Hello, everyone, welcome to this call for the buy and sell sides on the transaction that was announced this morning. You will have watched the media briefing, so we'll start with some additional remarks from Piyush, and then we will take questions. Piyush?
Okay, thanks, Michael. Actually, my comment, my remarks are very focused. Michael suggested to me that I might want to spend a couple of minutes trying to explain this whole net asset concept. There's some questions around it. So you know, when you're doing a purchase of assets and liabilities, which we are, this whole construct that has been created around net asset and using that as a definition of book is a warped construct. It makes no sense. In our case, we're taking $11 billion in loans and then $15 billion in deposits. So the gap is $4 billion, which they give us in cash. This is just an exchange of cash, cash flows. So effectively, we count the cash as an asset.
They give us $11 billion in loans and $4 billion in cash, and we pay them $15 billion for liability; net assets are zero. The only way to think about capital is when I inherit the book, what is the RWA of the book, and what is the capital adequacy I need to keep to support that RWA? That RWA of the book and the capital I need to keep to do this thing is about $1 billion. So that's effectively the book. When you add in the integration cost, because you say, "Okay, I'm going to capitalize that," that gets at $1.2 billion, and so the $900-odd million premium that we pay is 1.8 times that number. That's the sensible way to think about what is the price to book of this transaction.
and so the rest of it is just a cash flow exchange issue. It's nothing to do with the, any of this stuff. So I don't know, with this clarifying comment, maybe, we'll throw it open for question and answers.
Okay, Diana, we can open the floor for questions.
We will now begin the question-and-answer session. All your participants with questions to pose, please press zero-one on your telephone keypad, and you will be placed in the queue. To cancel the queue, please press zero-two. Once again, zero-one on your telephone keypad now. Our first question, Mr. Rakesh from UBS. Please go ahead, sir.
Great, thank you. Thank you, Piyush, for the clarification on the price to book and price to net assets. I think the confusion obviously arises because UOB quoted on price to net assets basis, and I think if you use a similar methodology to yours, their price to book also doesn't seem to be very different from what you've paid for this deal, I believe.
Well, that's, that's, that's exactly right. And which is why I think there is a, you know, frankly, I was quite surprised, very unorthodox way of thinking about book value. But if you look at the loan book that they have, it's about 20% lower than ours, that they're taking on. And those tend to be, you know, more high-risk markets compared to Taiwan. So I suspect the RWA is quite similar. And therefore, the premium we're paying is about quite similar. So I completely share, if you really effectively think about the, the capital you need to keep against the book you're buying rather than premium, it'll be about in the same range as ours. And that's the right way to think about it.
Right. So this pricing that you arrived at, is it, like, was it better because of the competition, or does it seem like a reasonable price to you to pay, to pay for this book?
It's a bit of both. Because it's such an attractive piece of business, right? It's a 20% ROE business, in the, in the market. We figured that if we work backwards and say, "How much could we go up to, to take the business and make it accretive, at the time of integration?" I don't want to dilute this thing. So if I can make it accretive, then the question is: How much, do you go up to what you can afford to pay and still be competitive in the market? So, I mean, that's the usual way you do these things. That's what, that's what we did.
Got it. Thank you. So on synergies, you did not mention branches at all. You did say that, you know, for the next three years, you don't expect any retrenchment of the staff. But what about the branches? Are you in a position to sort of close some branches or drop them in your existing network?
We'd have to, yes. I mean, theoretically, yes. If you look at the ANZ transaction, in the last 3-4 years, we've shut down 20% of the branches. But it's sensitive. It's sensitive from a regulatory standpoint, and we've also got to be mindful of the customer impact. And therefore, I fully expect that we will get the synergies and rationalize the distribution. There are 45 branches with 33. And, you know, given I'm going to start with so many, I think we'll have even more than the 20% opportunity eventually. But we're going to have to work it along with the regulator and make sure the customer over... I mean, you know, we don't wind up creating customer service issues, et cetera. But the regulator has been very productive in working collaboratively with us on the ANZ transaction.
