This article first appeared in The Edge Malaysia Weekly on August 20, 2018 - August 26, 2018

IT will be a challenging year for banks, but OCBC Bank (Malaysia) Bhd (OCBC Malaysia) is optimistic it can grow its earnings for the second straight year after hitting a record high last year.

OCBC Malaysia, a subsidiary of Singapore’s second largest banking group by assets, Oversea-Chinese Banking Corp Ltd, saw net profit rise 17% to RM949.23 million last year, its highest ever.

“We aspire to reach at least RM1 billion in net profit this year. Hence, we have to ensure that our platforms — in both people and infrastructure — are ready to support growth that can always be consistently above RM1 billion. Importantly, we also want to grow our business to support our customers as they venture out of Malaysia. That business is substantial and growing,” CEO Datuk Ong Eng Bin tells The Edge in an interview.

Oversea-Chinese Banking Corp, whose key markets are Singapore, Greater China, Malaysia and Indonesia, recently reported a strong set of results for the first half of 2018 (1H2018), with net profit increasing a solid 22% to S$2.32 billion. Malaysia accounted for 16% of its profit before tax of S$2.89 billion.

“It was a very good set of results,” Ong says of the Singapore group.

OCBC Malaysia has yet to release its 1HFY2018 financial results. However, based on the data on its parent company’s website, OCBC Malaysia’s 2Q net profit fell 12% to RM207 million, which led to its 1H profit declining 2% to RM451 million. Total income in 1H, however, rose 3% to RM1.24 billion.

Ong says the decline in net profit was due to a sizeable provision that the bank made for an oil and gas (O&G) account in 2Q.

“Things are moving in the right direction for us, but there was one legacy non-performing loan (NPL) in the O&G industry, for which we needed to make a provision arising from a restructuring exercise. As a result, it caused our after-tax profit for 1H to dip slightly,” he explains.

As of now, Ong does not expect to have to make further provisions for that account. OCBC Malaysia’s overall provisions in 2Q stood at RM65 million compared with RM7 million in 1Q.

Ong admits that the operating environment remains challenging, with Malaysian businesses, especially large corporates, having slowed their activities in the last few months as the Pakatan Harapan government weighs its spending priorities and new policies.

Businesses are important to OCBC Malaysia as it derives the bulk of its earnings from business banking. Last year, for example, business banking accounted for 51% of OCBC Malaysia’s net profit, while consumer financial services made up just 10%.

The government’s cancellation or postponement of certain major infrastructure projects in the country will likely affect “only a few” of OCBC Malaysia’s large corporate clients, but, so far, there has not been much impact on the bank as most of the projects were to have spread over many years, says Ong.

“Our corporates are still quite okay. Our business banking has not really slowed down. We’re still seeing good growth. But, I think it could slow down later as some of the impact could be felt in 2019, 2020, but we’re already planning ahead on how to manage that as we have more initiatives in place to boost revenue,” he shares.

Growing small SME and mortgage again

Ong is hopeful that 2H2018 will be better for OCBC Malaysia.

“I believe the second half would not be worse than the first ... but whether it will be much better than the first, I can’t be sure. The reason [for our optimism] is that we’re starting to once again grow two business segments that we had scaled back on in the last few years — small business and mortgages — apart from strengthening all the other businesses we have,” he says.

Small business refers to the bank’s smaller-sized SME clients, that is, those with annual sales of up to RM25 million. The bank, once the leader in unsecured lending to smaller SMEs, scaled down the business a few years ago when it saw such companies face cash flow problems after the Goods and Services Tax was introduced in April 2015.

“We had let the portfolio run down a bit and now, we’re comfortable to keep it at a stable pace or maybe grow it a bit. We’ve hired quite a number of sales personnel and we’re seeing the results, so that should help us in the second half,” Ong says.

And, as part of a longer-term plan, OCBC Malaysia is broadening its commercial banking focus to include mid-sized SMEs, or companies with annual sales of between RM25 million and RM50 million.

