Oversea-Chinese Banking Corporation Limited (O39) Earnings Call Transcript & Summary

Okay. Good morning. This is Collins Chin from Investor Relations. Welcome to OCBC's 2019 Full Year Earnings Call. On the panel with me today are our Group CEO, Mr. Samuel Tsien; Group CFO, Mr. Darren Tan; and Mr. Ching Wei Hong, Head of our Global Consumer Bank. So [ specifically ] observer today is Ms. Elaine Lam, Head of our Global Corporate Bank. Sam will begin today's session, with his opening remarks, after which I will proceed to Q&A. This call will last 1 hour. Over to you, Sam.

Thank you, Collins. Good morning to all of you. I'm very pleased that you've been able to join this analyst and investors call. I would have wanted to have a chance to meet every one of you person by person, but these are indeed -- these are tough times, these are unusual times, so we have to resort to a teleconference call. I look forward to the next briefing to be able to meet all of you in person. I will start off this remarks section by talking about our 2019 results first, and then I'll move on to talk about the 2020 outlook, including our currency valuation of the total banking impact on the portfolio. First of all, we have released our fourth quarter and full year 2019 results this morning, and the presentation deck and the detailed financials have been uploaded to the SGX website as well as the OCBC Investor Relations website, so you can review it from there. We're very pleased that for the fourth quarter, the group is able to report a 34% increase year-on-year. And for the bank, it's a 23% increase year-on-year. On a full year basis, this is the third consecutive year that we're able to record a record profit. And it's the first time that the banking side is also reporting an over $4 billion net earnings. I'll now talk about the drivers of the results, basically for the full year, and then I'll move on to other topics under the financial performance. In terms of the driver of the results, on the banking side, the loans, the deposits, all went up, but the most important, notable part is that our NIM went up by 7 basis points. And on the quarter-to-quarter basis, we're able to keep the NIM flat, despite in the previous quarterly calls I mentioned that we do expect a slight decrease in the fourth quarter, but we are able to maintain it at a flat level vis-a-vis the third quarter. The primary driver of that is our control on the funding costs. You will notice that our CASA ratio has improved to 48%. But more importantly, the CASA ratio for each of our major markets, Singapore, Malaysia, Indonesia and Hong Kong, all rose and they rose not only in terms of proportion, they rose in terms of actionable amounts, so that helped us to manage the funding cost well, and that contributed to our NIM improvement. The other point I wish to point out is our fee income. Our total fee income rose to a new record high of $2.12 billion, and that's another driver. You notice that we treat financial year '19 and financial year '18, our noninterest revenue rose higher than that of interest revenue's growth. For both the quarter as well as for the year, for both the group as well as the banking operations, we are able to achieve an operating leverage. We find as the rise in revenue versus the rise in operating expenses of 2% and therefore this gave rise to a higher rise in the operating profit from our operations. On the analysis and the NPL, our NPL ratio came down. It came down to 1.45% from close to 1.6% in the previous quarter. On a year-on-year basis, it stays the same at 1.5%. But if you go to the second decimal point, it slightly improved over that of the previous year. But in terms of NPL, I also wish to point out that the recoveries and upgrades is $664 million, which is the highest in our portfolio presentations vis-à-vis the previous years. So here, I would also like to talk about the oil and gas portfolio. The ECL 3 provision for the oil and gas portfolio continues to be high, which resulted in the total year's credit cost to be higher than that of the prior year. Now within the allowance that we took for the full year, 65% for the full year and 67% for the quarter still related to the oil and gas portfolio. So about 2/3 of the provisions that we took in this year as well as the fourth quarter related to oil and gas. So I'd like to go deeper into why is this the case. You will recall that in the first quarter of this year, we started to have a different evaluation of our collateral. That if the vessel collateral is there, but the vessel is not under longer than 1-year charter and does not have the visibility that the matured charter will be reviewed for over 1 year, we will write-down the collateral value to basically scrap value, and scrap value is approximately 6% of the market value of the vessel. We also take into account the disposal time, and the disposal time will usually take 2 to 3 years for us to obtain the best value, and that takes another 3% away from the 6%. So for the vessels, of which the charter is shorter than 1 year, and there's no visibility that it will be renewed for over 1 year, we will write-down the collateral value. So we took a oil and gas portfolio write-down in the first quarter, and in the fourth quarter we also took a similar approach where we write-down the value in the event that there is no-time charter. So this contributed to the higher oil and gas write-down for this year as well as for the fourth quarter. As a result of that, we believe that the portfolio is now prudently managed in a way that all of the remaining portfolio are supported by identifiable cash flow rather than the collateral value and the identifiable cash flow has a visibility of 1 year. This has also resulted in our upgrade in the NPL. In the fourth quarter, we upgraded, as I mentioned, $664 million, recoveries and upgrades, 25% of that belonged to the previously classified oil and gas portfolio. So we actually started to see some recoveries in that respect. And we do expect that under this prudent approach, there potentially could be further recoveries in this portfolio going into this year and going into 2021. So that explains the allowances increase and 65% of the allowances is still from the oil and gas portfolio. I will now move on to wealth management. Our wealth management continues to perform very well. Our wealth management fee in the fourth quarter alone is almost $250 million, and this is the second highest quarter that we have recorded. On the full year basis, our wealth management fee -- not total fees and commissions, but our wealth management fees alone is $949 million, which is close to $1 billion. Our Bank of Singapore private banking AUM rose to $117 million, which is 15% higher on a year-on-year basis. And this has contributed approximately a -- 16% or so is net new money and the remaining is by the market action as a result of the higher market prices, the portfolio got loans as well. So the net new money continues to be a driver of our increase in AUM. And all of you very well know, AUM is a determinant of the future period earnings that we can make from the private banking sector. In terms of insurance, it is a very good quarter for us. And it's a good quarter, not only in the sense that there are mark-to-market gains in the shareholders' portfolio but also the underlying business is very, very strong. Our new business embedded value, which is the strongest vis-a-vis of the insurance underlying business, is up 15% on the full year basis. And on a Q-on-Q basis, it's up 23%. The NBEV, the new business embedded value margin, exceeded 30% for both the third and the fourth quarter, bringing the full year NBEV margin to 48.8%, much higher than last year's 43%. This shows the underlying business in terms of new value creation of insurance business is very strong. Why are we able to do that? You may recall that about -- over -- slightly over a year ago, starting in the fourth quarter of 2018, we said that we would be pursuing more on regular premium products rather than single premium products. Regular premium products has got a much larger embedded value creation because it's much longer term, and it doesn't really stop at a particular maturity because the -- as long as the insurance underlying protection continues to be there, we will continue to bring the better value creation. So regular premium sales growth is much stronger than the single premium sales growth and then embedded value creation under regular premium is stronger than that of the regular premium. So in the fourth quarter as well as for the full year, the banking pillar, the wealth management pillar and the insurance pillar have all fared well for us. Our CET1 ratio rose to 14.9%. And we're looking at the future growth requirements, we have decided to increase our full year dividend by 23% to $0.53 and raising the payout ratio to 47%, which is higher than the previous 2 years. We have also decided to stop the Scrip Dividend Scheme because our capital ratio is at the level that, that we feel that we are very comfortable with, even taking into account the higher dividend that we have decided to pay. Looking forward into 2020, we continue to view that the market has got some hiccups that we will see in 2020. The impact from the continuing trade and technology tensions between the 2 super economies, the geopolitical risks, and of course as we see it now, the widening COVID-19 outbreak. As a result of that, our guidance is that the loan growth would be low. The lower interest rate environment is going to persist. The NIM is likely to be slightly under that you saw of 1.77% in 2019. But at this point in time, we still expect that it will be higher than 2018. 