of branches or repurpose a branch, such as occupying a smaller space. Banks cannot do away with branches as they need to be there for complicated transactions and a handful of customers who prefer it. Otherwise, there is a strong case for reducing or shrinking the branch network,” he adds.

These are exciting times when “digital banking has made it easier for customers to transact and interact with us and we are able to do it safely, fast and securely,” Ong points out.

He believes this will be instrumental in making the financial industry even more efficient, whereby processes can be completed in mere minutes and the opening of bank accounts done remotely.

“This represents an opportunity for traditional banks to get even better by harnessing the power of digital.

“As we move deeper into 2021, with the pandemic still very much in the foreground, we do expect our digital business to continue to grow as many would prefer to conduct their banking activities online at their own convenience without the need to visit the bank branch,” Ong opines, adding that staff can be retrained to conduct value-added activities.

With the ongoing lockdown, he expects to see a further acceleration in digital engagement between OCBC and its customers.

Data supports this trend. Over 90% of OCBC’s CASA financial transactions for consumers are now performed digitally. This, Ong says, is in line with the drive to reduce cash and cheque transactions and increase the use of digital for efficiency and safety.

He adds that the number of digital transactions by OCBC’s corporate customers — service or sales related — has “grown significantly” over the course of this year.

OCBC’s digital customer base for corporates has also grown over the past three years from 48% to 55% currently, with 52% of its small and medium-size (SME) customers having adopted digital banking solutions.

The group expects its digital business initiatives for SME online banking to represent a significant portion of business revenue in the next five years.

A similar trend is seen sector-wide. On average, Malaysians made 170 e-payment transactions in 2020 compared with 150 in 2019 and 125 in 2018 in the banking system.

The e-payment transaction volume per person nearly doubled in the span of four years from 98 e-payment transactions in 2016 to 170 in 2020.

Internet banking has been growing rapidly, with transaction volume growing from 620 million in 2016 to 1.54 billion in 2020. In terms of value, internet banking transactions jumped from RM5,415 billion to RM8,858 billion in the same period (see chart).

With every other bank shifting to digital aggressively, and with digital banks making their way to Malaysian shores soon, what sets OCBC’s digital strategies apart from the rest?

The answer, Ong says, lies in how it leans on and learns from the OCBC Group’s digital leadership and strong regional connectivity.

“With this, we have put together a digital road map that invests in digital infrastructure to provide the expected customer experience — both for individual and our business customers. Our capex for IT and digital enhancements for the past three years has been in the region of RM150 million,” he states.

OCBC, whose history can be traced back to over a century, is cognisant of the fact that the landscape is changing rapidly and the digital onslaught will bring about just as much competition as it does opportunities.

The group does not consider digital banks a major threat as they serve different markets, and instead sees potential to work and collaborate with them. It has reached out to some of the digital bank applicants in Malaysia for a possible working partnership in the future.

“They have a small capital base and we have a big capital base ... So we can come together for mutual benefit as initially, the digital banks are supposed to target the underserved markets,” Ong notes.

Also, in preparation for the entry of digital banks into Malaysia, OCBC started its own challenger bank — FRANK — last September.

The mobile-only FRANK by OCBC removes traditional banking restrictions and among other things, requires a low minimum deposit of RM20.

“But what remains is the human touch, which still holds true as the key to having good long-term relationships with our customers, especially when key decisions need to be made or a problem crops up. Nothing beats the personal touch, frankly, and the advisory role that banks can play,” Ong remarks.

OCBC has not been left unscathed by the Covid-19 storm. The banking group saw its net profit decline 41% year on year to RM564 million for the financial year ended Dec 31, 2020.

This drop in earnings was mainly due to impairment allowances rising by RM458 million, to buffer the group against an expected increase in credit losses as the credit environment remained challenging due to the pandemic.

In FY2020, the group incurred a net modification loss due to the blanket loan moratorium of RM8 million arising from affected loans, advances and financing (before modification) totalling RM394 million. (See “Covid-19 ‘wake-up call’ for banks” on next page.)

