Yes. First question is from Akash from DBS.
Good morning. I have four questions. The first one is the recent acquisition and the future expansion plans that you've talked about, I think they're all great strategic moves. But alongside these, should investors also be expecting some sort of fine tuning on your payout policy? And you might see a need for preserving a bit more capital than before?
Or do you think you can continue with the more aggressive dividend policy that you've had, especially like compared to the peers?
Are you going to ask all four questions together?
Madhish, we can go one by one, if that's okay.
Okay. Yes. So I think we think we have adequate capital. We're about 14.2% at this point in time. And that's after both Lakshmi Vilas and the Shenzhenur Bank.
There's a question earlier in media, would we look at Citi? And I said, yes, look at them. But even if we wound up being a liberal Citi, we still have enough capital. And so at this point in time, we do think we have the capacity to go back to our pre COVID dividend level, notwithstanding the M and A that we've done.
Okay. Understood. The second question I had is on the digital exchange. So are you already seeing any income from that? And if yes, then where is it showing up on the income statement?
And on a related note, like what sort of contribution do you see from this business this year and maybe in a steady state?
Akash, so far the income you from that will be in decimal to a point. So it doesn't matter where in the income statement it won't show up. Because like I said, we've been unlike the big exchanges which are sort of going for the mass market, because we're trying to position ourselves differently. And the way we compete with Binance and Coinbase, etcetera, is we want people to figure that we are regulated in parts of the business at least, that we are come from a bank. And so we have a much higher threshold and standard for everything.
Our custody is bank standard custody capabilities, it's not exchange standard custody capability and so on. And therefore, we've been quite deliberate in opening up that business. And so far, like I said, we've only got 120 clients. I know first that we have 100 or more, probably thousands of clients who are waiting in the queue, but we've been slightly thoughtful about how we bring them on board. Similarly, on the asset side.
Also, we started off just keeping it open in the Asia trading hours. And obviously, the serious traders want 20 fourseven access to trading. So it's going to be a steady process for us between now and the end of the year. I think we'll start seeing material contribution to income, which I can point to only from 2022. I won't hold my breath on looking for income in 2021.
Got it. And any sense of what that material contribution might be? It's just that rough range around 10% to 5%, 15%?
No, no. So we make $16,000,000,000 there will be $1,500,000,000 10%, right? I don't know where we get there. The thinking I have on many of these, what I call, infrastructure existing activities is the markets are changing and customers are doing more and more. And we need to figure how we get into the game and start monetizing.
But I really don't have very good line of sight for how big any of these could get. I do think given the amount of interest in all the 4 cryptos that we trade now, that interest is quite high. And therefore, I do think it will pick up. But whether it picks up to tens of 1,000,000 or 100 of 1,000,000 of income over the next few years is hard to say. So my thing is we should get in there, figure it out and grow and then we'll get a better sense for how big this could be in time.
So by the way, the same is true for other parts of the business, not just the trading. On the digital custody, we are getting a lot of approaches now from other exchanges who want to use us for the digital custody capability because it's commonly superior. And we obviously clip a coupon. We charge a little bit for people who want to use the custody capability. The journey is still a little 20 when we provide the service to other
20 when we provide the service
to other exchanges. So we're trying to streamline that and make that more straight through and the same. So we're also being careful about how we bring that on. I don't want to create our operations nightmare. And finally, on the securities token offering, like I said, we will try and do at least 1, maybe a couple smaller tickets in the Q2 just to make sure that it works.
We know how to do it. We can get it out. We're trying to fixed income equity, maybe some property. But all of this is frankly as much learning and seasoning for us as well before we can really scale it up.
Got it. Thanks, Akish. 3rd question I have is on the credit risk RWAs, which went up by $7,000,000,000 quarter on quarter. And of course, it was offset by the market risk reduction. What drove these two things?
Like if you're thinking the asset quality is actually looking better, why didn't the credit risk start up actually go up so much? And then
The loans went up by $12,000,000,000
So it's primarily driven by asset growth?
Because we grew loans at $12,000,000,000. Dollars 5,000,000,000 in loans are typically our credit density is around 50%. So if you grow loans at $12,000,000,000 you should expect RWA to grow at $6,000,000,000 and then there'll be some noise in the numbers beyond that.
Understood. And on the market risk side, what was it that actually drove the RWA down, the RWA 6,000,000,000?
We made an improvement in our market as model. I'm going to let Sakwa explain it.