It's just that you got to do it with some sensitivity and finesse.
Got it. Thanks. And then 10%-20% customer attrition assumption that you're working with, based on your experience, what is the timeline for that? Like, does that happen in day one, or does it, you know, happen over the next 1-2 years?
We got about 15%-17% attrition, and a large part of that is at by the time that more than half of that happened at the time of transfer itself.
Right. So it's very immediate and happens very quickly. Okay. And then I think the other thing that you mentioned in the media briefing was that for some of the other cities assets that you have looked at, the financial economics did not make sense. I'm assuming this was largely in context of Indonesia. So could you share this option, like, what was the reason for why you left the Indonesia portfolio back? Was it like subpar, or was it the price too high?
Well, we looked at... frankly, you know, I mean, on the score, the two best asset classes always had are India and Taiwan, right? In the whole region. India is a very good book, but India is extraordinarily high-priced. And because, you know, we figured very early in the game that the Indian banks, given their price-to-book that they have, would always outcompete us. And when you go back to how do you make the transaction accretive, beyond a certain value, I didn't know how to do it, so I decided to pass. Of the other ones we looked at, Indonesia and China, from my standpoint, they're both subscale. They're not big enough to move the needle.
And so for the work and effort you need to do to integrate the business relative to the scale impact you get, it's not that consequential, right? So now, obviously, UOB is a different situation because they're doing full market. Maybe they can find a better thing for it, but from our standpoint, very hard to get the scale benefits that you need to make this thing really attractive.
Got it. And then my last question is, you know, your steady state ROE target of 13% that you've got in the past, would that change on the back of this acquisition in the future?
Well, I think if anything, this will improve a little bit. So, you know, Sok Hui, you want to?
Yeah. So we say that, it will add at least SGD 250 million to us, post the sort of COVID recovery. So on SGD 250 million, bottom line, at least, even excluding the synergies and on our sort of, if I look at the NPAT that we are actually getting, I think we actually easily get, a lift of 3 to 4%.
Got it. So 13.3-13.4 would probably be the right number to keep in mind now for your steady state ROE?
Yes.
Cool. All right. Thank you. That's all for me. Thank you.
Add something.
It's a 3%-4% EPS.
I think we're talking about ROE terms, right? That you're going to be able to add a lift. So on the SGD 250 million and assuming a base of roughly SGD 7 billion, I think you can get that kind of lift.
Yeah, assuming equity doesn't change-
Yeah.
In the pathway to ROE is the same.
Yeah, okay. Understood. Thank you.
Thank you. Our next question, Jayden from Macquarie. Please go ahead.
Hi, thanks a lot for the presentation, and congratulations on doing this transaction. I just had a couple of questions. First of all, around the SGD 250 million profit number. If I-
Sorry, around what number? You're actually a little skinny. Can you speak up?
Can you hear me okay?
Yeah, that's much better.
Yeah, $250 million. Yeah. Okay, I'll talk louder. Sorry. I had some questions around the $250 million. It sounds like that's before we get the attrition of 10%-20%. And then you mentioned also, Piyush, during the presentation, that there's about 8%-10%, you know, cost-based synergies, potential for 20% revenue growth over 3-4 years. So this $250 million, where do we think that it could get to if we put all of those factors together? And I guess the, the follow-on question from that is, you know, what do you think is the sort of CAGR in growth you could get out of this business over, over that time period as well?
I tell you, the one thing I can't tell you about is what happens to interest rates.
Mm.
So the big upside in this business is the fact that they have a $15 billion deposit base, of which, $11 billion is CASA. And so if rates actually, well, you wind up getting 6 rate hikes, and you go back to more than, you know, the exceed the 2019 rate levels, then there's a lot more upside in this business, frankly. So it really depends on... But let's park that aside for a minute, and you just assume that you get to a normalized interest rate environment, then I think we will give up roughly 25-odd million, I mean, out of the 250, maybe 10-odd%, because of the customer base attrition over the period of time.
