Record results underscore the magnitude of a decade-long transformation

We reported another record performance in 2019. Net profit rose 14% to SGD 6.39 billion as total income climbed 10% to SGD 14.5 billion from broad-based growth. Return on equity increased from 12.1% in the previous year to a new high of 13.2%.

The results underscored the success of a journey we embarked on a decade ago. In February 2010, we had unveiled a nine-point strategy to transform the bank. In last year’s annual report, I wrote about how its steadfast and nimble implementation had since structurally improved the profitability of our franchise.

In Singapore, we deployed our low-cost deposits more profitably, increasing our market share of loans by five percentage points over the decade to 26% and raising our SGD loan-deposit ratio from 55% to 89%. Despite intense competition, we continued to command the lion’s share of SGD savings deposits at 53%. We also maintained our position as the runaway leader in everyday transactions as consumers and corporates shifted from cash to digital payments.

In Hong Kong, we grew low-cost current and savings accounts to almost three-fifths of our deposit base. We captured the cross-border financing requirements of large Chinese corporates and re-focused our consumer offering to the wealth management segment. As a result, our combined Hong Kong and Rest of Greater China earnings tripled over the decade to SGD 1.64 billion.

The returns of our two largest markets were further elevated by the extensive digitalisation efforts we began six years ago. Consumer and SME customers using our acclaimed platforms brought us twice the income per head even as the cost of delivering products digitally was significantly lower than for traditional channels. In India and Indonesia, the launch of mobile-only platforms enabled us to tap into the large mass-affluent consumer segments and organically grow our domestic presence in South and Southeast Asia.

We also said we would grow high-returns businesses. Wealth management and cash management now account for 35% of group income from 11% a decade ago. We became the sixth largest wealth management bank in the Asia-Pacific with SGD 245 billion in assets under management, offering the full range of products from unit trusts to bancassurance. Our cash management business was ranked by corporates and non-financial institutions as one of the best globally. For our treasury business, our focus was redirected towards serving customers. Today, customer flows account for 58% of total treasury income, double the 27% in 2009.

Transformation has yielded superior financial returns for shareholders

The magnitude of the transformation is reflected in the superior financial returns we have delivered over the decade.

Net profit of SGD 6.39 billion this year is three times the level in 2009, underpinned by a more-than-doubling of total income to SGD 14.5 billion. Return on equity, the key metric investors use to assess a bank’s financial standing, of 13.2% today is five percentage points above the 8.4% in 2009.

Moreover, our results were due almost fully to organic growth. The two acquisitions we made over the decade – for Societe Generale’s and ANZ’s wealth management businesses in some of the markets we operate in – while generating high returns quickly were not significant to our overall size.

We outperformed peers in several financial metrics over the period, including net interest margin and allowance coverage. The transformation of our franchise has resulted in superior returns for shareholders. Since 31 December 2008, our share price has tripled. Our annual dividends more than doubled from 56 cents per share in 2009 to SGD 1.23.

Broad-based growth during the year despite macroeconomic headwinds and geopolitical tensions throughout the year

The year’s results were notable not only for being a record. They also underscored the resilience of an entrenched, broad-based franchise able to navigate market volatility and capture opportunities as they arose. Unlike 2018, which had benefited from healthy macroeconomic tailwinds and risk appetite in the first half, a synchronised global slowdown exacerbated by geopolitical tensions pervaded 2019.

Corporate loan drawdowns – from a pipeline led by acquisition, cross-border and property financing, principally from Singapore and Greater China – were healthy at the start of the year but slowed in the second and third quarters as confidence ebbed before regaining momentum in the fourth quarter. Despite the uneven pace, non-trade corporate loans expanded 6% or SGD 12 billion in constant-currency terms to SGD 202 billion.

Trade loans grew 3% or SGD 1 billion to SGD 44 billion. A slowdown in Hong Kong, which was affected by the shifting of supply chains to other parts of Asia, offset the growth in other regions.

Consumer loans rose 2% or SGD 2 billion to SGD 114 billion as increased borrowing from wealth management customers was tempered by a decline in Singapore housing loans. Housing market transactions, which had weakened after cooling measures were introduced in July 2018, improved in the second half of 2019, but the recovery was confined to new property launches. Unlike resale market transactions, where loans are disbursed in a short time, loan drawdowns for new property launches occur progressively over a few years as the projects are being built. As a result, total housing loan drawdowns fell below repayments in the first three quarters of the year before recovering in the fourth.