So previously, we were basically using what we call a maturity method, and we have now moved to a duration method, which is more efficient. The duration method allows you to use the cash flow based sensitivity, which is PD-one, in slotting the bucket as opposed to taking sort of the entire NPV and slotting it. So this refinement model required the MES approval. So we have been in discussions for a year it's been approved. And that's why we're using a more refined method.
So it's more consistent with the way we manage the risk in the ceiling room.
Understood. And for the rest of
the year, do you see any added way growth because
of the credit migration, not because of asset growth?
Actually, as I said, we actually see the reverse. The portfolio quality is improving and not deteriorating. In the Q1, I saw more upgrades than downgrades, frankly, overall. And so, no, I mean, as the moratorium end, you might see something. And but again, the Singapore moratoriums are the chunk of them are behind us.
The Hong Kong moratoriums won't end until 2022. So you could see some, but on the whole, I don't think it's going to be material.
So Akash, one easy way for you to look at that is actually look at the Pillar 3. Pillar 3 actually have that breakdown. So if you look at A6 of the Pillar 3, basically, you'll see the RWA was 204, it went up to 211 and the breakdown is given to you. Asset size basically increased it by RMB7.4 billion, asset quality improved, so you got a reduction of RMB1.8 billion and foreign exchange movements contributed another RMB1.6 percent. So you can actually see the breakdown quite readily in that schedule.
Got it. Thank you for that. And the last question
is just on the loan growth.
So what the enterprise and foreign exchange movements were the big contributors but offset by improvement in credit quality, which we just went through the same reasons for why DCL came down.
Understood. Thank you for that. The last question is on the loan growth. So I mean this $12,000,000,000 increase is quite big Q on Q. Could you share some breakdown?
You did say it was broad based, but could you give some color on what sectors in the corporate side drove that?
Yes. Actually, out of the $12,000,000,000 about $3,000,000,000 was actually reverse repo transaction, which was liquidity for financials and counterparties. And in but if you pass it aside, the balance we had about $4,000,000,000 of corporate loan growth, which was broad based. We got TMT, we had real estate, we had transportation, we had it was very broad based. So I tried to figure out if there's any concentration, but it was just very broad, manufacturing, trading, etcetera.
We had about $2,000,000,000 in trade and trade was mostly commodity trade but some manufacturing trade as well. So that was generally up. We got $1,000,000,000 growth in the housing portfolio that I've spoken about before. We got close to a couple of $1,000,000,000 growth supporting the wealth management and the activities around that. So it was quite dispersed.
Okay, understood. Thank you for that. That is all questions for me. Thank you.
Thank you, Akash. Next, we have Nicholas J. From Credit Suisse.
Yes. Thanks for taking my question. Just a couple of questions from me. Just wanted to ask on the GP side. I guess if I look at pre pandemic levels in 2019, it was around the GP was about 0.7% of your total loans.
I guess as we go forward, as you're thinking about where your GP amount could settle, are you looking at settling at that kind of level, I guess towards the end of 2022? Or do you think it could be lower or higher than that? And the other question I had was just on dividends. I think previously, you mentioned that you would go up to your $0.33 in kind of 2 steps. Are you with the improved outlook, are you looking at sort of just moving it up in one fell swoop?
So on the GP, I don't know if that Sakkari handles that, but there's an MDS expectation on GP, which is 1% of what is the qualified portfolio, including some secured assets, and maybe Sakkari can elaborate a little bit more on that. There's the benchmark that we like you to use, Softie?
Yes. So it's 1% of this qualifying base and this base excludes so effectively, because households are all fully secured. So basically, it's one chunk that gets removed. So overall, that's why you noticed maybe it's just 4.7% of the total loan. So the whole stack of 4.1%, like we mentioned earlier, is 2 parts, right?
It is the modeled reserve plus the what we feel the models may not adequately take care of in the pandemic situation and we have a management overlay. So in those RMB 4,100,000,000 how it moves, we don't stick the percentage around it. We will say that in cases like in this quarter where they had upgrades, the Western names get paid off or the maturity gets shortened, you get the net or the fill rates improve, you get the natural write backs. And then the call on the management overlay will be a view that we have to assess taking into account on the retail side. I think we say that we look at unemployment rates, etcetera, in each location, and there could be opportunity to free up some GP if the conditions driving those models are for management overlay are conducive.