2018 was 1.7%. We will continue to manage the cost very tightly, but the investments in technology, in digitalization and in our people will continue. We are seeing the results, both on the revenue side more and also a little bit on the cost side in terms of our investments that we have made in the past. So we are maintaining our target steady state cost-to-income ratio of 40%. You will note that we have made improvements in our cost-to-income ratio from 43.3% to 42.7% last year. We are still targeting 40% as the steady state cost-to-income ratio when the technology investments started to show in the results that we anticipate them to show. We also anticipate that the strong capital position will continue, which will allow us to pay progressive and sustainable dividend that is consistent with our long-term growth. On the event of COVID-19, I would like to talk about it. I would like to talk about it in terms of our operational preparation as well as the impact on the portfolio. In terms of our operational preparation, we have safeguarding of our employees as the most important objective. In this respect, we have split our operations. We have arranged for health checks, we have shortened some of the branch operating hours, particularly in Hong Kong and in China. We have set up medical hotlines in some jurisdictions for staff to call. We have provided our staff with protective supplies. And in some locations, such as Hong Kong and Macau, we actually deliver lunches now to the staff, instead of having the staff to go out to buy lunches on their own and therefore avoid the crowd during the peak hours. In terms of supporting our customers, we view this event as a short-term event. Events come and events go and therefore as long as the underlying business of the customer is still positive, we will support our customers in whatever ways we can. So this will include loan rescheduling, portfolio and principal repayments, additional working capital facilities as well as co-financing with the government schemes, which has been introduced in Singapore, in Hong Kong as well as in Macau, and we believe that Malaysia may also introduce some schemes. To work with government agencies on those schemes, plus our own schemes that we will introduce to our customers, we believe, will result in the customers being able to ride through this event and they come back to normal, relying on their underlying strength again. In terms of the magnitude, we have interviewed about 600 customers in the SME side to understand whether they will need extra assistance or not during this period of time. And our baseline assumption is that the event is going to end by June of this year, which is about 4 months away from now. But the consumer sentiments and the propensity to spend and the private market investments will probably not return until the fourth quarter. So there will be a drag-on effect into the third quarter. But by the fourth quarter, there will be a gradual recovery. Of course, the investors' appetite and the provisionary spend will not be as strong as what we would have seen in the first half of last year, but still I think it will stabilize quite significantly by the end of this year. A higher growth is expected only in 2021. Against this scenario, we have done some assessment. And we believe that the revenue impact as a result of this event, based on the assumptions that we have just made, will be about 2%. Now this 2% does not mean that we expect to see a 2% reduction in revenue versus 2019. It is just 2% below that of what we would have seen had there been no COVID-19 event. Now in terms of the revenue growth forecast, we don't go into the specifics. But if you look at the revenue growth that we have been able to achieve over the past 3 years, so that will give you a trend as to how much revenue growth should be expected in the normal operation, and we believe that there will be a dent of about 2% against that what we have -- would otherwise have been able to achieve. Now in terms of NPL and the credit cost, we look at the segment and there are first order of impact and second order of impact. The first order of impact will be on those industries which includes hotels, hospitalities, retail, F&B, retail services such as entertainment, health, gyms, recreational facilities, airlines. This will be what -- we classify them as the segment that will be impacted on a first order basis. We assessed the debt portfolio and we then look at it both from an NPL perspective and from a credit cost perspective. And then we put it into the context of what we would expect otherwise. You will notice that in 2019, we have taken credit costs against the oil and gas portfolio on a very aggressive manner. So in an otherwise situation, we wouldn't expect the credit cost in 2020 would be lower than that of 2019. As a result of this COVID-19 event though, we believe that those improvements that we would be able to achieve in 2020 would be eroded as a result of the additional credit costs that we may have to take in this year. And as a result of that, the -- including the credit costs that we would see, would probably only be low few basis points above that of what we saw in 2019. Now 2019, you'll have to recognize that our credit cost has included the provision that we took in Indonesia to prepare it to transit into IFRS 9. So that is an extraordinary thing. But we've identified that as an exceptional thing. Our normalized credit cost for 2019 is 25 basis point, because this does not include the $144 million that we took on our books as a result of the transition because of the accounting methodology change. So our normalized credit cost for 2019 is 25 basis points. And if the worst situation were to happen based on our estimation of the COVID-19 event, we believe that it will only be a few low -- few basis points above that. The government program, however, is going to help because this is assuming -- not assuming any of the government assistance program that will come in to complement our systems that we will provide to our customers. If that were to happen, it will actually help. With respect to the NPL ratio, it is not yet very clear as to whether those rescheduled account needs to be classified as NPL. But in the worst-case scenario that they will need to be classified as NPL and our intention is that if they need to be classified as NPL, we will separately show what are these NPLs to the investor public, so that you have a feel as to what are these that are caused by the event and what are in the normalized portfolio, will also not be significant in the context of the 1.5% that we have seen. So that is what we expect on the revenue side and on the credit cost side. This is predicated on our assumption that the event is going to dwindle by June, recovery starting in third quarter, seen normalized -- generally normalized situation in the fourth quarter of this year. In addition to that, before I close my opening remarks, I also want to mention that the third thing that we do in the event is to make sure that we support the community in general. So as a result of that, our staff as well as the institution have been making donations as well as distributing food over to the hospital service staff who are so important for us to keep the well-being of our communities in which we serve. So with that, I will open up for any particular area that you want me to elaborate further.

