UOB eyes up China acquisitions and Singapore divestments
Terence Ong Sea Eng, Senior Executive Vice President at UOB Group has been at the forefront of the transformation of the bank in recent years. He runs the bank's investment banking and asset management businesses and has the ear of the board. In particular he has been instrumental in pushing the Singapore banking giant to move to more fee-based business and diversify away from the core lending business. Variously described as "an innovative thinker" and a "forward looking" by those who have worked with him, Ong is widely seen as a key actor in UOB's ongoing re-characterization. Here he talks to FinanceAsia.com about UOB's plans for China, for divestments, for capital raising and for further enhancing its fee income.
These are difficult times for banks in Singapore. Where will the future growth of UOB come from?
Ong: We are going through a challenging time. Loan demand is sluggish. In mortgage lending there is a price war going on so margins have been squeezed there. We have to look away from Singapore. Our Chairman Wee Cho Yaw has been saying that greater China will be the focal point for us. We have five branches in China, five branches in Hong Kong and a branch in Taiwan. Malaysia is still a good place for us: business there is good and the margins are better. So you will see us doing more in Malaysia. Three years ago we acquired a bank in Thailand and we are now very close to breaking even there. We have turned it around and we also see a lot of potential there.
It seems that everybody these days has to have a China strategy, in the same way that three years ago everyone had to have an internet strategy. What is your specific strategy? Investing small amounts in local banks or pursuing organic growth?
In November last year we upgraded our Beijing representative office to a full branch. At the time our Chairman mentioned that we would look at the opportunities as they came along. As part of our long-term growth strategy in China, taking a stake in a Chinese bank is one of the options. We are still in the exploratory stage in evaluating such options and it may not be appropriate for us to comment at this stage. But before even talking about acquisitions, we are looking into things such as strategic alliances with some of the Chinese banks in specific projects such as providing operational advisory services, credit cards and joint ventures in asset management. We think China is such a big market that we cannot afford not to be there when things are happening. But first we need to build a base.
Your emphasis has been not just on China but also on Greater China. Does this mean you are looking at Taiwan and Hong Kong as well?
Yes it does. We already have five branches in Hong Kong. As far as Taiwan is concerned, because the margins in Taiwan are not very good, we do more business with Taiwanese companies with operations in other parts of the world such as Malaysia or Vietnam, where the margins are better.
Back to Singapore. UOB is quite far down the road of the divestment process that you are obliged to undertake under the terms of the 2001 Banking Act. You have concluded the distribution of part of your holdings in Haw Par. What are the plans for the rest of the divestments you have to make?
Yes we have completed the Haw Par situation through distributing 31.12% of the issued share capital of Haw Par to the shareholders of UOB by way of a dividend in specie. Following the completion of the distribution, UOB continues to hold approximately 10% of Haw Par, which we intend to retain as an investment.
I am not able to tell you what our plans are for divesting our other holdings as that is considered forward looking and we are in our blackout period.
On the Haw Par distribution, that must affect your bank capital ratios. Can you do similar structures for future divestments without further hurting your capital adequacy?
I do not know whether we will be using the same strategy or not. I am not directly involved in the process. We have set up a special divestment committee to handle the process and have retained advisers to help us.
So with the on going divestment process and limited acquisition plans, can we assume that you have limited capital raising plans?
Many, many investment bankers have asked us that question. We are in the process of divestment and consolidation of our companies and from that process we can see some capital being ploughed back into the balance sheet. We are looking to see if we really need any additional capital and we will be making a decision. We only finished the integration process of UOB and OUB on the 17th June last year, very much ahead of schedule. We originally thought it would take between 12 and 18 months, but in the end, it only took around eight months. So now we have done the integration, we are looking at how we can have better management of our capital. There are other factors we must look at rather than only if there are any acquisitions or not.
So would it be fair to say that you are looking more at capital management than capital raising this year?
Yes.
How do the two synthetic CDOs [collateralized debt obligations] that you did in the second half of last year fit into this overall strategic picture?
We actually started doing CDO business in March 1998, and we did 10 cash CDOs before we did our recent synthetic CDOs. We did these first 10 as managers or advisers. Then we did our first synthetic CDO in September and the second one towards the end of the year. Altogether we have done around $5.3 billion of these products. When we first started doing these we acted as the asset manager or the adviser; we were not involved in the structuring of the deal. So we decided that we should try to be involved from the very beginning of the deal and get involved in the structuring. We want to learn the trade so that we can do the next CDO on our own.
It is a good instrument because investors get a diversified but investment grade portfolio. And due to the tranches, investors can really choose which level of risk they want to take. It is also a good opportunity for investors to diversify into investment grade corporate credits from Europe and the US and it also increases our assets under management. Finally it increases our fee-based income, which is a very important part of the whole exercise. Indeed, by 2010, we hope to have half of our income coming from fee-based income and deals such as this really help that.
What strategies do you have for hitting this ambitious target?
As far as our investment banking business is concerned, a lot of it will be to do with asset management. We have UOB Asset Management, which is a major part of our business, and we want to increase our assets under management so our fee income will go up. We are working hard in the local market where we are one of the biggest unit trust players. We are pushing hard for more innovative products that appeal to investors.
Internationally we have a subsidiary called UOB Global Capital with offices in New York and Paris, which are the marketing arms for our investment products. They are pushing hard to get funds from overseas to be managed by UOB Asset Management.
What synergies and conflicts do you face running a bank while building up this asset management business?
One of the best synergies is the huge distribution network and customer base that we have here in Singapore and around the region. The other advantage is a very strong cross selling culture that we have in the bank. So we see lots of opportunities coming from our size in banking in building up this asset management business.
From your experience in this area, have you found that strategies that have been successful in Singapore can be replicated in other countries in the region, or do they need to be tailored?
We don't have big branch networks in every country in the region. In some countries we only have a single branch so we need to work with a local bank and use their distribution network, as we have done in Taiwan. Where we do have branch networks we have found that we can use the same marketing strategies for our asset management business and be successful.
In Singapore, what lessons have you learnt from the successful consolidation of OUB?
We have achieved cost savings by rationalizing our branch network and overlapping areas such as IT systems and backroom office functions. Luckily the customer overlap between the two banks has been quite small - less than 5%. The integration was very smooth. I would say that some of the major decisions have been made top down: for instance we decided early on to make the whole bank take UOB's IT system and if necessary, we will do re-engineering afterwards. We did not have a situation where people were arguing over which system to use. There were also a lot of cultural similarities between the two banks on the staff side, which made integration easier, and we were very objective when it came to making staffing decisions. But most important of all, we have a dedicated team that worked very hard to make this integration smooth and swift.