SMEs will look at moratorium tapering off. And for the larger corporates, I think we'll have to assess the sort of global situation. But at any point in time, we'll be sort of quite vigilant. We'll always have a weight on the stress environment. It's only a question of how much weight we place on the stress.
That's how we've always managed our GP on a prudent basis.
Your other question on dividend, yes, so actually, as I said last time, frankly, it's not entirely in the hand, it depends on what the MAS wants to do. If the MAS decides to remove all restrictions on dividend payment, then yes, I think there will be likelihood that we will go back to the pre COVID levels right away. But if the MAS put in restrictions and only allow us to move back in a graduated way or a couple of steps, then obviously we're going to have to follow what the guidelines are. And so far, we've not had any direction or indications from MAS about what they're planning to do.
Okay, got it. Thanks so much.
Thank you, Nicholas. Next in questions, we have Nicholas from Morgan Stanley. Please go ahead.
Thanks very much. Thanks for taking my question. A couple of questions from me actually. But first, just in terms of Wealth Management volumes, I mean, obviously pretty strong in Q1. I just wonder if you could give us any commentary as to what activity levels are like sort of as we go into April?
My second question would just be on the loan growth. I mean, you've given us a good description of where it's come from. I guess if we were to annualize Q1, we would end up well ahead of sort of double or high single digits. So I just wonder if you could talk about where you think the slowdown comes or what happens in Q2 that restrains you from to mid to high single digits? And then finally, one of your global competitors yesterday and their reporting, Susan, spoke about as you have cutting sort of the commercial office space, but also said they're looking to have their branch networks.
So I just wonder if the sort of increased use of digitization and the impacts of what we've learned from COVID would lead you to lower your branch footprint at some stage.
So on the Wealth Management, it has been a tad bit slower than March, but it's sort of in line with previous things. So overall, environment is still good and activity is positive. It's just that the Q1, Jan and March were very strong. So it's not at the same level, but it's quite solid so far. I think a lot depends on what happens to the market.
The markets don't tag, I think the markets have been a little iffy for the last couple of weeks. So people aren't sure whether they're going up or down. If the markets hold up or if they actually see a run up, then that activity will come back. On loan growth, I said, one is the repo loans in the Q1, right? You should park them aside because those tend to be opportunistic.
And I don't count that into our normal business, so I forecast the business. So I really look at $9 odd 1,000,000,000 of growth in the Q1 as opposed to $12,000,000,000 as I'm thinking about the outlook. Within that, the corporate lending pipeline and the trade pipeline are actually quite robust. So at least as far as I can see, 2nd quarter is safe on those two fronts. The wealth management related loans, which are material, those again are a function of your first question.
If wealth management is not as strong, then that loan book won't grow that strong. So that could be softer. On mortgages, I think you'll see a stronger mortgage growth in the first half of the year than the second half of the year. I think you'll a large part of this is the front ending of people doing the retail and etcetera. So I do think you'll see some slowdown potentially slowdown in mortgages in the second half of the year.
And therefore, if you back out before, we did about 2% in the Q1. If you annualize that, you'll be looking at 8% -ish. And I think you might not hit 8%, but you can get
high single digits somewhere there.
Your third question is on the branch footprint. We already actually said that before that one of the things that we've been doing is rationalizing our branches not through reduction of footprint as a number of branches per se, but in transforming the nature of our branches. And so all our branches are not the old fashioned, put lots of people, foodservice branches. We now have digital branches. We have what we call NAV hubs which are sort of in between branches.
So that is already allowing us the opportunity to trim the branch footprint in terms of square feet without necessarily reducing the absolute number of branches per se. The actual presence for us in various parts of the city and having a shingle out there is actually quite important. But yes, we will see some benefits from the commercial real estate in the branch network as well. We're also seeing that outside Singapore and we probably do some rationalization of the LVB footprint in time. We're seeing something in Taiwan.
So we're getting some benefit. When I said we probably say 20 odd percent saving in commercial space, it's not just the headquarter space. There is some impact to the branches in that regard.
Thanks very much.
Thank you. We have Melissa Kwang from Goldman Sachs next. Please go ahead.
Hi there. Thank you for taking my questions. I have a few questions. Just firstly, in terms of the AUM, just wanted to understand, are you seeing also quite strong AUM flow coming into Singapore and into BBS? That's what's also driving your fee income.
And if you have some color on the regions which is coming in would be helpful. Secondly, perhaps in terms of your digital site and DigiBank, you mentioned that in terms of the current players in the market on those digital guys coming in, there's not much action and there's nothing yet. But those guys also have been a bit strong in the PayLater site. So do you think that is something that DDS would launch ahead of these virtual banks coming on board in Singapore? That's my second question.