Okay. Just a reminder, if you have put yourself in the queue please press star 1. I think first one on the queue we have is Aakash from UBS.

Congratulations on a great result. My first question is on the dividend and the Scrip. So that's good news for investors, but I just want to understand what has really changed in terms of the thinking from the first half that led to this dividend increase and the discontinuation of the Scrip? And looking forward, is this like a one-time thing or -- and we should not expect any higher dividends in the coming years?

Yes. Aakash, thank you very much for the question. Good to hear you. I will ask Darren, our CFO, to respond to this question.

Yes. Aakash. Anyways, just before I respond to your question, thanks for the discussion we had in December. And in a way, the dividend is also a reflection of feedback coming from the investment community. So essentially, if you look at our guidance for dividend, we also have guided now to one of progressive dividend policy. In a way, we are essentially reflecting what we have been doing, increasing quantum of the dividend that we pay as our long-term growth perspective improves. So reflection of what we are doing, but essentially being more specific in terms of that approach. Now the reason why we switched off the Scrip Dividend, it's essentially, also, a reflection of what we are hearing from the investment community in the sense that at this point in time our dividend is at a level that we're comfortable with. Both keeping in consideration what we have discussed, we will see a [indiscernible] being prudent in the event of a downturn, and act as normally as we can precisely, preparing ourselves for unexpected incidents like what is happening with the COVID outbreak. And also at the same time, giving us the ability to embark on anything that could complement our portfolio, should that opportunity arise. So essentially, if you were to look at the approach, it has not really changed. But it is in terms of hearing the feedback from the investment community in terms of the guidance that we are providing, going forward will be one of progressive dividend policy in line with our long-term growth value. What I means is so that we will ratchet up our dividend, in line with our earning and that's with [ corporate ].

Okay. Great. The second question I have is on the guidance on revenue because of the virus impact. So you quantified it, which is quite useful, 2% roughly revenue impact. Could I also ask, which area do you think will majority of this impact come from? Will it be more on the net interest income side or mostly on the noninterest income side?

The higher impact is on the noninterest income side, because the event -- the impact of the event is actually on the footfall and the opportunity to have a face-to-face meeting with the customer. The second impact is on the investment plans, which originally they would have done, it could have been delayed. So in that respect, there will be all impacts on the net interest revenue as well as on interest income side. However, on the noninterest income side, the impact will be more immediate because the loan revenue side, we think, gradually draw down, gradually reduce draw down, but the fee income side would be more impactful. And that will include areas such as credit card fees, will also come down as a result of that. Credit card fees was particularly strong last year as well as in the fourth quarter. So it's -- they'll be a higher proportion in the noninterest income side than the interest income side. But interest income will be impacted because of the investment plans being delayed. Now having said that, the momentum that was created last year into this year actually continue. We have not seen cancellation of projects, per se, but we see a much lower appetite to invest into expansion plans for now, which, in a way, is a good sign because event comes and event goes. And as long as the liquidity in the market continues to be there, this will be the future driver of our future recovery. So our view is that whereas 2019 -- sorry, 2020 first half is likely to be quite weak, third quarter, you will probably continue to see the weakness, fourth quarter stabilization. 2021 will probably be a fairly meaningful recovery as the sentiments return and the confidence return, driving spending appetite, capacity spend as well as investments.

Got it. That's very clear. And if I could just ask one more question on the mortgages. So I think contrary to your peers, your mortgage could decline Q-on-Q, whereas it grew quite strongly for you, it also grew for DBS. So is that a conscious strategy to kind of be a little less aggressive on mortgages? And will that continue into 2020? And then a related question is on the deposit side. The deposit costs actually saw a pretty big decline Q-on-Q of 15 basis points, which, of course, like you said is because of strong growth in CASA. Is this something that we should continue to expect in 2020? Or there is less room for that now in 2020?

Okay. Sorry, I didn't catch the interest -- the NIM and the CASA side. Can you repeat the second part?

