Good morning, everyone.
Thank you for joining us on our first half of the last briefing. I'd like to pass it over to Piyush, our CEO and Savi, our CFO.
Actually, I've only passed it on to the Q and A because there's not that much I want to share on above what we said in the media section there. Thank you. We can go to Q and A, please.
First, we have Peter from Macquarie. Your question please.
Thank you very much. Thanks, DBS King, and Carne Azaria. I guess I'm just trying to square the credit quality outlook. Just a couple of questions, if I can, Piyush. In the full year, you're saying that provisions won't be any more than C500,000,000.
So that suggests up to R400 1,000,000 in the second half has been very benign. And your comments earlier set down very upbeat on the absolute credit quality. So is it possible that this guidance is just too high and that we actually need a car lower credit charge for the next 2 quarters of the first half. And second of all, I know the last quarter, a lot of the relief had to do at the time sort of model adjustments, which took effect of variables. Can I confirm if that was a big factor this quarter or if there was any sort of discretion that came into the general release?
And how much of the writeback had to do with the repayments versus upgrade to the credit outlook? I'm just sort of curious to some of the mechanics on what we should expect for the rest of the year. Thank you very much.
All right. I'll take the first question, and then Sophie, you can take the next 2. The 400,000,000 I used the word, the CapEx, that I'm hedging my position saying GBP 400,000,000. I think it could be a lot less because based on actually everything you're seeing, I'm not seeing a pickup and I'm not seeing so it'll come through. It's just that the final impact of the delta on consumer portfolios in Indonesia, Taiwan, etcetera, is still a little uncertain.
So you could see some pickup from that. 2nd is as the loans are coming off moratorium, so far I'm not seeing a pickup that it could be that it's very early that as you go down next 2, 3 months, you might see a pickup in NPLs and therefore provisions related to the loans coming off moratorium. But if I had to make a bet right now based on what we have, I think there might be some upside to that number. So, Sathiya, you want to talk to the other 2, the model in this thing as well as the regime.
Yes. So I understand your question to be around the general provision. We said that there was a net repayment, a net writeback of RMB275,000,000 and the large part of that came from repayments and credit upgrades. So the way the model works, you should expect some reduction when cases move into NPL because that's how we're supposed to operate. You release general provisions to go into specific provision.
Within the category, you will get improvement also when in the methodology, you move from state weak to red or to amber. It means there's an improvement in the credit quality of the borrower. And that corresponds to typically counterparty risk rating upgrade as well. Or you put a right back from maturity or simply repayment by the borrowers when they refinance. So for a number of reasons, these were the ones that contributed to the RMB275 1,000,000 of which the both the institutional banking and retail banking both contributed the larger component from the non retail base.
The downgrades were largely sort of offset by the downgrades were largely offset and we had repayments totaling without the ECL of about RMB75 1,000,000 reduction, upgrades about RMB37 1,000,000 reduction and some due to just reduction in maturity and within the Stage 2 improvements in the rating from weak to red or red to amber. So these were the main drivers for the sort of RMB275 1,000,000 write back.
Let me actually give you a different perspective on that. Our total general provisions are about RMB4 1,000,000,000 in change. Out of that, about GBP 1,500,000,000 are what we call modeled overlays. The modeled overlays reflect downside scenario that we take, and we build provision in case something could happen. So about GBP 2,500,000,000 of that reflects what GP we keep because it gets built up to our model.
The modern GP, of course, is a function of ECL and the probability of default, loss given default and the risk rating of our portfolio. So when the portfolio risk rating improves either because the customer has upgrades or the customer's actual outstandings fall because it pay us back and so on, other than that obviously results in an improvement on that modest component, right? And so that's a part of what affects in the
G2. Yes. Many years ago, I actually was exploring corporate credit quality. So a lot of it has to do with the outlook. If I take the comments carefully, it sounds that the actual write backs were $75,000,000 and the improvement in the outlook for these customers is $200,000,000 Am I reading that correctly?
It's not with outlook. It might be also the outstanding. So if a customer has got $1,000,000 loan, and he sort of plays it down, I don't count it in the payment because not fully paid. It's just that the outstanding for that customer in his current category reduces.
Or it could be that the maturity of the same loans are actually shortened. So our methodology takes into account the maturity profile again in H2.
Yes. So just to be really clear, do you have the breakdown between the 3? Like how much of it was repayment? How much was it because of the maturity shopping and how much was it because the repayment was the customer's prospects has gotten better? That's what I really want to understand.
Okay.
Of the RMB275 1,000,000 of RMB18 1,000,000 will be RMB18 1,000,000 we give to retail and retail has come off because a lot of the general provisions that were set aside last year was much higher given the outlook and given the unsecured loans, they have either actually sort of provisioned in moving to specific provisions or the loan base has declined because we are actually not doing some not going from this portfolio. So the retail ECL has declined by about RMB18 1,000,000. So the balance is really from the institutional side. From the institutional side, I mentioned repayment would contribute about RMB75 1,000,000, upgrade about RMB37 1,000,000. And then the others are all due to maturity and other sort of improvements from the modeling point of view.