And then, certainly, maybe a really odd question to ask here, but I just wanted to understand if you know like when banks buy assets outside of the banking system, they get actually penalized in terms of capital deductions. So I was just thinking in terms of the virtual banks, they are part of a consumer company or sort of. So do they have the same kind of penalization in terms of their capital that will hinder them? And if not the case, then would at some point do we have consider looking at maybe something in the consumer space as well to kind of enhance the whole ecosystem? Thank you.
So the first one on AUM, our AUMs are growing but not dramatically different from mostly. I think our net new money was about $4,500,000,000 for the quarter of our total AUM growth. And that's fairly steady, and it comes from all over the place, including some from North Asia. If the end of the question, are we seeing a big pickup on money flows coming in from Hong Kong or China? Are they saying not really.
We're seeing very steady flows from all our usual sources of inflow of money. On the Digibank, the Pay Later scheme, first of all, I'm not sure how much opportunity there is in the Pay Later schemes in Singapore because I said before, by and large, the Singapore SMEs are fairly well banked. All of the surveys and all of the services that most people have adequate access to financing. Especially last year, with the pandemic, all the government support programs, for example, we gave out 20,000 small merchant loans which they didn't have before. So there is some benefit, but it's not huge.
The flip side of the pay later, I think it has the possibility of creating social issues because when you go through the regulated banking space, the central banks have a fairly tight eye on how much net credit is being created, is there over extension of credit, what is that sort of credit. The pay later space allows people to actually assume that some of those controls and it's quite frankly that many regulators are not comfortable with that. So I do think that there will be some sharper oversight of the pay later space. So in short, I think the opportunity is there, but it's not huge. In any case, I think there will be a regulatory oversight over it.
Your last question on capital and capital deductions, it's actually we also there is a limit with NBS, let's us go and buy anything we want. And NBS changed the regulation some years ago. So we can go outside of our traditional business and participate in other activities up to some reasonable limits. 10% of our total capital, I think, we can, which is quite a bit. We could put $5,000,000,000 into different things without such challenge.
And so we're very not necessarily that disadvantaged from that standpoint. When you look at capital for these 3 companies, the thing to remember is it's not the constraint in terms of capital adequacy. The real issue is that their source of capital is what gives them arbitrage. They get a lot of money from a lot of private equity and other investors on terms which public companies like us are unable to access. That's really the source of advantage.
But just to be a question is, would we do stuff outside of our core thing? And we do in small pockets. We put in small investments in those ecosystem arrangements where we think that we can bring some value. But they've been in the handful of $1,000,000, right? I mean, they're not large.
I do think that we have some opportunities to expand beyond the core banking space, but we are quite thoughtful to make sure that these are adjacencies that make sense. And the way we are trending to lead into it is to see where can we provide infrastructure services, where can we use our technology capabilities and how can we get into a broader revenue stream leveraging some of those things as opposed to try to get into completely new businesses we don't understand.
Right. Thank you very
much. Operator, do you have another call?
Thank you. Thank you, Minister, for your question. Next, we have Hash from JPMorgan.
Hi. Thanks for the call.
A couple of more than couple of questions actually. First one, on CET1, this 12.5 to 13.5, let's say, midpoint 13, taking into consideration both organic and organic growth, assuming you go back to $13.10 on dividend, by when do you think you should get back to that 13 odd percent CET1?
Well, it all depends on M and A. So if we don't, we have a lot of surplus capital and every quarter we accrete more capital. So even at $0.33 we accrete capital. And therefore, if we don't do M and A, we'll have to start returning a lot more capital to get back to $12.5 to $13.5 But it does give us the cushion to do M and A, and we've talked about things that we could look at. So it's not a function of that.
Okay.
The second one is just on this, things like the digital exchange, you don't have Sparky are also takes that box. Is there any capital commitment to these initiatives in terms of $80,000,000 is a small number, but let's say it becomes $1,000,000,000 of assets under custody, there will be some operational risk likely some sort of counterparty risk and so on. Does the capital consumption move up meaningfully in some of these new businesses that you're looking at?
Actually, no, all the businesses we've looked at. So it's quite interesting. The way the rule and structure work, you don't need a lot of capital in these businesses. What you said is correct. The real issue is off risk.