I think we'll wind up, but it take 2-3 years, getting about a 20% lift on revenue. So I think, and some on expenses. So somewhere between SGD 275 million and SGD 250 million and SGD 300 million is what I think we can get to, but it will take 2-3 years to get there, you know, so.
Okay, that's really helpful color. And my follow-on question is, if I look at some of the data, just from the regulator in Taiwan, it seems that the Citi number of active cards have been declining over the past few years. The local banks have seen a bit of a step up in terms of active cards. DBS has obviously grown a little bit as well. Do you think that now that you've-- you're combining, will you look to go and increase that base of active cards? Would you just sort of seek to monetize the base of customers you've got on? You know, would you go into an acquisition mode now for customers?
Yes, I think we can. If you look at our performance in the last two... What you said is correct, by the way. So Citi's card base is, you know, being flaccid, to describe it a bit. And in the last two years, the unsecured book has also come off. It's very different from DBS. We've been able to hold our cards. The cards also, everybody's cards came off because of COVID spend, but our, our secured book also we were able to hold. And I think that reflects a willingness and ability of Citi to continue investing over the last two, two and a half years. I think it is quite clear that, this part of, what's been going on, the investments have not been forthcoming, that we need to grow this kind of franchise.
I think if you're willing to do that, you can actually hold your own once you have reasonable scale. And like I said, you know, the reason I put up those slides about what we've been able to achieve in Taiwan, in the last 3, 4 years, is just to make that point. And the reason we can hold our own is partly the digital agenda. I think in cards today, the cards in the old days was pure offline business. You got a credit card and you went and spent. Today, you've got to have a really good digital capability to supplement your offline card space. You know, your rewards management, your, ability to do a whole bunch of card servicing and so on. Once you have that, then customers start doing more and more with you on the card front as well....
I do think that, based on our own experience in the last 2-3 years, we can actually do a lot more with their card footprint than they've done in the last couple of years.
Okay, great. Thank you, Piyush, for the color. Well done again on the deal. Thanks very much.
Thank you. Our next question is Melissa Kuang from Goldman Sachs. Please go ahead.
Hi, thank you for taking my question. I just have a question on your AUM. Maybe can you share in terms of the AUMs of Citi, how has that been growing over the years, and how that has been comparing to the industry in Taiwan? And in terms of, you know, your AUM growth as well on your own book, currently, do you have any quite a bit of a Taiwan, you know, investor base or wealth base? And how do you see that, you know, developing? And also, I'm just a little bit curious in terms of you mentioned on the call that your F- was a bit high yield.
Can you just share the kind of products that Citi sells and the kind of products that you have, and how, you know, that, that is complementary and how you can actually, you know, bring about the changes? Thank you.
So I have data only for three years, Melissa, but, but in the last, let's say, 2018, 2019, 2020 to date, Citi's AUM has been growing at about - has grown 15% in that period, not prime, in that. And the same period, our AUMs have grown 30%. So, but that's just, that's point in time period because of the data I have in front of me. The nature of our AUM are actually, interestingly different, and that's why we think that we make more money on a per AUM basis, and we think we have an opportunity. A large part of Citi's AUM are focused on bonds, so they really do a lot of bond sales. But bond sales typically have the lowest margin in the portfolio mix.
We do a lot more sales of structured products and structured opportunities, which tend to generate better returns. So our relative mix, that's why Sanjoy called it complementary products. They do a lot more bonds, we do a lot more structured products, in our mix. And, that's really the difference in what drives the incremental returns for us relative to them.
Right. Okay. Can you maybe share also, like, wealth management fee growth? How has that been on the AUM growth? It's 15% from 2018 to date. But just in terms of the wealth management fee growth, that would be helpful.
What is the question?
Wealth management fee growth.
The wealth management fee growth, growth for Citi?
Yeah.
Well, again, the two data points I have has been actually very strong. SGD 2.3 billion-SGD 3.4 billion, whatever that...
Fifty percent.