Yes. The second part is on the funding cost. The funding deposit cost declined by around 15 basis points, I think, Q-on-Q, which, like you said earlier, is because of the strong CASA growth across the markets. I'm just trying to understand if a large part of this has been done or should we continue to see this kind of momentum in 2020?

Okay. I'll answer the second part of the question, and I'll have Wei Hong, who's actually president for wealth management and consumer banking, to respond to your mortgage question. But the mortgage question has to be distributed by countries because Singapore, Malaysia, Hong Kong are all major countries of mortgage generation. With respect to the funding cost, our drive towards CASA and our drive towards operating accounts has been in place and has been showing results. So this result is particularly showing in 2019 in terms of both absolute amount as well as proportion of our total deposits. This drive will continue. In an interest rate environment, which is low, then that earnings is not yet fully reflected. When interest rates start to rise, probably a 2021 event, then we will see more of that. We do expect that whereas the CASA balances and operating balances will increase, because of higher interest rates that we saw in the first half of last year, which helped our NIM for the full year, that high interest rate in 2019 will not be seen in 2020. So our guidance is that the NIM will be slightly under that of 2019, but it will still be above 2018. 2018 was 1.7% and 2019 was 1.77%. But had there no -- had there not been the driver and the success we are able to achieve on the CASA side, both in terms of proportion and balances, we would not be able to see the NIM performance that you saw. And our NIM did not drop in the fourth quarter because of the rising level of balances in CASA, particularly in Hong Kong. So second part, mortgage.

Yes. I think on the mortgage side, I can't comment on the other like the other 2 banks directly, but I mean, might need to check in on those again with regards to the growth of the variances there. But if we look at, for OCBC, I think we kept our book flat for Singapore. I think the decline we generated mainly from the Hong Kong market, you know the Hong Kong market last year was fairly soft. And even for the Singapore market, the total loan book country-wide, I mean, for total Singapore being [indiscernible] of the housing loan book has contracted. I think last year, 2018 was about $207 billion and 2019, it has actually for the first time in I think about 7, 8 years, it's contracted down to $207 billion. In general, we don't [indiscernible] guidance what we expect for 2020 this year, we intend to manage and maintain our market share for the Singapore market. And in terms of -- also, the way we build, the attrition is in terms of acquisition, we're also targeting over that. And to cover the attrition and the book in Singapore.

Thank you, Aakash. I think now we have Robert Kong from Citi on the line. Robert, over to you.

Can I ask my questions one at a time, if that's possible? The first one is just back on the dividend. So to -- just to clarify, should we now look at the second half dividend, which is $0.28 per share, should we now look at that as the new absolute level that you'll defend, all cash, no more Scrip unless there's something catastrophic happen? So I just want to understand that, that $0.28 is a signal that you're very confident that this is the new level that you can maintain? And along with that, what are the constraints that would change that? So for example, what would be the CET1 level where you'd say, okay, if it falls below this level, we'd have to rethink it? And also, what does this talk about in terms of your stance on M&A?

Yes. Robert, yes, you're right in that $0.28 will be the new base of absolute quantum that we work with, whether we apply through the [ north ], it really depends on each dividend and whether there's any intention to either review capital for either organic or inorganic reasons. So the Scrip is a dividend as we discussed on the particular basis. Now there is not a particular capital level that we work with. As you have also -- for example, in the past, we do have a very comfortable level of capital. So we are not -- unlike our previous guidance that any absolute level of the dividend, whereby thereafter we will change our dividend -- absolute dividend payoff.

With respect to your M&A question, M&A opportunities always exists. And as one of the strongest bank in this region, we always will show opportunities. But all I can say now is that there's no near-term transaction-oriented discussions.

That's very clear. The second question, coming to your -- the assessment of the credit cost impact of the COVID and indeed just the overall slowdown, obviously, we had a relatively similar guidance from the other 2 banks, but especially after last week's results, with the first bank that guided, a lot of investors came back to us and said, this is nonsense, the banks always talk about a minimal amount of credit costs and then they point to things like SARs and GFC and oil and gas in 2016 and show that it actually ends up a lot worse. So could you let us know your thinking around what is your stress case environment? What could happen? Things go wrong, what would you be looking for? Because I'm assuming the slight uptick in credit costs that you're guiding is sort of your base case based on the assumptions you've made. So just to get a sense of what your -- your worst case is.

As you know, it is not that easy to do such an assessment. Our focus is still currently on the first order of impact. And included in the first order of the impact, we believe that it may be only a few basis points above of what you saw for last year. But you also noticed that for last year, 65% of the allowance that we took is actually oil and gas related. And we believe that this proportion of oil and gas will not be -- will be significantly less in 2020. That savings will be absorbed by this event. So this event is not only a few basis points, it's higher than a few basis points because the savings that we get on -- not necessarily to take further provisioning on the oil and gas side, we anticipate as far as we can see now because we've identified without -- basically, only do on a cash flow basis. And if the collateral there is sort of irrelevant to us by not focusing on them, then, the impact on the portfolio is actually higher than a few basis points because had it not been there, it would -- we would achieve a quite a meaningful level below the 25 basis point that you saw in 2020. Now the second level of impact is kind of difficult to assess right now, and we have identified manufacturing as the second level of impact, because the first level of impact, as you may recall, I talk hospitality, hotels, retail, retail services, F&B, airlines. The second level of impact that is actually difficult because there are parts of which China produce, which would not be able to produce in time. As a result of that, the customers of the manufacturing side are not able to ship it out and therefore they lose the sales. And secondly, there were also sales into China, of which they're not able to complete. This also impacted them. So we believe that there will be impact on there as well. So maybe I can give you the loan portfolio concentration and then you will sort of assess it to see what sort of impact would it be. In the first order impact, which is the industries that I mentioned: hospitality, retail, F&B, airlines, it represents about 6% of our total loan portfolio. In the second order, which is the manufacturing side, of which the manufacturing does touch China, in other words, parts from China or exports to China, so it's not our entire manufacturing base because part of our manufacturing base is for domestic sales. For example, Indonesia is permanent on domestic sales. And those does not require because most of the parts are produced locally or produced by the region. That part of manufacturing is 4% of the portfolio, meaning that part of the portfolio that is likely to be impacted is 4% or so. So if you include the first order or the second order, it's about 10% of our portfolio, could be impacted. And then we try to assess how strong they are by looking at the model, by looking at the interest-coverage ratio, by looking at who is the sponsor, and we believe that for the first order the impact will result in a few basis points above that of what we saw in 2019. So from 25, maybe to 29, maybe to 30 or so. The second order of impact on the manufacturing side is very difficult to assess, but we believe that it will only also be a few basis point.