And the way you think about the off risk and off risk capital, it's not huge. We don't get any credit risk. We really don't get any market risk. You add on some ops risk. You've got to be tight about that.
But it's not very capital conservative, no.
Okay. And moving on to provisions, the guidance of $1,000,000,000 sounds a bit conservative. How should we think about that number given it was close to 0 in Q1? How much of that is conservative guidance? How much of that is realistic?
And what are the numbers that should change that? Let's say, at the end of the year, we end up at, let's say, 400 or 500 number. What would have led to that kind
of outcome?
Ashut, I think I'm going to let you figure what you want to put into your model. I'm not giving you any guidance. All I can say is that, yes, I think we'll be well shy of $1,000,000,000 And if you look at the outlook, the Q1, like I said, I mean, there are really 3 pieces. I mean, will you make it easy for the 3 pieces, right? One is specific provision.
At this point in time, I'm not seeing anything on the wind speed, which is giving me a cause to believe that there will be a big pickup in specific provisions. The provision in the Q1 of $200,000,000 or $1,000,000,000 go back to peak forward, and I'm not seeing anything which says there'll be a lot more. Then the second is the improvement in the portfolio, which is a model driven GP, so and the repayment. So I guess that came from both things. 1, some of the weaker gains paid down.
And I think partly it's because people have been able to go to bond market, raise money out, and they paid us down. But the bigger thing was that companies are improving. And so we had a shipyard company that improved. We had an automotive company that improved. So we think improvement in companies.
If that improvement in companies continues, you should expect to see a continued reversal of their model driven GP. Then the question is, should we expect the improvement of the country? And that goes back to macroeconomic. With the tremendous bounce back in all of the economies and whether the U. S.
Or China or everywhere else, it's got to logically should expect it should flow through to corporate earnings and to if it flows through to corporate earnings, then it will flow through the improvement in the portfolio, right? And that's the way to think about it. But exactly how much that improvement is and how much we might be able to get back is hard to call. And so I don't want to put a number around it. And the last category is that $1,000,000,000 that we put in, principally because we didn't know how to model the moratorium impact and didn't know how to model some of those things in our model, so we added it on.
That really is a function of if the moratoriums keep winding up through the course of the year, the consumer keeps improving, then do we keep some of it for the residual moratorium? Hong Kong is going to carry on in 2022. There are some other areas. Also, we'll have to have conversations with our regulators. Like in some cases, the regulators might want us to keep more hours and keep less.
So these are not things we would have to worry about in the course of the next couple of quarters. But if I add all of that together, I think there's any likelihood that we'll be well 1,000,000 €1,000,000,000. I mean, it's hard to dimension what the number could be.
Got it. Got it.
I'm sorry, if I may, Piyush. Just on Parthia, massive, massive positive. I'm not saying because I'm from JPMorgan. But blockchain was just a concept. And when you actually think about monetizing it, is it are you let's say, for a DBS customer who is doing a cross border payment, is it just better quality service, more secure?
Or do you also charge a premium for this? Like, let's say, how do you start monetizing it? And 2 years out, how do you think it takes the shape in terms of actual P and L impact and or actual revenue client impact for you?
So Harsh, I think the actual benefit of it for direct customers will be there but limited. And we already charge the component of payments, we charge some money. For large corporates, it's a flat fee. I don't think you can charge a lot more. For SMEs, it tends to be at Baluram still for large and for the SMEs.
If you can improve their payment, this thing by a couple of days, you could squeeze something out. I doubt you'll get a lot. What you will get, if you can get a lot more volume because you can do it more efficiently, then you tend to make a lot more things like FX. So that adds up, but that's not the principal driver. The principal driver of the infrastructure play is to think like Visa or Mastercard or Swift.
Visa or Mastercard take a coupon just for providing the wheels on which global settlement takes place in the card space. They make $15,000,000,000 $20,000,000,000 respectively just doing that or They do more than that by just doing that. So if it could be part of an infrastructure play and you can effectively take a small coupon on payments to facilitate the things, then that's where you effectively the platform winds up making money. And then you essentially gain from the value of the platform more than the customer revenues that you make directly.
Right. I don't know if I'm pushing it, but do you think this replaces Swift? Is that the Utopian goal?
But Swift want to do something similar. But if you really look at the underlying nature, just to focus on Swift, but the issue, I've been doing this for 30 years. This has been for me one of the Holy Grail. We did a version of it, a shortcut of it 4, 5 years ago, we launched DBS Remit and Paypal. Because the whole notion of settlement, which it takes 2, T plus 2 because it goes through 2 hops.