Yes, between 2018 and 2020, it's up about 50%. And by the way, ours is also up north of 50% in this period.
All right. Thank you.
Thank you. We've got Mr. Krishna from Jefferies next. Please go ahead, sir.
Yeah, hi. Thank you. Thank you very much for taking my question. I have a couple of questions. Just wanted to clarify that you said you will be having $1.2 billion of capital, and if I hear correctly, the risk-weighted assets are about $7 billion. So I think the capital ratio that you're working on is 17%, which seems a bit high. So if you can give some color, if that $1 billion already includes some capital that you think that you need for the growth, just over and above what you need for, you know, running a subsidiary. And the second question is that, I mean, I would tend to think that Citi will be operated as a branch, and you will be looking at it as a subsidiary.
So, are there anything on the consumer banking business that you may not be able to do that Citi was able to do because they were working as a branch?
Well, first, the RWA, do you have it?
Yeah. So I think you're asking how do we get a 0.7 percentage-
No, no, no. His question is, he says he's reckoned the RWA is SGD 7 billion, and therefore SGD 1.2 billion capital on SGD 7 billion RWA is 17% capital adequacy. Why are you keeping so much capital? But I'm not sure where the SGD 7 billion RWA number came from, right? So...
Yeah. So the RWA that we have imputed is about SGD 9.9 billion. And remember, the premium is a capital deduction. It is not an RWA.
Okay.
It's a capital deduction from the numerator. So your tier capital, Tier 1 capital or core capital, you deduct the SGD 1 billion, and then you add on about SGD 9 billion to the denominator for risk-weighted assets.
Okay. Okay, you know, that helps. Okay, so the RWA is SGD 9 billion. Okay, and then the question on-
Yeah, so we need to take into account the local rules, like mortgages, there'll be 40% risk-weighted, cards and all that will probably be 100% risk-weighted, and then there'll be some operational risk charge and all that.
Your second question, the short answer is, no. Frankly, as a subsidiary, you're always able to do a lot more than you are as a branch. You know, and that's why our model is that we subsidize where we can. The downside of a subsidiary, of course, is governance. You need to have a local board. But since we know how to operate with local boards and local governance, we're happy to take that overhead. But the flip to that is you just get a lot more flexibility because you get all the capabilities that a locally incorporated bank gets.
Okay. Thank you very much.
Thank you. The Q&A session is still open. If you would like to ask a question, please press zero-one on your telephone keypad now. We've got the next question from Mr. Nick Lord, Credit Suisse. Please go ahead, sir. Please go ahead, Mr. Nick Lord.
All right. Yep, thanks for taking my question. Just had a further clarification on that, SGD 275 million-SGD 300 million that you were, talking about earlier to Jayden's question. How do we think about, I guess, the fact that you're getting some excess deposits that you can, plug into DBS Taiwan, and essentially that should bring down your funding costs, and improve the earnings there? Is that already incorporated in that SGD 275 million-SGD 300 million that you talked about?
No, actually it isn't. So the synergy I talked about is purely what we think we can do on the consumer franchise. But I think this is material. Frankly, it's not just a funding cost improvement, it's the funding capacity, because, you know, there's only so much I can fund in the interbank market and through cross-border funding. And therefore, the funding software actually constrains some of my ability to grow the book, as well. And so the incremental funding we get is quite helpful, both in terms of being able to grow our corporate banking business size, as well as you correctly said, that the margin might improve our cost of funding. And no, I haven't factored that in.
But to the extent that Citi has also deployed the surplus funds at higher, higher rates during the pre-COVID days, that will be inside the SGD 250 million number.
Yeah, but the credit margin them all.
Yeah, credit margin-
Credit margin will be in the corporate bank.
Yeah.
Okay. Okay, got it. And, apologies, it was cutting out a bit for me during the media briefing, but could you just repeat what you mentioned on... I believe there were some details on the average accounts for Citi being much larger than DBS and some spend being 20% higher, and how that's an opportunity for you guys?