Overall loans grew 4% or SGD 15 billion to SGD 358 billion.

Interest rates, which had risen during the previous year, began declining in the middle of 2019, putting pressure on net interest margin in the fourth quarter. Full-year net interest margin rose four basis points to 1.89%. Treasury Markets activities had a moderating effect on the reported net interest margin due to accounting rules for transactions involving currency swaps. Excluding Treasury Markets activities, net interest margin rose nine basis points.

The increase in loan volumes and net interest margin resulted in a 7% rise in net interest income to SGD 9.63 billion.

Net fee income increased 10% to SGD 3.05 billion as double-digit growth in the second half was moderated by a high-base effect in the first half. All fee activities grew except brokerage, which was affected by lower stock market trading volumes. Wealth management fees increased 13% as demand for investment products accelerated in the second half. Bancassurance sales were also higher. Credit card fees increased 11% from higher transactions across the region. Investment banking fees grew 66% as income from equity capital market activities reached a new high. Fees from transaction services and loan-related activities also rose.

Other non-interest income grew 29% to SGD 1.87 billion. Trading income rose 24% to SGD 1.46 billion from higher gains in interest rate activities, while gains on investment securities more than doubled to SGD 334 million. The strong increase in both activities was due partly to a low base in the previous year. These gains more than offset the impact of a SGD 91 million property disposal gain the year before.

All business units’ total income rose. Consumer Banking/ Wealth Management grew 11% to SGD 6.30 billion, with the increase led by deposits and investment products. Institutional Banking increased 5% to SGD 6.07 billion from cash management, loans and investment banking. Treasury Markets rose 39% to SGD 932 million from higher gains in interest rate activities, as well as low base a year ago, when a flatter yield curve had reduced gapping income and credit spreads had widened.

Expenses grew 8% to SGD 6.26 billion. The positive jaw of two percentage points resulted in a one-percentage-point improvement in the cost-income ratio to 43%.

Strong balance sheet maintained

Asset quality continued to be healthy. Non-performing assets rose 2% to SGD 5.77 billion as new non-performing asset formation was moderated by recoveries and write-offs. The non-performing loan ratio was unchanged at 1.5%. Specific allowances increased 7% to SGD 761 million. As a percentage of loans, specific allowances were at 20 basis points, stable from the previous year.

We maintained a healthy level of general allowances which, together with the regulatory loss allowance reserves mandated by the Monetary Authority of Singapore, amounted to SGD 2.92 billion. The cumulative total allowances we set aside amounted to 94% of NPAs. If collateral was considered, the allowance coverage was at 191%.

We had sufficient liquidity to support growth. Deposits rose 3%, in line with loan growth, to SGD 404 billion. The loan-deposit ratio was comfortably at 89%. The liquidity coverage ratio of 139% and net stable funding ratio of 110% were well above the regulatory requirement of 100%.

Our Common Equity Tier 1 capital adequacy ratio was at 14.1%, slightly above the 13.9% a year ago and also above regulatory requirements.

We increased the frequency of dividend payments to every quarter from half-yearly so that shareholders receive more regular income streams. For the first three quarters, we paid 30 cents per share per quarter, similar to the annualised rate in the previous year. For the fourth quarter, we are proposing a dividend of 33 cents for approval at the upcoming annual general meeting. This will bring the payout for the financial year 2019 to SGD 1.23 per share. It would also mean that, barring unforeseen circumstances, the annualised dividend going forward would be SGD 1.32 per share. The increase in the dividend is in line with our policy of paying sustainable dividends that rise progressively with earnings.

Total shareholder returns

We delivered total shareholder returns of 16% during the year. This comprised dividends of SGD 1.50 per share paid out during the calendar year (consisting of the final 2018 dividend of 60 cents and dividends of 30 cents for each of the first three quarters of 2019) and a share price accretion of 9%.