Like JV's correspondent banks, if I have to pay somebody in London, I pay to JP. JP then pays to Citi, Citi then pays to Barclays. And those hops take 2 days. Now the problem with that is FX is happening in real time, security is happening in real time, but the cash settlement is taking 2 days. And that creates massive inefficiencies in the system.
So when we launched Remit, we said forget going through the hop, I'll just set up direct bilateral relationships in the countries that matter. And that's why I can now do payments into all of the countries that are meaningful to me in 3 seconds. And that's allowed us to build a big business. We make over $100,000,000. I tell you, we do a month better than transfer wise.
And that's basically because we've changed the hub and spoke picture of that. Now that unfortunately, you can do a bilateral arrangement only so far. What the blockchain lets you do is take it and democratize it at scale for any counterparty in the world. I'm not only limited to places that set up an arrangement. And therefore, anybody on this platform can effectively pay in real time instantly.
And so your settlement of security, settlement of FX, settlement of active payment, you do in real time. I think that's a game changer, and it's much better than the current expand infrastructure, including the Swift infrastructure. The challenge with all of these, which will be a challenge for Patek as well, is how do you get enough usage, how do you get people to embrace it, and which is why we are creating this open platform. We are also hopeful about 2 things. One is this does have the support of the central bank.
MAS is a big participant of Project Oven and KAR. So there are big push and they're talking to other central banks, they're talking to other agencies to see how we could actually push this platform and make it generically available. I'm also quite optimistic that as you see more of the CBDCs, every country is generating its own CBDCs. But finally, I think you need a platform to be able to set up CBDCs from one country's CBDC to another CBDC. And again, this blockchain driven platform, which is I'll just say it might be a good way to do that.
Now so I'm optimistic that the use cases you can develop, but obviously the biggest challenge is getting enough people to embrace those use cases.
Right. Yes, there's a more involved conversation on that. No, but this is brilliant. Thank you so much, Piyush. Those are all the questions I have for now.
Thank you, Harsh. Next, we have Anand Rambak of America. Please go ahead.
Sure. Thank
you. Piyush, you mentioned a bit about the structural changes to wealth management and the treasury side. So just to put some numbers in context, the P pop ROA that you showed this quarter, 1.38%, is just shy of like 3, 4 business points of the peak P pop ROE you showed in 2019 when the rate cycle was so high. So margins are down like almost 50 bps, but P pop margins are badly impacted. In that context, if I adjust your credit cost to 25, which level, I already get to a 13% ROE at the bottom of the rate cycle.
So in that context, where do you think it's your kind of new structural step up? How much of this improvement is structural? How much of this is cyclical? Obviously, there is some component of fee income and some OpEx here. And when credit costs and rates normalize, are we looking at a much higher base for your ARPU compared to what we have seen historically?
I said apart from credit cost, we didn't take out another big thing for this quarter, the trading. So trading is a big quarter. I mean, normal trading quarter, I expect 2.50,000,000 bucks. This time, it was 500,000,000 bucks. And that $500,000,000 is not going to repeat.
It is just a very unusual quarter for trading and that's probably just us because every big bank in the world. So you've got to adjust down the not just the unusual credit cost, but you also got to adjust out the trading. And if you adjust both those out, then ROE is not as high as it appears on surface once you take trading out. So my own thing is that the structure changes are helping. Without a doubt, the changes in our business in Transaction Banking, the changes in our business in treasury customer flows, the changes in wealth management, they're all helping.
And I've said before, the cumulative of that should give us over time maybe a percentage point of improvement in ROE, but it's not going to be huge. The impact of the interest rate is very material. So my own sense is that if you look at our ROE before the interest rate hikes, we were hanging around trying to get to 10.5%, 11% ROE. The structural changes might take us north of the levels. You might get to 11.5% ROE, but I don't think you'll get to 13% or thereabouts unless the rate cycle comes back.
Sure. And on the OpEx side also you could see some more upside? Or that typically will come back in the next few quarters?
So it depends on what business you look. I think the absolute management of expenses, they clearly are upside. We are running a huge transformation program, which includes our distribution. We're moving to digital. We're changing whatever.
So we will see some upside coming through from that. But at the same time, as I do too, the wage pressures are building up. And I do think we're going to have to dial up a little bit on the wages and variable comp this year. So that will be a bit of a lag. So I think we can control expenses, like I said, to maybe 3%, 4% over the 2019 level.