Thank you so much, Sakwa and I appreciate it very much. I'll pass it back to you later
now. Thank you. Next, we have Melissa from Goldman Sachs. Your question, please.
Hi. Thank you very much for taking my question. Maybe just a little bit back in terms of the provision. Did I hear right that you have still RMB1 1,000,000,000 as the overlay management overlay over provision? And does it mean that you're still taking it and perhaps you might consider maybe releasing it next year if these are really better?
Then can you just moving on to the margin, can you just give a little bit more of a split in terms of the 4th year compression, what it actually made up of? And perhaps in the second half you mentioned that there will be pressure. Can you give us an indication of how margin will trend in the second half of this year? Thank you.
So the overhead is actually about Piyush mentioned about RMB1.5 billion, right. So that is the amount that we set aside partly last year and partly build up in previous periods to cater for kind of stress event. So we are likely to write down the entire amount of overlay because in our modeling there always be something that would cause us concern and part of COVID. We have also overlays to cater for example the geopolitical tensions etcetera. So a good gauge is the I said the RMB800 1,000,000 above MES minimum requirement.
So that's one sort of jackpot we can use on potentially if things really improve, how much we can actually expect to release. Lisa, does that answer your question?
Yes. So then can I just check that in terms of when what is really a normalized credit cost Let's say, we get a total of what can we expect from life credit cost? So then I can kind of like look like 800 offset that what possibly can be better?
So we expect that this will be released in tandem with I guess the outlook for the economy in particular also whether travel restrictions are listed. So we are going to take a conservative grant and it's not like we're going to release an entire month. So it will be gradual and will be in line with what we are seeing on the horizon.
All right.
Thank you. And what we've
said in the past is that about 22, 25 basis points should be an ombe cost of credit in the past. I think on on the cost of credit, if you get all of this noise from messing up a provision or release a provision, it is likely to be sub-twenty basis points. I think that reflects the quality of our portfolio and our credit processes as we are today. The cost of credit activities in the Q2 was 14 basis points as you can see. As Sophie pointed out, we do think that we've been very conservative in building up our buffers.
And so things really get much better. We do have the capacity to repeat some of those. Some I think will automatically reverse because of what the earlier question from Akari was. The models will push us to improve as the customer's credit quality improves, the exposure comes up. Some of it will unwind because of that.
This balance, dollars 1,500,000 which we've kept as an overlay, Sophie pointed out, we're not going to release all of that. We always like to keep some in our head pocket because we don't know what might come along with our growth in excess of models. But we have the opportunity to do that as well. So the way I would work your model is to look at standard cost of credit in that 18, 20 basis point range and then adjust it up and down depending on what's happening through provisions and
reserves. Right.
Thank you very much. And on the NIM please?
Yes. On the NIM, I think you're referring to 2nd quarter versus 1st quarter where we saw a 4 basis points decline. And that's really a function of the surplus deposits that we have, which are then deployed to mainly Central Bank, such as Central Bank. So I think you heard the response earlier. So these are 0% weighted.
They do not pick up capital. It can be accretive to our income as well as bottom line, but it does mean that we have some volatility due to the interbank interest rates. So this quarter is down a bit. So you see some drag from the surplus funds that are placed with Central Bank.
Marissa, I think that's the bulk of the other 2 other reasons. 1, LIBOR and HIBOR came off this quarter compared to the Q1 by 2, 3 basis points. So there has a little bit of an impact. And then obviously, the flow through into the rest of our fixed business in portfolio, there's still some large residual impact of that. But our outlook for rates in the beginning, we guided for rates NIM of between 145 and 150 for the year.
I think our NIM for the year will be at the low end of that, 145, which means that you will still see a little bit of a drag of a couple of 2, 3 basis points through the back end of the year.
Right. Thank you very much.
Thank you. Next on the line, we have Terence Cha from Credit Securities. Your question please.
Hello management. Thanks for taking my question. I have one question. What is the percentage of
loans coming off loans moratorium? And my
second question is which business are they coming from?
Coming off loans moratorium or the loans in moratorium?
Loans in moratorium and loans coming off moratorium.
Well, this is difficult. Let me add that here. We had 5,000,000,000 in the mortgage moratorium in Singapore. We had another 5,000,000,000 in the SME moratorium in Singapore. That's 10,000,000,000.
And at its peak, we had about 7,000,000,000 or 8,000,000,000 in moratorium in Hong Kong, so 17,000,000,000 or 18,000,000,000 out of our total loan book of about 400,000,000,000. So that was about 4% of our loans were at its peak in moratorium, if you will. Right now, we're left with $500,000,000 in mortgages, dollars 400,000,000 in SME and about $1,200,000,000 in Hong Kong. So about $2,200,000,000 on $400,000,000 So we're left with about 0.6 percent or 0.7 percent of our loans in currency in monetary. On top of that, we have the E and C loans, which are 90% government protected, but that's another 5,000,000,000 lot of E and C loans.