Okay. So actually, you're indicating because you could say, for example, of the 2/3 of the provisions from last year for oil and gas, maybe half of it could go away this year. So that would be -- the real basis points impact is fairly substantial then in that respect, if I were to just do some simple math?

That is correct. Yes. That is correct.

And that more substantial basis points is only the first order impact because you haven't yet got the full assessment of the second order impact?

The second order impact is more difficult to assume, but I would assume that even the second quarter impact will be, it's only a few basis points as well. So in a way, this is already the worst-case scenario because this has not taken into account any of the government assistance schemes. The government assistance schemes will provide relief that we otherwise would have to provide.

Right. Okay. So my final...

Yes. So it will be [indiscernible] by the government schemes. And the government schemes has now been announced in Singapore, announced in Hong Kong, announced in Macau and Malaysia is working on it.

Okay. That's clear. And for my final question, could you -- I was just looking at your associate profit, which, if I'm not mistaken, it's almost entirely Bank of Ningbo. And if I'm correct, it fell 39% quarter-on-quarter. So I just wondered what was -- if you could give some color on Bank of Ningbo, because I'm assuming that is the key number behind that. What's going on in China and why that number's come off? And then also just to relate to the previous briefing this morning as it related to that, the other bank basically said they're significantly derisking away from Hong Kong, China and they're reorienting towards ASEAN. So I'd just like to think in conjunction, what do you think of that view and whether you have a different view?

Okay. On Bank of Ningbo, I think you're referring to quarter-on-quarter, because on the year-on-year, as on a full year basis, they continue to do very, very well. So going bank, the Bank of Ningbo, the fourth quarter is always the weakest quarter. Because during the fourth quarter, they typically will look at according to local accounting principle, which is acceptable, they'll look at some of the expenses that they need to either accrue or they will not recognize on an amortized basis previously, they have to do a catch-up. So I would suggest that we do not look at it on a Q-on-Q basis, look at it on a year-on-year basis and look at it on a full year to full year basis. So that was due to a -- the way that they capture some of the expenses. And it happens every fourth quarter.

Yes. And your thoughts on, as I mentioned, the previous bank's call, they talked about completely derisking away from North Asia and reorienting towards ASEAN. Just wanted your thoughts on that?

No. It is not our intention to do that. First of all, let me talk about the recovery. We believe that the recovery in Singapore is going to be quite noticeable towards the end of this year into 2021, will be a strong recovery, because it is all events driven. And when an event goes, it goes away. For the Hong Kong market, we believe that a recovery would take longer because, as you know, Hong Kong has got social events, plus this reinforcement of the event by another event, the COVID event. And Hong Kong also needs some basic restructuring. We believe that Hong Kong recovery will take at least 2 years, back to its more normal state. And during this 2-year period, we believe that the Chinese authorities is going to not only preserve the Hong Kong status as much as they can but will increase their injection of business-oriented activities into Hong Kong to ensure that Hong Kong will continue to be able to have a basic level of activities going on there to support the local livelihood. So we do not write-off Hong Kong at all. On the contrary, we believe that whereas Hong Kong would take a longer time to recover, Hong Kong's recovery will be able to bring it to a state, which is equal to what they used to enjoy. But the driver of that recovery is not the same as before. Chinese investments, Chinese oriented, Chinese-driven activities will be much more in Hong Kong. You will notice that over the past 1 year, when the Soviet event happened and up to this moment when the COVID event happened, Hong Kong's financial market continues to be quite healthy, in terms of treasury activities, in terms of capital markets, in terms of the general liquidity there. We believe that there is a switch in the driver for investments, probably has got a fair portion now for investment fair portion, will be reduced debt as compared with previously, the Chinese investments that come in. So we do not -- we would not be withdrawing from the Hong Kong market. On the contrary, it will be a well-state position that we would like to reinforce our presence over there. But our presence is not limited to lending. If you look at our increase from contribution from the Hong Kong franchise, it's actually on wealth management, on deposit earnings. These are very important drivers. The Greater China region, origination of the private banking assets, is the strongest of the 5 regions that we capture under our private banking franchise. Their contribution in terms of AUM is the largest as well. So that continues to be an originator of business activities for us. With respect to China, we've always said, in China, we don't want to compete with the domestic banks because we can't. So as a result of that, if you look at our Greater China exposure chart, Greater China direct exposure is only $5 billion. The remaining $60 billion, which we classify as Greater China exposure, is actually both in Hong Kong and then followed by Singapore, which means that we are actually doing the onshore/offshore business rather than doing the domestic business. We continue to believe that China will be the largest originator of activities for this part of the world. So having a strong presence in China will create activities for us in ASEAN countries as well. So that connection needs to be not only maintained but needs to be reinforced.