Well, the real point we're trying to make is that their customer profile is the best and most affluent customer profile of any bank in the country. And the two areas, the three ones which I pointed out as examples, is their credit card spend is about 20% higher than our credit card spend. Now, if you look at credit card spends, you know, our average credit card spend is about SGD 4,500 or SGD 4,600. It's on the top quartile. But Citi's credit card spend is more closer to SGD 5,500, right? So it's a meaningful. So their profile of customers is a more affluent, more spending customer profile on cards. And the same is true on their affluent banking business.
On the affluent banking business, on the, you know, the equivalent of Citigold or DBS Treasures, their average relationship balance is, you know, about 50% higher than what our DBS Treasures average balances are. On the private clients, the Citigold private clients, their average balance is about $2.5 billion, which is almost 100% higher than what our averages are. So it's just all data points to demonstrate that they have a very affluent and high quality, high profile customer base, which anecdotally people know, and just to substantiate it with the data. Now, when you have a higher profile, high quality customer base, you really have the opportunity to get them to do a lot more cross buy, I call it, the cross sell, cross buy.
If you have the right range of products and the right digital solutions, you can actually get much better wallet penetration for that kind of customer profile.
That's on slide five of the Piyush's presentation deck. You can see all the numbers there.
Okay, got it. Thanks so much, Piyush and Shalini.
Thank you. Our next question, Harsh Wardhan Modi from J.P. Morgan. Please go ahead, sir.
Hi. Thanks, Piyush, for taking the question. A couple of questions. First, in Taiwan, how is the payment competition evolving, especially things like BNPL and also this entire, cohort of high net worth individuals on the payment side, credit card, wealth management, is the, the segment everybody is focusing on. So is there, any risk of, breakthrough, let's say, either on the payment side or on BNPL or any other, even DeFi or something, kind of, taking away the traditional market share? Or on the flip side, is there an opportunity, for you to have to meaningfully grow your market share because we are already ahead of the curve in some of these, new and some of these, technology to deepen your presence?
So Harsh, that's a tough question. First of all, I don't think DeFi is going to change anything anytime soon. If it happens, it'll happen many other places before Taiwan. Taiwan, actually, the overall digitization of the landscape has trailed many other markets, interestingly. So I don't see that happening in Taiwan first. The wealth product, again, I don't see too much impacting the Taiwan thing. It's because the wealth product is less to do with payment, right? It's to do with being able to get democratized wealth, maybe some digital and some advisory. On the wealth side, if you had to ask for a macro trend, it has been that a lot of Taiwanese money is continuing to equally flow out.
As the Taiwanese are trying to get this, and frankly, we look at the biggest—one of the biggest sources of money in Singapore in the last 2-3 years has been the Taiwanese inflows coming in over here. And to that extent, the fact that we have connectivity and the fact that Singapore, Taiwan work well together, I actually see that as a benefit. I think we can benefit from that.... The last piece is the one which is a little uncertain, which is the impact of buy now, pay later, et cetera, schemes, and there are two dimensions to that. One is, if people get very aggressive and the regulators let you, then I think it cuts into your card revolving. That's the most, apparently, because card revolve pricing is much higher than BNPL. That's in theory.
In practice, what happens is the banks have already been doing that. If you look at all of our ANR in the last two years, we offer installment loan programs on the card, and therefore, there are a lot of people who want to move to installment loan programs, they take it from us anyway. So the real question is, do the regulators introduce, let new competitors come in to compete in this space? And we see a lot more new competitors in the space that will put some pricing pressure. So that's, probably true. But in point of view, what's happening is most places, regulators are being very cagey about letting a lot more aggressive BNPL happen. So, it, you know, remains to be seen.
It's not entirely clear to me that you're going to see a huge impact of BNPL on the installment loan book, installment loan books in most of our markets.
Right. So the basic assumption should hold. Okay. The second one, your regulator, what are the questions they are asking as you are deploying capital, both internally, regulator, and your board? Are you comfortable you're now close to 14, slightly below that or close to it? There's still a way to go to 13. So how quickly do you think you are in position to normalize that and between both internally, you and regulatory guidance on that? Thanks.