The risk from that is about 5 100,000,000 for us. So we want to throw that into the pot. And I would say everything put together is about under 1%, 0.8% or so maybe.
Right. So we just want to make sure I get
it right. So 0.8% of
loans are currently under Moripur Limited, correct?
No. It's only 0.6% under moratorium. The point is as the ESG is it loans. So I think about 0.6% under moratorium.
Margin. Next from the line, we have Hash Moorthy from JPMorgan. Your question, please.
Hi. Thanks for the call. Three questions. First is, if you start thinking about 2022, do you think is it fair to say that provisions should be in line with 21 or lower given the extent of GPs and whatever is a central base case right now for asset quality?
So Harsh, I'd say it's tough for me to tell. When I'm doing my budgeting for next year, I'm not planning to budget at this year's low levels. I'm planning to budget at the 2 cycle level that we've had. And the reason for that is that at a margin, the net impact of the government's fiscal and monetary stimulus responses finishing in many of the countries is still relatively unknown. So I can't tell you what happens because right now in every country, the government is still providing some form of support in 1, 2, shape or form.
And that's one uncertainty. Another uncertainty is the taper. So if you figure that liquidity starts waving out and because of taper, you start seeing some pickup in days, that's another uncertainty. So I won't rush to say it will be as good as this. Yes, it could be.
You could be right, but it's just that there is some unknown yet about fixed here.
Got it. Okay. That's fair. Second one on capital. Again, it's kind of similar question to you, 13%.
There are multiple parts to it, returning more capital, reinvesting the capital as you have been doing. Most likely, it's some combination thereof. But how should we think about time line towards that 15% and the path towards 13%.
It might happen tomorrow if we wind up doing all the Citi deals.
Right.
That's a cute thing of saying. This part of Gansa is a function of do we do any M and A or not. And if we wind up not doing any M and A, the CDPs are don't come through or we don't want to do them, which is equally likely, Then we go back and take a more aggressive view of what we want to do with capital and capital management.
So going on that logic by, let's say, next 6 to max 12 months, we should see some confusion on the 3 markets you talked about, Indo, India, Taiwan. So then is it fair to say that we're saying we're thinking about 1,000,000,000 are at maximum from dividend next year? We should have a much better clarity on payout on the dividend per share and flat numbers.
Bahash, our view you and the dividend per share payout, obviously that we will continue to increase it steadily over time, and the policy still remains. So if we are making more money, we will obviously pay out more. And anything, it is the immediate possibility. But of course, over the next couple of quarters, I still want to keep my eyes and model open if the other of these bolt on deals that come on become available because of the macro environment. And those could be banking or non banking fees.
But yes, I think over the next 12 months or so, it's reasonable to say that we should have a good sense of if anything else comes along our way in the back of this crisis. I remember the 2 deals we've done basically were an outcome of the crisis or some of the people got an opportunity. And so I'm keeping some powder dry is something else might come along. And if it doesn't and things become normal, then you go back and take a fresh look.
Right. And just on that, what kind of internal hurdle rate you're solving for any of the deals? Like is there a broad guidance on IRR or payback, anything on those fronts?
I said before, I want to make sure that the deals become accretive in about 3 years or less, which means we've got the return cost of capital and of course of that.
Okay. And final one, Lakshmi will ask how is the progress there? And any milestones that you would want to suggest that could be reached or that we're aiming for, let's say, by end of the year for that deal?
So, Ashuraj, there's good news and bad news. The good news is that things are proceeding on plan in terms of integration and in terms of credit quality. So, we've actually been getting repayments on some of the stuff we provided earlier. Integration is smooth, deposits are up, cost of funding is down 60 basis points, gold loans are up for the year. So all of that is proceeding well.
The bad news is that because of the India pandemic and COVID situation, we are about 2, 3 months behind in terms of actually being able to sweat the franchise. And that is deliberate. I don't see Hemakkuram as the franchise is a large consumer SME, etcetera. And I'm reluctant to push the pedal on that just yet, still I'm more confident here about what the overall macroeconomic situation in India is. So that part is a little bit slow.
In terms of therefore, the things are washed up for by year end, I think year end might be a little early because of that. We're still we need to dial up a bit, but we're being very careful about dialing up. So I think the chances are it probably has better line of sight to what pickup you should expect next year for Raul brand in the next quarter or 2.
Okay. So just final question on that, Piyush. Let's say by, let's say, end of next year, do you get to a point where you become comfortable enough to inject more capital where now it is genuine growth capital rather than precautionary capital? By where do you think steady state there?
No, no. So I won't be saying that. If you look at our current view, I mean, we think that over the next 5 years, we will actually put a lot more capital into India because the expanded franchise we have gives us very significant growth opportunity. And so we have a very ambitious growth agenda for India on the back of this acquisition, which will take capital for at least the next 2, 3, 4 years before it starts leveling off.