Okay. Thanks, Robert. Can we move on to Harsh from JPMorgan?

Three questions. The first one is on, you said about 10%, primary and secondary second-order risk to -- of portfolio is at risk. If I look at your historical loss given default, I would say, about 40-odd percent. And if I back calculate from your comments, take out the oil and gas, it gives me about 15, 20 basis point of additional impact from COVID, which effectively tells me that you are looking at only 0.5% NPL, in this increase in NPL, which is about 5%, if you look at 10% of your total book. Is that fair? Is it 5% NPL on the stressed -- overall book, which is under stress. Is that a fair assumption to make or you think I'm missing something here?

I do not quite follow the numbers that you calculated. But we believe that the NPL ratio is going to increase as a result of this COVID event. So your 5% is, what, 5% of the entire portfolio?

5% of the 10%. As in, the 10% which you suggested as both primary and secondary book at [indiscernible], yes, so 5% of that.

Okay, I see. Yes. No. So you're basically saying that it's a 0.5% increase absolute?

Yes. Yes. Yes.

Of the normal situation? Yes. No. Our assumption is higher than that.

Okay. But that's the case, sir...

Because as I just said, we assume that it's higher than that.

If that's the case, then how do we reconcile, even if I take out the oil and gas, I should have credit costs north of 30 basis points, potentially 40 and above, if you think that the NPL numbers are more than 0.5%?

I think there are 2 issues here. One is that you have to accept that this is an event. So the underlying business of the customer continues to be acceptable. And whilst we are able to help the customer drive through this event, its underlying business we'll be able to come back, whether it is the sales that they've lost, we have already bridged it, whether it is the parts that they cannot get in time, we've already bridged it. So these customers, by and large will be able to survive this, not that these customers are in a blinding state where they will ultimately end up in a liquidation scenario. So that is the part which I think the assumption is different. The assumption is that they will need this time, some of them will not be able to survive, but most of them will be able to survive because these are the customers that has been able to demonstrate their ability to survive in a healthy state over a normalized period. And whether this event goes, some of them would not survive because they're not able to do the catch-up, most of them will be. Once they're on the catch-up, there will not be direct credit costs associated with it. Our NPL ratio is higher than your -- what you have assumed.

Okay. So -- just so that I understand better, Sam, what effectively you are saying is the loss given default is likely going to be lower in this portfolio because it has won the trade, hence it is likely that coverage ratio may go down in the interim period. Is that fair to say?

Yes. That is correct. Yes. That is correct. The loss given default as compared with normal, when compared with normal. Yes. The other point is that, in our portfolio, as we announced last quarter as well, we have the NPV adjustment with the ECL 1 and 2, which is the macroeconomic variable, which is the component of the ECL 1 and 2 that whenever there is a shift in the market economy, we will build additional provisions into that as well. And we did that for both the third quarter as well as the fourth quarter.

Got it. The second is a bit more mathematical question. Tax rate has gone down in 2019. What drove that? And how should I think about that number over next couple of years?

That's a technical question, [ Wei Hong ] is there to answer the technical question.

Yes. Harsh, it's mainly a combination of the composition of the earnings. Because again, we are a diversified group with different business suppliers in different geographies, so I think from time to time, different contributors to the earnings would have an impact on the tax. And also, I think within [indiscernible] business lines, I think when you have different products. Again, you also attract different tax rates. So I think that's basically the general reason for the effective tax rate.

But Collins, is it fair to say that this was lower than our usual run rate and should we expect the paths normalization back?

Yes. I think mathematically, it is lower than a particular company, actually, I think at least for this quarter. Again, it's for the reasons I mentioned.

Okay. I'll try to reach out to you separately. The final one, Sam, is more on M&A. You said there is nothing ongoing right now, but I think about a year ago or so, you had alluded to some possibility of growth, greater investment, increased investment in some form or shape in Greater China. And probably part of the reason why you were accreting capital. So the fact that you have increased payout, made it all cash, does it mean that there is -- there are no more plans over next couple of years in terms of widening the Greater China presence? Or is that, that approval has been delayed more than what you initially expected and hence it's a matter of time before which you would, ultimately, be able to increase your presence in Greater China?

Yes. Harsh, I cannot recall immediately what was the name that potentially could be talked about in the market. So I cannot answer the detailed part of this question. But suffice it to say that we look at M&A opportunities quite frequently because of the strength and the track record that we're able to demonstrate to the market. But as of this time, I can tell you that there is no near-term transaction-oriented discussions that is taking place.

Thank you, Harsh. We move on to Nicholas from Morgan Stanley.

A couple of questions, actually First of all, I just want to come back and maybe just to tap a little bit on loan loss charge's question in a slightly different way. If we -- what I was just curious on, I mean, obviously, 25 basis points underlying charge this year. You said 2/3 of it roughly was oil and gas related. And you I think gave the impression, and correct me if I'm wrong on this, but a lot of that is now provided for. Now if we excluded this COVID event, are you effectively telling us that your loan loss charge would go down to 10, 12 basis points, were it not for COVID? And therefore, if we go into 2021, is that the sort of level we're talking about? Or am I reading that incorrectly? And then I have another question on -- sorry, I have another question but please go ahead on that.