The cost income ratio will creep up. It will creep up because the income will be down because of the interest in this thing. So if you look at the cost income ratio, Pizan, that will go up because the income will come down.
Sure. Thank you.
Anand, next we have Dabibee from HSBC. Please go ahead.
Hi, this is Raul Ben from HSBC. So one is on the overseas strategy. Can I ask basically what kind of target settlement do you want to look at? Because I guess the AMZ you're looking at wealth and the Shenzhen is kind of some SMEs and some amount of wealth as well. But the C3 assets, I guess, are mostly more like retail side because it's just out the wealth.
So I'm trying to see that this really or do you think it fits under what you are looking for?
So I think there are 2 pieces of the City business that are very similar to the ANZ book. One is the City Gold business, which is very similar to what we got from the ANZ West piece. That's very similar to what we have in our mass affluent in our Treasures segment and even the low end of the TPG segment. So that is quite interesting. The other big pieces, they have a fantastic car franchise, which is again very similar to what we got from ANZ in Taiwan and Indonesia.
So that piece is also actually quite attractive.
Okay. I see. Can I also ask about the Parcel platform? Like how scalable? Did you have a pipeline of or how many international banks is on your pipeline?
And also if you extend to different currencies, you need the regulatory approval of each regulator? Because this basically putting the flag onto the ledger, right?
Yes. So actually what we are going to let Biju on our Gupai strategy talk to give a better sense for what which banks and the I mean how many banks and things are in the pipeline. But the basic thing we're going to figure is that we're not creating a new cryptocurrency, right? And so that's the important thing to understand. It's not a new Bitcoin or a new DM or whatever.
So all we're doing is digitizing fiat money. And to the extent we're digitizing Spirit Money, it doesn't create an extended new way of this thing. So I do think the regulatory forbearance is much better than if you start trying to create a new currency. But which one you want to take the question on how do we get other players onto the platform, which are the currencies? Yes.
So if you think about it,
there is the whole concept of a settlement bank and a participating bank
for
the Up Tier platform. So we are talking to banks to be the core settlement bank that will be adult currencies like yen, euro and hopefully we can RMB where TBOC allows. So those would be the important ones. And then the other one will be participant banks where banks will come in to take advantage of this to clear a lot of their corporate and treasury payments. And so if you look at it in totality, today we're speaking to right now of 67 of them.
And this is where the partners in the JV, which is JP on 7th domestic are talking. And the entity has yet to be fully operational, and we already have quite a fair bit of interest. So this is where we are. And with the setup itself, more will come. And since the announcement itself, we have been getting more inquiries from banks that we didn't target initially because we're just looking at those who can give us flows to get the platform growing.
Growing. Right. So can I just one last question, I guess, also in the digital area, the digital bank in Indonesia? I guess there's some other players like Bank Jago now and all that. So what do you think really is the difference between DigiBank and some of these digital players?
And how can you be more competitive?
Actually, in many cases, you won't be too much of it. Our customer experience and our customer journey are actually quite similar. But to me, in the big market, the way to think about it is that you will never see a winner take all. It's not that there'll be one big provider who will get certainly dominant 100% market share. I think there'll be multiple providers who will continue to win market share, not just because of the digital product out there, but the rest of the suite of services and products they put together.
One of the things that we've been quite successful with is in partnerships. So we've got a very good ecosystem partnership with several providers, e commerce companies, loan origination companies, card user companies. By plugging our platform into some of those, we are actually getting some very decent volume and traction. So bottom line, I think we'll be a competitive test in the market. It doesn't necessarily mean that Jago won't be successful or someone else.
Right. But you also have finances with all the e commerce and all these there?
Yes. We have plugged in. So we have essentially a large part of our origination now is coming into other partners. So we're just doing more direct to
market. We are
going into this ecosystem strategy. Okay, okay.
Thank you.
Thank you. Next, we have Robert Kong from Citi Research.
Hi. Thanks for the briefing and congrats again on the great results. Just some small questions, if I may. For India and LVB, what's the long term? I guess you're moving much to a hybrid strategy between the DigiBank and the LVB.
I'm just trying to think what the long term structure of the business will look like. You still have something like 600 branches, which I suppose is a little bit on the high side. 2nd, on the Shenzhen Rural Commercial Bank, what kind I mean, you're going to be the biggest shareholder with 13% stake. What kind of management control do you expect to be able to get? I know you're going to get some sort of broad representation.