Right. No, exactly, exactly. So that's what I'm trying to guess that in terms of time line, when do you get enough confidence to go back to the board and say, all right, this is about we have enough of attractive for Mao to commit business of capital. And that's the state I'm trying to figure out when do you reach that.
We've already done the work. So our plans are safe. Actually, haven't taken it to the Board yet. We will do that in the next couple of months to get both, I think. But I'll probably run it through this thing.
I mean, it is an ambitious plan, and the Board is pretty supportive of it. I mean, the Board basically took line of sight to that when they approved during the deal.
Okay. Thank you so much.
Thank you. Next is Vikram Tae from Credit Suisse. Your question, please.
Thanks for taking my questions. Just have a couple of questions. Firstly, I wanted to ask on Hong Kong, China specifically, I guess with the rising cases in China and the shutdowns there and also the delays in order reopening in Hong Kong. Have you started to see any impact on the accounts there? The second question I had is on the deposit side.
Deposit growth has been very strong. And any sense or any thoughts on how to think about whether these deposits can be 50 tiers and what you initially anticipated and hence starting to think about deploying some of those deposits into higher yielding assets rather than with MAS?
Those are my questions.
On the first one, the short answer is no. I mean the increased sector in China and the border is not creating any instrumental downside or headwinds there. You got to remember that in Hong Kong, we've been through, especially enough of Sears, well before the pandemic. It was because of the China U. S.
Tensions and the technology supply chain. So we should have been with us this year, and we've been managing very nicely to that. So I think we've actually corralled ourselves quite well. I don't see anticipate any further downside. In China, this incremental increase in cases
back
to Malaga comment in the media discussion as well. So if you look at the translation of that into the macroeconomic indicators, this is very secular. And if you'll like us, don't have a consumer book in China and don't have an SME book in China, it's unlikely to make any material impact to our portfolio and our kind of business that we do. On the deposit, I think the answer is some. So I do expect that some of this massive deposit increase will run off, partly when the paper happens, partly when interest rates start.
Now with this, there's too much money sloshing around. Now how long that takes does anybody get? It's not clear to me that the Central Bank will be able to eliminate this liquidity anytime soon. If you think about the GST, right, the Fed incurs the balance sheet towards $4,500,000,000 They wanted to bring it down to subsea, dollars 4,500,000,000 I remember. They got to 3.7, 3.8, and then turned 30, so went back up.
Now this time, they pulled out $12,000,000,000 So how long it takes to squeeze the liquidity out of the system is any good guess, but I don't see this is very soon. And nevertheless, at some stage, if you assume that liquidity adds up and liquidity starts going, then how the second part, how much of that is sticky with us? I do think that there's a fair element of that because a lot of the liquidity that we've got is upside. It's not FD, it's SASA and it's operating down liquidity. SASA ratio is 76%.
All of that is set to the operating balances that we're getting. And a lot of that is to do with the digitization and the API connectivity and the API connectivity and the engine and
supply chain integration and
all the work we've done. So if I
had to hazard
a debt, I
would say 30%, 14% of the surplus liquidity will stick. But again, this is like more than anything else. How do you use that money? Of course, you can put the money to work, but on the other hand, you also want to have a view on the risk. Who do you want to give the money to?
And this part of the earlier question from Harsh, I do think eventually we can put the money to work with growing the SME and the consumer franchise, but you've got to be thoughtful about the time and when you want to start doing that. So for the time being, you really can continue to grow our business in the large corporate space. We are very careful about the risk we want to take in the more risky segments of the market. We will get there and we probably stabilize some more.
Okay. Got it. Can I just slip one last one in and
ask what your stake in the carbon exchange is?
In the carbon exchange is I'm trying to remember, we were originally 25%. I think we might be a tad bit below that now.
Okay. Sure.
Thank you.
Thank you. Next on the line, we have Akash from UBS.
Hi, good morning. Thank you so much for taking
the question. Can you hear me all right?
Yes. Hello.
Yes, great. My first question is on the revenue opportunity,
like $200,000,000 on the I'm just wondering like what is the expense growth associated with this group of businesses? What would be the cost
income ratio for the group
of businesses? If you have an idea on that.
Yes. So I'm wondering actually expense associated with everything other than Lakshmi Vila's bank and non material. On the Lakshmi Vila's bank, expensive material. So right now, the cost income ratio of the bank is close to 100%. That's not 100%, actually.
It's lower. It's including the provisions and credit is what we're expecting.
Close to Ricky then, yes.
Okay. So it's LED, which
is mainly that you would need to take income and expenses, not the expenses?
Because of existing expense, actually the expenses are going to be reducing because LVT expenses come to a large extent from a franchise. We're already looking at rationalizing the franchise. We need a lot of it, but not all of it. Also headcount, when we got LVT, we started with 4,000 people. We're already down to 3,000, 300 people.
We're already down 5,600 people as part of our integration and rationalization. So we will see improvement in the cost income ratio for MBB as well. But right now, the cost income ratio is still high.
Okay, got it. Can you just also talk about the impact this has on your long term ROE target? You've just said in regards that you know 30% to 30.5% is where should be when rates recover the rupee vendor level.