Okay. It is -- we will not rule out that there will be smaller amounts, much smaller amounts than all the cash provisions that we need to take because of the way that we approach the oil and gas portfolio to make sure that there is a cash flow that will come in for at least 1 year and there's visibility for renewal. And if they don't, then we may have to take. But suffice it to say that at the present time, our view is that the oil and gas portfolio allow us what that we need to take would be quite small. And if you look at our recovery, a lot of that I mentioned just earlier in my conversation, if you look at the recovery and upgrades in NPL, in the fourth quarter, we have $664 million, which is the highest recovery and upgrade that we have achieved for the quarter. And the 25% of that is oil and gas. Now not 65 go in the upgrade because I would anticipate that should the market be able to develop in such a way that we expected then the future upgrade and the future recovery, and whenever there's recovery, we will actually have P&L recovery and allowance recovery as well, which will help us. So arithmetically, if you take that 2/3 away from the 25 basis points, this will give you maybe 12 basis point or so. I think this is slightly on the low side, if you ask me, it's slightly on the low side because you have to assume that there will be some portfolio-associated provision that we may have to take. But again, this number is a fluid number. And the other benefit that we've been able to achieve for this number is that we have not taken into account the government assistance program role that can play in the portfolio management side. That will take the relief, as I said, away from the banks. And this will actually protect the bank in a way that the provision requires for this event could be less than we otherwise would have to provide.

Okay. And if I'm thinking about what you're talking about providing for COVID-19, that is -- is it almost entirely in the SME space? Or are we including some personal in that as well?

We have included some personal, but the way that we look at the consumer portfolio is that people who work in this sector, we will classify them as potentially vulnerable. And then the 6% did not include those. But in the assessment, in terms of credit costs, we have included that.

Okay. But roughly what percentage would be retail? What percentage would be SME? I presume there's no large corporate that you're expecting in that?

Correct. Large corporate would be much less because the sponsors are typically quite strong. So most of the hospitality side has actually dominated for quite strong sponsors. So the 6% contains a fairly big portion that we launched in the corporate side. The middle market portfolio only represents -- which is a high-risk portfolio, only represents about maybe 10%, 15% of the entire portfolio that we classify as the segment that has got a first order of impact.

Yes. Okay. Cool. But I presume the -- I mean, let's say, you're talking about a loan loss charge of 15 to 30, so 15 basis points all related to COVID-19, is that sort of 10 SME and 5 retail? Or -- is that a fair sort of split? Or have you not done the math to that sort of degree?

I have the portfolio number, which included everyone. I would think that the SME side will be higher that we just described it.

But we make -- the number we're looking at is not 15 basis points.

Okay. You said the relief program will make it smaller than that. Yes, okay. And second question, just on trading, your trading profit is obviously very strong in Q4, especially compared to prior quarters. And you spoke about increased client flows. But I just wondered if you could talk about what exactly was driving that and the sustainability of that line?

Okay. If you look at the trading income, for the full year trading income, we make $977 million trading income. Within which, about 65% is customer flow. 65% is customer flow. And the customer flow has been consistently increasing year-on-year as well as quarter-on-quarter. The remaining 1/3 of what we classified as noncustomer flow, and the noncustomer flow comes from 3 sources. One is from our portfolio trading, which is undertaken by treasury unit because of the gapping that they do. Another one is the foreign exchange exposure that we have against the P&L in our structure. For example, you have got capital in an overseas countries, which -- for example, in China, we have U.S. dollar capital, we have renminbi capital. Should there be any changes in that, it will impact, and that part is carried to the P&L rather than through the translation loss. And the third component, which for the fourth quarter is the largest component, is the mark-to-market for our shareholders' fund under Great Eastern. So the storyline here is that out of the close to $1 billion trading income, the customer flow is about 60% to 65% on a year-on-year -- on a year basis as well as on a quarter basis. And that represents the majority and that customer flow comes from our commercial consumer customers from -- as well as from our Bank of Singapore customers. So these are all the trading activities that they do through our product banking arm, and those are captured as trading income.

Okay. So given the -- what happened to assets under management and new funds flow in Q4, some of that's going to be sustainable then, to about a higher level it's going to be sustainable?

Yes. The majority -- within the 65%, a higher proportion is subscribed to the commercial, corporate and consumer treasury activities. So on the consumer side, we've got structured products. We just got the treasury component to it. And on the commercial and corporate side, we have swaps, cross-currency swaps, our assets, which is quite a sustainable business.

All right. We got Jayden from Macquarie. Over to you, Jayden.

Just 2 questions. First of all, just to follow-up on the Bank of Singapore and the wealth flows. Obviously, the achievement is very good, particularly given that in fourth quarter, you usually see a seasonal dip. What sort of wealth flow should we be expecting for 2020? And does the current situation with the virus change that very much or is it going to be in other parts of your operations as you've already alluded to?

I'll have Wei Hong, our country president for wealth management and consumer banking to respond to this question.

Yes. I think for both Bank of Singapore as well as the wealth management business, within OCBC Bank, I think we are very confident that the momentum is -- will be maintained, I mean, primarily because of the high offshore element, it's not a domestic-based business anymore. And the markets are still fairly active. I mean we haven't seen a falloff in the equity as well as the bond market. So the business continues. Where we see a little bit of impact is, of course, of new to bank acquisition that slowed down a little bit, right, because of the new restriction in travel, hence we can't customers who can fly in or aren't being able to fly out, but what we have really on-boarded and got into the book, I think that activity has been fairly resilient. So we don't see this falling off in any way.

Okay. And I just have one more question. And it's just a follow-up. There was a lot of discussion, obviously, on the credit side already on the call. But just a suggestion, it might be helpful to show us how the sort of loan restructuring is evolving through the course of this year. And to give us sort of some color on if these businesses are viable, how are they sort of moving through the situation? And any sort of additional NPLs or charges you're taking on that portfolio. The only question I had was how much room to move is there on the general provision side? I take most of the discussion has been around specific provisions, but as you pointed out earlier, you've already taken some general provision adjustments earlier in 2019. So do you think there's much scope to offset them with that?