“We are thinking the recovery will be stronger in 2022,” predicts Ong, pointing to the higher vaccination rate and the economy slowly opening up again.

As it is, OCBC’s recent financials for the first half ended June 30, 2021 (1H2021), show green shoots, with profit up RM118 million or 39% year on year to RM424 million. It is also higher than its pre-pandemic net profit of RM415.5 million in 1H2019.

Ong attributes the performance in 1H2021 mainly to lower impairment allowances of RM67 million as the economy was poised for a recovery following the plunge brought about by the Covid-19 pandemic in the first half of 2020.

Moving forward in an uncertain environment and a persistently tough operating landscape, Ong says the banking group will be maintaining its existing book as it strives to grow more sustainably.

“No point growing your loans by 5% but if you don’t take care of your existing book … you’ll lose a lot of money from that perspective. Hence our focus is to help our customers through this difficult cycle.”

He reveals that OCBC’s mortgage loan book did not grow in the last couple of years — it found the space challenging as local banks were very aggressive, the property market was weakening and household debt was at very high levels.

“So we were more pivoted towards helping consumers to grow and manage their wealth through investment solutions. Not everyone was looking into this earlier but now everyone wants to jump on the wealth management bandwagon, so the space looks quite heated up for the next five years, and this is good for the consumer,” he acknowledges.

As competition picks up in the wealth management segment, OCBC is innovating. It recently introduced wealth financing in a small way, whereby its wealth products can be used as collateral to invest further.

“It is different from other types of financing and we have a big target for this. By 2025, we target for wealth financing in Malaysia to hit RM3 billion,” says Ong.

In terms of total portfolio contribution, the corporate/ commercial business segment contributes 68% to OCBC’s balance sheet earnings while 32% comes from its consumer segment. This includes its exposure in Labuan, which is mainly to support top-tier corporates and government-linked companies in their foreign-currency loan requirements.

OCBC was aggressive in mortgage financing from 2010 to around 2014/15, jumping to the top spot among foreign banks for mortgages from fifth within seven years as the property market was rising, but it slowed down in 2014 as the market started to consolidate and lending margins were squeezed.

“Had we continued to grow aggressively in 2015, many of these properties we financed would have been underwater … and now with PEMULIH (the government’s loan moratorium programme), we will have a bigger problem on our hands. We lost market share but, in hindsight, it also helped us to refocus on wealth management,” Ong says.

He observes that for the recent moratorium under PEMULIH, close to 70% of the bank’s applicants have never asked for repayment assistance before.

“So we are quite puzzled; why so much? We gathered that perhaps it is coming from the fact that they are uncertain about how long the lockdown will be and are playing it safe,” Ong shares. He notes that as a foreign bank, OCBC has fewer clients from the B40 (bottom 40% income earners) segment. As such, it should mean that fewer of its customers need help.

When asked how likely these PEMULIH loans will turn bad when the moratorium ends, Ong says he is confident that the bank has made the necessary provisions as a buffer and will monitor as well as engage all its customers to ensure that they are able to recommence their repayments when the time comes.

“With the higher vaccination rates and gradual reopening of the economy, this will give sufficient buffer for customers when they restart their payment obligations by early 2022. Those who need further assistance will also be accorded help,” he adds.

Covid-19 may have brought overwhelming challenges but there are silver linings too, concludes Ong. Some of the positives include a higher level of staff engagement, the shift to work-from-home (WFH), higher digital take-up by customers, quicker decision-making enabled by technology, as well as the fact that it is working very closely with the industry and Bank Negara Malaysia for a common cause to help affected customers.

On that note, he says: “I would like to take a moment to offer a tribute to all OCBC staff, especially the frontliners who worked tirelessly in the office and for extended hours, helping to handle customers at all our branches including with their repayment assistance, and to our critical and efficient IT folks who helped enable WFH arrangements.”

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