So just new
growth initiatives have been impacting that part? Or is it still broadly similar?
No. I've given this indication some years ago that as we continue to clarify alternative avenues of growth, structurally, the LOE of the company will keep improving. But it takes time for that structural improvement to figure through the system. We have to look back over the last 5 years, without doubt, the fact that wealth management today is a $3,500,000,000 income business for us. So cash management makes us $2,000,000,000 All of that improves the structural ROE.
And that's why ROE has gone up from 8.5% to 13 odd percent. A lot of that is a structural shift in the nature. So all of these activities is likely to hedge that. And but in a given year, we are lucky to see 0.1%, 0.2% from these activities. It's collectively over a period of time we can look back and say, okay, about 0.5% or something up from these activities that we've done.
Okay. And just on a related note, we've talked about this 40% CIR in a steady state, again, something that's discussed in 2017. What's the progress towards that? And how you can give us that number now?
Well, we continue to work at this. Some of that, of course, is a function of income. And the 40% is the biggest, just think about that, is interest rate. So the interest rate impact to the income line between last year and this year is almost $3,000,000,000 $2,800,000,000 And it becomes much harder to get a 40% ratio when your income rate has got suddenly impacted by that. But as you know, from Aynska, we've clawed back most of the fee from other things we've done, but the data income is still down from that level.
So we need to see some benefit from the interest rate to improve the cost income ratio as well.
Yes. So the best sort of indicator to look at, it's what we disclosed in our annual report where the cost to income ratio for the digital sort of segment that we track in consumer banking and SME in Singapore and Hong Kong. Excluding the benefit from rates, you actually see the comp to income ratio is actually improving year on year or at least stable in the period where rates are rising.
Okay, understood. Thank you.
And the last one I had is on the crypto business. What's the progress in that? And this crypto license that is granted to the MES, how efficient is that for your business? Is that a positive in general for ecosystems you think?
Let me answer your second question. In fact, I don't know the answer. I've just asked my people this morning to try and understand why the crypto license is any different from the crypto license we have or if it is different at all. Because the Feet reported that this is the 1st crypto license, and I know that the C4 exchange is before us, and we certainly have a license to do everything. So I'm not entirely clear what the difference is.
I'm going to find out. So I don't know the answer short. On the first one, I'm actually quite happy. So we've now got to a tad under 400 customers, investors on the exchange. We did about 170,000,000,000,000, 1,80,000,000 of trading volume in the quarter.
We have about 130,000,000, 140,000,000 assets under custody in that business. And as you know, we'll be selective. We're not doing mass market because just the total noise around this is a challenge. My target is to get to about 1,000 customers by this year end. Now these customers obviously are active and trade well.
So one of the things that we need to do and we need to do by the next month or 2 is take it a 20 fourseven exchange. We started off in an exchange which operated in the Asian time zone. A large part of this activity actually happens outside of the Asian time zone. So once we do that, I expect the volume of activity to pick up a lot more. But I'm quite pleased.
It's going to
pleasant. Next, we have Robert from Citi Research. Your question, please.
Hi, everyone. Thanks for the opportunity. I've got a bit of thesis question, so I'll start with my main question. Just thinking about the math around capital, so let's
just start with
the 13% CET1 ratio. You've got a return on risk weighted assets, I think, or something like 1.9%, I think, and maybe a sustainable RWA
growth might be
a high single digit or even high single digit. So with those sort of parameters, what would be the optimal or neutral payout ratio if you are starting at a 13% to 20% in Q1 rather than the currency Q1?
I'm just trying to get a sense
of the math.
I can at least talk to Alstair's question, Robert. I haven't done that math. But part of Alstair goes back to what I told Harsh. It really depends on our outlook to M and A. And so if you need to keep any capital buffer, because we think opportunistically we can do those bolt on and bulk up either in line of business, web management, SME, maybe some business activity, We might want to keep some cushion for that in addition to the organic 6% growth rates that you're talking about.
So we have to cater a little bit for that as well as you do your math. But if you look at where we've been in the past, we've been able to get our payout ratio into the high 50s. In fact, it's probably close to 60% as well. I hate working with the payout ratio because when I get committed to a number and I find the flexibility from quarter to quarter, mom, that's easy. So my guidance is to keep looking at the income we generate and make sure that we are very consistent in the dividend payout relative to the income that we generate over time.
Okay. So we are you able to offer the growth?
I think the payout ratio currently is about 12% to 50% anyway. So the other sort of pipeline to watch is 1onetwentythirty three when the new Basel IV or I call Basel IV, it's Basel III reform and finally kicks in on capital flow, right. So I think with a slew of changes, it's going to be beneficial for us. So we are less likely to be impacted compared to, I guess, a lot of European banks that have models that are overly sort of calibrated and probably will hit some constraints or they have very high car ratios will be brought down. So that will be another timeline when we can sort of calibrate and see with the sort of improvement in the car ratio, how do we assess the surplus capital?
