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Morningstar | UOB Builds on its Digital Strategy

UOB’s corporate day three years ago highlighted a common infrastructure across its regional subsidiaries and the potential digital applications to be developed for both retail and wholesale banking. Three years on, the bank’s most recent corporate day highlighted the progress of those developments, including the trends in customer interaction in retail banking, a digital banking application for the Thailand market, and solutions for corporates and institutions.

At a group level, management is targeting cost/income ratio of 42%, driven by cost efficiencies in Singapore and rising income for the group. The latter will be supported by rising volume and growth in Southeast Asia. Contribution from the bank’s Singapore operation declined to 56% last year from 64% in 2008, but mainly coming from rising income from Greater China. Contribution from Southeast Asia ranged between 25% and 27% over the same period but management is seeking to increase this to 50%.

Our thesis for the narrow-moat-rated bank is unchanged and we continue to see the bank benefiting from regional growth in the medium term. Our fair value of SGD 30 is reaffirmed along with our 3-star rating.

For the developed markets in Singapore, the branch network remains relevant despite rising transaction volumes on its digital platform. The bank will employ an omnichannel strategy, combining both branches and digital. Data points showed the expected trend in declining transactions at the branch, which makes up 6% of total transactions compared with 9% in 2016. While the number of customers using only the traditional branches have declined to 50% from 55% in 2016, customers relying on both the traditional branch network and digital solutions make up 37% and is increasing. The balance of digital-only customers is 13%. Further, the customer base relying only on the traditional branches still contributes to 43% of total revenue.

The bank also looked at the usage of online and offline solutions. Around 60% to 70% of customers are using online to find and compare financial products across wealth management, deposits, and loans. But only 44% of customers are purchasing the above financial products online, as advisory remains part of the purchasing process. One example is the various stamp duties applicable on residential real estate, with individuals seeking a mortgage and advice on the impact from the stamp duties on their specific purchases.

The branch network is optimised at 445 branches, compared with 486 branches in 2014. Close to 94% of branches are in high and medium concentration areas in various formats. Management noted the optimisation of processes at the branch level resulted in an adjustment to the composition of branch staff. One branch has seen sales headcount increasing to eight from five previously. While the number of branches appears to be optimised at the moment, we believe further migration of transactions onto the online channel could see the number of branches decline in the long term.

The bank also launch of UOB’s digital bank, TMRW, in Thailand two months ago, providing a separate offering to UOB’s existing operation, which includes an established physical network of 154 branches and 393 ATMs. TMRW is in an experimental stage offering deposits, fund transfers and bill payments on the platform. Customer verification occurs at 500 kiosks placed around Bangkok and relies on government data. Similar to most Asian countries, Thailand has a national identity card system for its citizens. The demographic targeted is the affluent, younger generation with average monthly income of THB 55,000, materially above average of THB 13,000 in Thailand. Average age for UOB’s main brand is 43 years old while the average for current customers of TMRW is 33.

As previously noted, the cost of acquiring customers is more significant than building the digital bank platform, which was completed in 14 months at SGD 100 million in investment. Another challenge is to get customers using and transacting on the platform. To encourage transactions, incentives are offered to users to increase usage and the strategy is scale by having these users advocating the digital bank. In our view, the interface is unique relative to traditional mobile banking and an integrated mobile game tied to savings and amount of deposits in the account may be an added attraction for the younger generation. The latter is similar to a simulation, role playing mobile game. Besides a fresh interface, most virtual banks are attracting customers with high interest savings on deposits. Positively, the platform is scalable and minor tweaks will be applied to the five markets the bank is trying to launch in. The aim is to attract 3 to 5 million new customers with cost/income ratio at 35%, marginally lower than UOB Thailand’s cost/income ratio of 58%.

The disruption of digital on wholesale banking is less visible relative to retail banking. However, the bank has built on current digital solutions in e-payments, cash and inventory management. This includes real-time connections, around the clock transactions, and instant settlements. The bank’s platforms are also integrated into the system of its corporate clients. The bank acknowledges the competitive environment with corporates serviced by multiple banks. The bank seeks to differentiate with sector expertise and regional reach. As an example, the bank offered financing facilities to a corporate with operations across six countries in Southeast Asia. The corporate previously banked with local banks as larger, multinational banks lacked expertise in the rubber industry the corporate operated in.