Outlook

We had entered 2020 with healthy underlying business momentum. We expected mid-single-digit percent loan growth and double-digit percent fee income growth, similar to 2019, with the impact partially offset by a lower net interest margin due to falling interest rates. At the time of writing, the Covid-19 virus outbreak has caused some uncertainty to our original expectations. If the outbreak is contained within a few months, there would be only a modest shaving to total income growth. Whatever the outcome, we will weather the uncertainty with nimble execution and a strong balance sheet that has ample capital, liquidity and general allowance reserves.

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(A) Digitalisation
The number of digital customers in the Consumer and SME businesses in Singapore and Hong Kong increased by 0.4m during the year to 3.3 million. As a result, the proportion of digital customers rose to 52% from 48% in 2018 and 42% in 2017 due to new customer acquisition and customer migration from the traditional segment.

A typical digital customer continued to generate twice as much revenue as a traditional customer. The cost-income ratio of the digital segment improved by one percentage point to 33%, which was 20 percentage points below the traditional segment’s 53%. The ROE of the digital segment strengthened to 36% from 32% in 2018, with the differential over the traditional segment widening to 11 percentage points from 10 percentage points.

These results included the benefit of a higher net interest margin during the year. After normalising for changes in the net interest margin, the underlying cost-income ratio of the overall businesses was unchanged from 2018 at 45%.

(B) Business unit performance
Business momentum was sustained over the course of the year, with all business units registering growth.

Consumer Banking/ Wealth Management total income rose 11% to SGD 6.30 billion from higher deposit margin and volumes, wealth management and card fees, and treasury customer sales. Expenses increased 8% while total allowances were 6% higher.

Institutional Banking total income increased 5% to SGD 6.07 billion from higher loan volumes, cash management income and investment banking fees. While expenses rose 10%, total allowances fell 41% due to a general allowance write-back.

Treasury Markets total income increased 39% to SGD 932 million from stronger trading income and higher gains on investment securities. Expenses were 2% higher.

The Others segment includes earnings on capital deployed into high quality assets, earnings from non-core asset sales and certain other head office items such as centrally raised allowances. Total income rose 13% to SGD 1.24 billion as higher net interest income from the deployment of shareholders’ funds was partially offset by a decline in non-interest income due to a property disposal gain in the previous year. Total allowances amounted to SGD 139 million as general allowances were taken due to the economic and political uncertainty prevailing during the year.

(C) Net interest income
Net interest income increased 7% to SGD 9.63 billion. Net interest margin rose four basis points to 1.89%. Compared to the year-ago period, net interest margin was higher in the first three quarters due to higher interest rates in Singapore and Hong Kong, but was little changed in the fourth quarter as Singapore interest rates fell with US Fed rate cuts in the second half of the year. Excluding Treasury Markets activities, net interest margin rose nine basis points for the year.

In constant-currency terms, gross loans rose 4% or SGD 15 billion to SGD 362 billion. The increase was led by a 6% or SGD 12 billion growth in non-trade corporate loans to Singapore and Greater China customers. Trade loans rose 3% or SGD 1 billion as growth in other regions was dampened by lower activity in Hong Kong. Consumer loans rose 2% or SGD 2 billion as growth in loans to wealth management customers was moderated by a contraction in housing loans.

In constant-currency terms, deposits rose 3% or SGD 13 billion to SGD 404 billion. Our market share of SGD savings deposits was maintained at 53%.

(D) Non-interest income
Net fee income rose 10% to SGD 3.05 billion. Leading the increase was a 13% rise in wealth management fees from higher unit trust products and investment product sales. Card fees rose 11% from growth across the region. Investment banking fees grew 66% as equity capital market income rose to a new high. Transaction banking fees and loan-related fees were also higher.

Other non-interest income rose 29% to SGD 1.87 billion as trading income benefitted from interest-rate activities and gains on investment securities rose from a low base.

(E) Expenses
Expenses rose 8% to SGD 6.26 billion, two percentage points below income growth. The cost-income ratio improved one percentage point to 43%.

(F) Asset quality and allowances
Non-performing assets rose 2% to SGD 5.77 billion. New non-performing asset formation was moderated by recoveries and write-offs. Specific allowances were at 20 basis points of loans, little changed from the previous year. Allowance coverage was at 94% and at 191% if collateral was considered.