Robert, part of the for the time being reason, we're not being more specific. As you know, the regulators are also still very worried about common capital we return. So while they remove the restriction, they were also very specific in the guidance about removing restrictions that we need to be very careful about kind of capital return we are doing. They called us several times to make sure we're not going to offer new share buybacks, for example. So we're going to keep a little bit of eye on that as well.
Okay. Thanks. So I have some bits and pieces questions. The targeted debt to EBITDA deposit, could I argue that your adjusted NIM is closer to 1.5% and roughly 5 basis points of the impact?
Last I saw, it's about 7 basis points impact. I didn't do the work recently, but when I factored, I thought it back to about 7 basis points.
Okay. The next one is, how many interesting wealth portfolios that are possibly out there for sale? Is there any more consolidation that you could see in the industry? That's obviously one of the ways that we do over the last several years.
Well, I'm not seeing anything imminently, though. You're still cutting the people who want to exit the region, and then we wanted to deprecorder the idea, but I'm not seeing anything imminent more. By the way, just to set record state, where 2 inorganic genes brought some benefit to us in terms of area but not materially. The bulk of our growth in wealth management has been organic growth.
Okay. And then this is a slightly tongue in cheek question, but I had an interesting discussion with doing the rest the other day. So you may know that in Indonesia, all the traditional banks are getting very jealous because these small digital banks, which don't make any money, are being traded almost at the same market. So the question is, is there a way we could split DBS and say, we know that roughly, I think, from the annual report, 38% of your business is retail, and I think 70% of that is now digital with an ROE of 2x that of the traditional. I'm just trying to think, is there a way you could split your digital business out and give it a slightly different valuation under the cost or something like that?
I'm just trying to think if there's a way we can do that.
So Robert, this is music to my ear. If you this has been my big bugbear for the longest time. A good way you can do that is you need to pass on the function from you to your technology colleagues Because my price is saying that because all the research world looks at banks through your EBITDA model and it's the robots of the world who've done this for the last 30 years, that's how you think, whereas the technology colleagues are open to say, I'm going to give you 80x valuation over revenue. So all the traditional banking work has been very far what Bill Winter said yesterday. He has the same thing that we've got the fantastic not only digital and revenue generating businesses, but your models don't take it up, whereas your tech colleagues' models take it and then they pile into the sky, right?
When we did our 2017, when we unbundled the bank and said we'll show you exactly line of sight between our digital activity, what is the difference in the digital activity, what it means to our share, what it means to our revenue, our cost and commission and ROE is exactly what we did. So today for half the bank, we actually show that exactly what it means in terms of improvement in growth, ROE and this thing. But unfortunately, nobody is sort of taking that and say, okay, this part of the bank, we should do a different valuation too. So it hasn't really worked. One of the things that we are actively considering, which I think what Viral said, is to see whether we really need to look and start unbundling some of these activities from the mothership.
And then once you do that and maybe get some sort of private equity interest in some of those activities, then maybe they'll get started getting covered not by you but by your tech policy. Let me give you an example. One of my favorite examples, which I'm actually looking to see if we can do, we have this product called Remit. And our Remit product is free transfer wide. We do share transfer in some 60, 70 countries around the world.
Our total volume of business is meaningful. It's like the last I saw is about 50%, 20% of the volume that TransferWise does around the world. But our profitability is massive because that business makes us $60,000,000 $70,000,000 in the bottom line, which is a lot more than Wise Mix, right? Now if I could unwind with that business, why is this large valued at $11,000,000,000 There's no reason why this business should not get a valuation of anything between $5,000,000,000 $10,000,000,000 It's hidden inside TBA. And the fact that our total market cap is $55,000,000,000 nobody is adding the fact that I've got a $5,000,000,000 to $10,000,000,000 business lying over there.
And if we just compare it to TransferWise business, it's actually a better business and does the same thing. If I could take the business and spin it out into a separate entity and then get some SoftBank kind of investor to come and put money on it as a brand new maybe somebody will start seeing that this business is there. By the way, this is not the only one. We've got a whole slew of businesses where we think we have the capacity to take them and send them out at this stage. So somebody is going to be looking at actively over the next year or 2.
Okay, good. So thinking in
the same direction. So I was just trying to think how to do this. I mean, you've got, let's say, your consumer bank Wealth Bank first half profit before allowance is over 1,100,000,000 euros If I could separate out a certain portion of that and say this is your digital customers, we can put a set of ROE on it and a set of valuation on it. This is the way I'm trying to think about it. It's just hard to do it with the existing public
numbers. We actually disclosed that. And when we heard the last time we disclosed that, Sofia, it was in the annual report. If you go back and look at the annual report, we started disclosing that in 2017. And we have a very rigorous framework which we've given them.
So a customer who does more than 75% of their activity digitally, we call a digital customer. And we built a complete P and L for the digital customer, fully allocated, all costs allocated, all credit allocated. And for that segment of customers, we demonstrate the growth rate of the segment, we demonstrate the cost integration of the segment and we demonstrate the ROE of the segment. And it's not small, it's quite material. So if you just go back and take a look at our disclosures there.