Well, we have no regulatory guidance on that. We've been quite clear in the past that our management operating range is between 12.5 and 13.5, so you call it 13. And the regulator has been quite comfortable with that operating range. So that means we can actually dip down below 13 as well, if we wanted to. So then the question is generally, what is the outlook for RWA growth, capital efficiency and use? And so that's something we keep an eye on. So this will finally reflect in our dividend policy. And we said that we will continue to have a, you know, steady growth in dividend policy. I think that's what we'll work at.
Great. Thanks, Plyush.
Thank you. Our next question, Mr. Neel Sinha from CLSA. Please go ahead, sir.
Hi, thank you for taking the questions. A couple of them have already been answered. Plyush, I had two questions to think about. Just from a 10,000-foot perspective, the Taiwan market, it's not like India, it's not a very large population base, I think 23-24 million people. The growth rate is also quite low. It's already affluent. So, trying to figure out, like, is it more to do with high-margin smaller base versus thinking of tapping the mass affluent and/or growing more affluent in India in terms of strategy? And the second thing I'm sort of thinking about like, credit card basis, sometimes they're quite brand-sticky, right? And it's part of the suite of many other services that maybe Citi was offering. So what is the downside risk?
Because it is a fairly over-banked market as well. Any thoughts on that would be good.
Okay, I think they're both good questions. To me, I'll be honest, if you really think about it in strategic terms and growth market agenda, you know, for us, the big countries, the Indias of the world and Chinas, are clearly more important than Taiwan. I'm going to start with that. However, with Taiwan, really, the mainstay is the wealth business. So I pointed out before that the number of rich people in Taiwan are, you know, twice what you have in Hong Kong and three times what you have in Singapore. And so to the extent that wealth management is such a core and integral part of our business, that is very, very attractive to me. You know, our wealth business is now 20% of the bank.
It used to be, you know, 7-8% of the bank, and that continues to be a very significant growth. Now, half of what I'm acquiring is basically the wealth franchise.
Mm.
That is strategically aligned. Not only is there an opportunity in Taiwan, I think the connectivity and the PB opportunity at the high end is further facilitated by that. The second part, which is that they have such a good franchise, which makes 20%, it's actually almost opportunistic, because if I can get the, this thing, I get a 50% wealth franchise, which is the thing, and then I, on top of that, I get a really good customer base, I build out the card thing, I can get a, you know, high return, high margin business. Nothing wrong with that, as well. So that's how we thought about it, frankly.
Okay.
On your second question, which was,
Yeah, I mean, I was talking about the, you know, the cards business tends to be-
Oh, the card business.
Yeah, and, and also for value chain, yeah.
Yeah. Interesting thing is, I think there are two or three drivers of card stickiness. One, I do think that increasingly, a large part of card stickiness is your capacity to blend the online and offline, the digital capability. And our digital cards, you know, when you come to our platform, the ability to do everything effortlessly and seamlessly, whether it's to change your limits, stop your overseas card, keep your onshore card, do better security, have... Move your rewards around, that's very superior, and that's getting us a lot of traction in the other markets where we have cards. The second is, you're right, brand matters. But I think as a quote-unquote, "foreign bank," you have a premium and a prestige. In Taiwan, in particular, Singapore brands play very well.
So I think that I'm not overly concerned about people, you know, looking at the DBS brand. In all our surveys, our brand positioning is right up there, alongside, Citi brand positioning. So that doesn't bother me, too much from a brand distinct standpoint. If you look at market shares in Singapore, for example, over the last, you know, few years, we've been outstripping Citi. In fact, we've been outstripping all the other cities. We were number three in the, in, in Singapore, we're now number one. So I can tell you that our brand plays quite well and, our digital capabilities play quite well. So I do think we'll retain card stickiness.
Okay. Thanks so much.
Thank you. We have come to the end of the Q&A session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.