And will the revenue model be more seeing growth in DBS Hong Kong? Is that will that be where we will see the positive upside on that? So those are the 2 questions. Thank you.
Yes. So Robert, I guess on both MVP and Shenzhen rule,
the basic premise, which is a little bit of a shift in our thinking in the last 5 years, is
that is a little bit of a shift in our thinking in the last 5 years, is that a pure digital play is not that easy to monetize to profitability. And that's why if you look at all our things, we do see we're getting a lot of top line growth, I mean numbers of customers growth, we're getting a lot of eyeball growth. But a lot of the people who join us through digital banks are young millennials, kids, they get the deals, they get the fee fees. So it's not been that easy to monetize them. And therefore, we've been very thoughtful about how much you keep pouring down that figure because we're unlike many of the other people who are only trying to focus on the valuation game, we're trying to focus on a cash flow and a profitability game at the same time.
Now we realize that in those places where we create digital, where we add that digital along with the branch footprint, we get much better customer performance. We get better quality customers. We do a lot more with them. And we saw that with the ANZ edition in Indonesia. It gives us a clear differentiation between that and what we are doing physically pure digitally.
So that thinking is what we're trying to gather. That if we can actually scale up some degree of physical presence, so we get brand, we get recognition, we get people's willingness, except that we are now a local bank, all of those things matter. That's what we're trying to achieve in some of these markets. Now in LBB, the five states where LBB has a presence, South Indian states, it's probably quite attractive for us for many reasons. It's the better performing part of the system.
The economy is better. It links better into Singapore. It also allows us to change the profile of our business because today in India, which is very heavily large corporate. And whereas all the big returns, if you think SCFC or quota, their returns are mostly SME and retail. We haven't had access to that.
This changes that case. It allows us to build out and scale up the retail SME. It gives us a much better deposit base. It gives us a better retail footprint. So there's a lot of good strategic reasons for doing that.
But I think this is correct. Over time, I don't think we need 600 branches. We said the branches also include 100 and some branches, which are rural unbanked. Those we'll do what the local banks do. We use the business correspondent arrangement to take care of those.
Of the others, we'll try and concentrate and focus on the districts and the centers where we really get value. So I think we will be able to nationalize some of that network. We will also overlay digital on top of that. Now that's going to take us a year because the technology platform alignment doesn't happen overnight, and we were already doing some work in India. But we will put digital products in there.
We will rationalize some of the network. We will add on some of the assets that they have, including the board loans and loan against property. So we'll create an integrated presence, but that allows us to get into that SME and retail space in a far more compelling way than we've been able to do with just the pure digital strategy. That's the thinking. On the Shenzhen Rural, so right now, one of the advantages that the thing of they have a really good management team.
We think that the Chairman, the CEO, the management team are very good. They have skin in the game. They run the place very well. And so we really don't think we need to do a lot of interfering in the day to day management of the bank. Obviously, we have a couple of board seats, so we'll keep an eye on the risk and help them with some stuff.
The real thing where we see we can bring value is how do you transform the bank for becoming more international and becoming more digital. They don't have that. And that's what they're reaching out to us for. So that's what we will put our energies behind. And you're right, a large part of the resourcing and the driving of that is going to come from Hong Kong and our own team.
We've got 30 large presence now in Shenzhen and in Guangzhou. So we will be using our onshore teams in GBA as well as the Hong Kong team to work with Shenzhen Rural to drive some of these incremental capabilities. But the core running of the bank is very good. I don't think we need to necessarily get involved with that.
Just one quick one on the pathway. I know I understand the phenomenal upside if you can take a clip of coupon on the volumes. But do you expect it to have a material impact on your own bank's fee income? Because as you say, you're going to be able to offer potentially a much more attractive way of settling payments than anybody else on the street.
So it remains to be seen, Robert. I think what we will see, and I'm already seeing that, if you look at my transaction banking business, both cash and trade and look at the volume growth we've seen, particularly through the pandemic, it's been off the chart. Now I think the result in not that I charge higher fee because I know on API, I can give them the thing, I charge them the same kind of fee structure, maybe slightly more. But I get a lot more volume. So my current take is that this should allow me to scale up the volumes we get, and that would be attended to larger fee pools and larger Capa balances and corporate deposits and that's why I think that will happen.
It's less clear to me whether we'll be able to charge premium pricing, and we wouldn't have to test that in the market as it evolves.
Thanks very much.