Okay. I will. I mean, I'm trying to figure out how to do this. That's why I'm asking the question. But also, it's a similar question.
Your wealth business, what kind of ROE can we attach to the wealth business? Again, we have the revenue during your consumer disclosure. I'm just trying to say, is it like a 30% ROE business?
It's actually not a 30% ROE business, the wealth business, because effectively, at calculation time, now of course, we have some credit portfolios in the business because of some leverage. But now this type of business, only operating risk and no other risk, but now there's some credit. But even there is not 30%. The pricing is the same thing. I think the other business I have in there, which is doing so well, is the retail based distribution.
I talked about it before that we've launched this end to end budgeting, planning, financial planning, etcetera, business. In fact, the Charles Schwab and Robinhood side of modules, we've got 4, what, 2,500,000 people who actually, how many have downloaded the budgeting tool? No, 2,000,000 people. Have downloaded the budgeting tool. A 1000000 people are using the budgeting actively, and the number of I've got $1,000,000,000 now from that in regular savings and digital portfolios, which are all managed digitally.
Now if I unbundle that business, it's also got this open banking element here because I give an aggregate of balance sheet, drawing variances from everywhere. If you would actually take this business and compare it to any excellent business who's in the space, I think we've got better capability and we've got the revenue and we've got the customer. So there's other one we're trying to see actually we've got a lot of interest from third party players who want to try and see if they can participate in that activity or we can spin it out to them. But that part of the business is also very attractive, not just the high end wealth business, which is obviously a north of 30% ROE business.
Okay. I think we're thinking in
the same direction. Thank you. Those were all my questions. Thank you.
Thank you. Next on the line, we have Pavel from Bank of America. Your question please.
Thank you. And what is increasingly leading to this acceleration, whether it's more demand or more digitalization, regional expansion, kind of driving that and especially also the supply chain financing?
So I was actually thinking about 3 things I had there. One was the securities JV in China. That's a demand thing. I think the China capital market opening up is a big thing, which is why everybody is trying to get in there with the sort of investment banking capability. Our JV, which we are up and running with, we have 51%.
The balance is held by various entities, the Shanghai government, but we have the option to buy the balance 49% over the next 2, 3 years. It's going to be 100% owned. That business has actually got off to a fine start because we have an active pipeline of mandate both in the Asia market, but also helping us to originate for the Hong Kong market across both DC and DCM. So I'm actually quite bullish on that. But that's the demand side.
In addition, I think the market is going to be big. The other two things I had there were retail wealth that I just spoke about. The retail investors essentially are on the same Robinhood phenomenon. If you look at the last 12 months around the world, the retail investor is getting more and more active in participating in the market. And because our timing is in good, we got this complete end to end process right from budgeting, planning, surplus, advice and it all goes digitally and driven by AI and contextual, we are seeing significant pickup in their activity.
Now that's because of our digitization coupled with the fact that there is a market change. The retail investor is ready to be more active in the space as well. So the last one I think I had there was the supply chain. And the supply chain is also a macro element as well as our digital team. The macro element is last year when the supply chains started giving people arms, the biggest thing people started looking for was supply chain efficiency and how do you digitize the supply chain and particularly how do you get more transparency in the supply chain, level 2, level 3, level 4 parts of the supply chain.
Now we had as part of our digital activity in the corporate side, built out this whole slew of APIs focused on that to be able to plug ourselves easily and seamlessly into various supply chains. And so we just decided to go for a time grab over the last 12, 18 months. We went to every industry company we could find everywhere and say we got the tools, we can plug them in and you can get digital visible in the supply chain. So we are seeing a massive pickup in our volumes from logistics, auto, TMT, a whole range of this thing where we're plugging into the supply chain providing digital connectivity and visibility and thus giving us data throughput and data business.
Sure. Thanks. Can you say the supply chain, API connectivity, is this
It's actually at 3 levels. So one is directly with anchor customers. So there'll be some cases where a large anchor leads the effort to digitize the supply chain, we plug into that. 2nd is to the platform. So we have plugged into some of the biggest platforms now in the region, especially, for example, the Chinese platform, the Indian platform.
So we plug into that, and through them, we participate in the suppliers and buyers. And the third is actually at industry level. A lot of that is in Singapore, where we've been able to digitize and plug into the construction industry supply chain, for example, building and construction. We also plug into the logistics industry supply chain, the cutters, hauliers, warehouses in Singapore. So at all three levels, at anchor level, at platform level and at industry level, are we being able to do that at all levels?
Sure. Does that mean your eventual return on mid single digitization should be much higher, probably last several quarters, closer to the recent
Yes. But there's 2 things we're seeing 3 revenues we're seeing right now. So firstly, obviously, we get a lot of operating accounts of all the people in the supply chain. The suppliers, the people tend to operate. We get cash.
That's not worth that much today because rates are low. But eventually, I think that will be worth a lot. The second is the financing. And financing is obviously the financing spread, our spread is an additional spread. It depends on whether we're taking anchor risk or whether we're taking spoke risk, but it's definitely better.