“This is an area we never really focused on as we were focusing on [larger companies]. We had a ‘main bank’ strategy, where we supported large companies’ business needs all the way through, and across geographies ... and this worked very well for us. But now, we think we should also focus on this new segment, which can potentially be as big as the small SME segment that generates over RM200 million in net profit a year for us. If we do it right, we can probably double the profit from this segment in three to five years. So, we’re building it up, starting from this year,” Ong says.

As for mortgages, which form the biggest portion of OCBC Malaysia’s lending book, the plan is to grow the business at a moderate pace. It is a highly competitive business and the bank does not want to sacrifice returns or engage in price wars with other lenders.

Housing loans accounted for 40% of its gross loan book of RM66.83 billion as at end-March.

“We decided to slow down housing loans in 2015 as it was getting too competitive, as lending rates did not increase while funding costs rose substantially. Moreover, we saw weaknesses in the property market which are now quite apparent. We’re now getting back in it again, but we just want to maintain our market share rather than grow aggressively. If you want to be a serious player in the banking industry, you just cannot avoid property lending, whether it is to individuals or businesses. But our growth will be moderate. The property market is not as strong as before. Most people are cautious about property, especially high-end, and affordability is an issue,” he says.

Once the largest mortgage player among foreign banks, OCBC Malaysia is now probably the second largest, with a market share of “just under 6%”, says Ong.

“We’ll probably do at least three or four times more than what we did last year, in terms of mortgage volume ... but it will probably be about one-third of what we used to do at our very peak when the market was hot,” he says.

Ong says the bank’s wealth management and bancassurance businesses are doing particularly well and should contribute positively to its non-interest income.

“We have a project, working closely together with our sister company, Great Eastern Life Malaysia, to triple our bancassurance business together within the next four to five years. We’ve had very good traction on that,” he remarks.

Meanwhile, the group’s Islamic banking business, through its subsidiary OCBC Al-Amin Bank Bhd, which was the most profitable foreign Islamic lender in the last two years, will start growing unsecured financing again after having scaled back on the business about two years ago. It is a business that yields strong margins for OCBC Malaysia.

“We intend to grow it, but not to the extent that we used to. That will also help preserve OCBC Malaysia’s net interest margin (NIM),” says Ong.

He says OCBC Malaysia’s NIM is likely to grow slightly to 2.1% this year, after 1.95% last year.

Eye on returns

However, Ong stresses that OCBC Malaysia, like its parent, looks at return on risk-weighted assets (ROR-WA) as its key performance benchmark. “For the Malaysian franchise, we’ve always had ROR-WA come in above 2%. Last year, it was 2.1%,” he says.

Loan growth is likely to come in at 1% to 2% this year. “We’re not expecting a dramatic increase because we are quite careful about our returns. The income lift will not come from mortgages but rather from our cross-selling efforts and our continued emphasis on wealth management,” he says.

As for asset quality, OCBC Malaysia expects its gross NPL ratio to trend down slowly, partly because loan growth is also slower these days. The ratio rose to 2.2% as at end-March from 2.1% three months earlier, mainly due to a smaller loans base arising from the repayment of a few larger accounts, Ong says.

“We have some NPLs in the O&G segment, which are on the support vessel business side. Over the next 12 months, if oil prices improve in a sustainable way, we may be able to upgrade them and write back some of the provisions we have made,” he says.

As for the bank’s digital initiatives, Ong says OCBC Malaysia has invested heavily on it. Next to personnel costs, technology costs are the highest expense incurred by the bank.

The bank is careful about the financial technology companies (fintechs) it chooses to collaborate with. The group recently created a fintech unit, The Open Vault, which is now in Malaysia as well, through which fintechs can work with the bank.

“Once we decide you are a potential fintech candidate [for us to work with] because you have a good solution for us, we then sit together and invest a bit of money to reach a conclusion on the viability of the solution. Then, over the next 12 weeks, we see whether it works, to get to the next stage before we start making real investments,” he explains.

The bank has done several collaborations with fintechs this year, with more expected to come.

OCBC Malaysia currently has 46 branches, of which 13 are OCBC Al-Amin branches. “Fifty to sixty are probably what we need, overall. We hope to open two more in Sabah and Sarawak and may want to have a few more in Penang and the Klang Valley,” Ong says.

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