Yes. In the second half of last year, we've taken a total of $64 million in NPV, macroeconomic variables, to pick up or the weakening economy in the region, and that primarily is driven by Hong Kong and Singapore. And that is embedded in our ECL 2. And this is an ongoing exercise because the big adjustments, at least 2 times a year, but in the situation where the market changes quite frequently, we will evaluate it every quarter. And under the methodology of IFRS 9, there is a requirement.

Thanks. Well, I think we have time for one last question. Can I turn the line over to [ David Wong ] from [indiscernible] Capital. David?

I just had one really on the capital. So basically, a few things. First of all, what do you think will be your organic CET1 generation in basis points of capital this year? Secondly, could you give us an update on the Wing Hang Bank mobile transition, the time line and any update on the expected magnitude of the benefit you could expect to receive? And the reason I ask this is, obviously, because you are at 14.9% CET1, and you will probably end the year with a pretty high ratio. So how are you thinking of that excess capital? Really what's in your toolbox to make use of that -- we've already covered the M&A piece, but I'm interested if you were thinking of the distribution side as well?

Okay. David, thanks for the question. For the first part, I'll ask Darren to respond to the question about the earnings-oriented CET1 ratio increase.

Yes. David, in terms of organic capital, this year, the expectation will be lesser than what we had last year. In fact, if you recall, beginning of last year, we did mention that there's a good chance that our CET1 could move closer to 15%. Now the reason why the increment this year will not be as high as last year, it's a function of what Sam actually elaborated on quite that, right? Firstly, in terms of accretion to earnings, there could be some impact rising from -- potentially from arising from the slowdown at [indiscernible] and also from -- and on -- by what is happening on the outbreak. And second part of that is also the denominator. Essentially, an increase in terms of a potential slowdown arising from the original slowdown in terms of the economy as long as -- as well coming from the outbreak could result in an increase in terms of the RWA. So I mean, there's too many moving parts at this point in time. I'm somewhat reluctant to point to a particular number. But I think suffice to say is that you will probably not see the same increment that we saw in 2019. In this case, 0.9%.

David, this is assuming none of the capital efficiency measures were taken into place. For example, we have Wing Hang Bank as this is public knowledge, I analyzed it to the analyst community and the business community as well that Wing Hang Bank is going to be still on a standardized portfolio. So we are working on converting it over to ROE portfolio. We have already started parallel run, and we will complete the parallel run by the end of this year. It depends on whether the regulators are receptive to the parallel run results. Potentially, there could be some savings there in terms of RWA rating and therefore reduce our CET1 ratio as well. But Darren's comment is correct in the normalized situation. David, your second part of the question is on Wing Hang Bank. Is the integration complete? Yes, in a way the integration is complete already because we have now principally now banked into the franchise of the OCBC Group. And we do not look at it as a legal entity. We look at it as a franchise component to see what additional value can we create, not only for itself but for the whole group. In August of last year, we have made a presentation on Greater Bay Area and Greater China, and this included all our businesses in that area, including Wing Hang, including OCBC and Hong Kong branch, which deals with the large corporates, including Bank of Singapore business and including actual premium that we also viewed in Hong Kong. So you will notice that Wing Hang Bank has contributed quite significantly above that. And if I recall the number correctly, something like 65% of the earnings that is contributed as a result of this franchise is not captured in the legal entity of Wing Hang Bank. So your question is integration. Integration from a franchise perspective, it is integrated already. In terms of other things that we would like to do, for example, can be -- in fact, transfers directly from Wing Hang Bank system over to the Singapore system, we can't do that yet. But those are the separate things. But in terms of franchise integration, it's already done.

Gentlemen, sorry. Yes. But my question was on more the transition to IRB, which you've already discussed. I just wondered if you had a more specific idea now on the sort of the quantum of capital benefit you could receive from that?

Capital benefit, meaning the return on capital?

No. The CET1. No. The potential CET1 ratio benefit? Yes. Yes.

Oh, I see. I see. He was referring to in the event that we are moved by ROE, how much saving savings are we able to get from a capital perspective.

Yes. Once it's approved by [indiscernible], obviously, there will be some improvement in terms of moving to IRB. Any point in time, we do anticipate debt that would translate into some improvement in our CET1. Yes. And we'll keep it at that at this point in time.

Okay. And so the last question is a follow-up. It's basically -- you're starting at almost 15% CET1. And even if you accrete capital more slowly this -- I mean you'd be sort of approaching 16% in the near to medium term. So I guess do you think there is excess capital? And how -- what's your thinking towards that in terms of potentially distributing more of that out?

Yes. We would look ahead and having a strong capital will give us the ability to essentially continue to pay dividend as our long-term prospects are improved. So we wouldn't really look at this formalized debt capital. I mean in a way you look at how we've been guiding both in terms of looking at opportunities and as well as looking at potential sort of impact coming from any kind of unexpected economic development.

I think if you look at the excess capital that it gives us the more flexibility in terms of a down market. It also gives us more opportunity to grow in case of upmarket. And it also is consistent with dividend calculation that we have made, that we will be making sustainable and progressive dividend payment. To make sure that we take the shareholders' interest into account, so we don't want to keep it as "excess capital" we want to keep it as strong capital, and if a strong capital can be quickly used in the upmarket or in the down market, it will be good for the investors. But on the other hand, we also complemented by saying that our dividend policy is going to be progressive, and it's going to be in a way that was already reflected in what we had decided to do for the [indiscernible] reason, making full year dividend increase of 23%. We also decided not to do with dividend recapture scheme.

Okay. Thank you very much. I think we're just over our time. But again, thanks for attending our earnings call.

Yes. Thank you very much. We look forward to seeing you in person at our future briefings. And hope this event is going to go away pretty soon. In the meantime, be strong, be safe and be healthy. Thank you very much.