And the third is some of the supply chains are cross border. So we get an FX component, which flows into our FX thing as well.
Sure. That's it. Lastly, just on your point where I'll go to the $350,000,000 incremental next year, would we assume that a majority of that will come to the third half?
No, no. The 3rd bucket, supply chain retail, I think, count in the 350. So that is, I quote, as business as usual growth, we didn't count in the 350. We counted in the 350, the first two buckets in the security joint venture.
Next is Surwal from Venture Partners. Your question please.
Hi, thanks for the opportunity. I think last quarter, Piyush, you talked about a normalized ROE of
10.5% to 11% and if interest rate is coming back then maybe 11.5% now that you also now mentioned that
your current cost normalization will be more like a
20 basis points instead of 20 to 25 and the mix of going to higher ROE business like the digital bank and wealth management business is going up. Wondering if you have
any updated view on the normalized ROE in this cycle?
I don't know. Maybe you should pull up the pump. I don't remember saying a normalized ROE is 10% to 10.5% in the current interest area. Yes. So that's how we say because where we are in the sense, yes, we can get yes, right now, we do a 0 interest rate, so with a 0 interest rate environment.
When you go back to what the interest rate pickup is and assume, so you can get at least a couple of percentage points picked up on ROE if interest rates go back to a pre pandemic kind of normalized level, right? So correct interest rate environment ROE, I was like, we should be able to get 13% ROE in a normalized interest rate environment. Then this is back to the earlier question, I think Marissa or someone. So all of the other stuff we're talking about, the improvement in the nature of our businesses, better returns businesses, more digital businesses, I think eventually those will produce accretive. So I think eventually you can see yourself getting up to closer to 14, but it's flat overnight.
That takes a lot of time for these to have to pursue.
I see. Thank you.
Next, we have Matt Locke from Morgan Stanley.
Two questions from me, actually. First is just on costs, and I hope the answer before on all the costs. But for this year, are you changing your cost guidance at all? It was 3% to 4% above 2019 levels. And obviously, you got the 2% from Luxury and Rivers, but you've actually got sort of 0 growth on the underlying.
So does that mean for this year, we're just going to see the Luxury Villas impact, say, year on year and pretty much flat from there?
Yes. I think that's correct, Nick. Our actual salary costs are slightly higher than we anticipated because we have weak pressures. I mean, part of that, but we've been able to save that on other lines. So yes, we should assume that.
So if I look at just so I got the years right, 2020 passes, take a couple of percent on collection. That's roughly what we're looking into where I should be. Our guidance was 4% up But you're not running it that ready to the moment, yes?
You're not running it. No. We're
Yes. So you're up about a percent underlying, yes? Roughly, yes. Yes. Yes.
And my second question
is on loan growth. Obviously, from what I mean, I've seen a digit and from what you indicated in the Media core looks like we're going to be at the top end of that. Given everything you know today in that pipeline and sort of economic view, do we think about sort of growth rate we can repeat since 2022 as well?
I think the look at the loan book, there are 3 elements to the loan book. The one is the corporate lending space, which reflects masses of macroeconomic activity. That, I think, you'll see repeat because the movement is very strong. And then we're talking to clients already about next year's activity. There is investment cycle, there's M and A activity and so on.
So I think that should be repeatable. And the second part of the loan book is the trade finance book. And as I mentioned over the years, the trade finance book goes up and down. It is impacted by commodity prices. It gets impacted frankly, it also gets impacted by our own actions.
When the pricing gets too unattractive, we just take the foot off that book. So that's like it was €6,000,000 of growth in the first half of the year. And so that is a little bit less. Now part of that $6,000,000,000 is the stuff we talked about before, the supply chain financing. That is growing nicely.
So that will grow. But the other part of the $6,000,000 is more opportunistic of what our trade stuff. So that is uncertain. And then the last part of the loan book is the consumer and wealth. Of that, there's a mortgage book, which this year we had about $3,000,000,000 I think we should be able to get somewhere in that range unless the markets have changed dramatically.
But the other part of that is the wealth leverage, and that's another people feel it. The wealth leverage is a function of the market, how much people want to lever up or not. But given my outlook on rates, I don't see rates going up dramatically next year. I don't see any reason why that would change in a 1 year time frame. I think that's the case.
Okay. So it sounds like this impact is really going to be the wealth leverage, yes? That's the year. That's what's going to change the outlook.
Yes. Okay. Thank you very
much. Cheers.
Thank you. Lastly, we have Kevin from Instinet. Your question, please.
Hi, Piyush, I apologize. I didn't hear clearly. When you said the intent is to pay higher dividends to make more money, did you indicate a higher payout ratio range? Or what is that on the basis of 13% CET1?
No, no, Ken, we didn't give any payout ratio. As you know, we don't give a payout ratio. All we said is that we will continue to take consistently higher dividends over time in line with our earnings this quarter.
Okay, got it. Thank you.