Analysis Of United Overseas Bank In Terms Of Three Segments Of Banking

Introduction

United Overseas Bank (UOB) is a full-service bank in Singapore founded by Wee Kheng Chiang in 1935. The bank provides its customers with a wide range of financial product and services with its network of more than 500 branches and offices in 19 countries worldwide. UOB’s three core business segments are Retail Banking, Wholesale Banking and Global Markets. This paper focuses on three segments of banking, covering deposits (supplies), lending to both retail and corporates (main revenue) and other revenue-driving ancillary activities (corporate advisory, wealth management, underwriting, etc)

Business strategy

UOB aims to strengthen its foothold in Southeast Asia (SEA) and Greater China by making use of its extensive regional franchise to serve the expanding needs of various regional customers. Through digitization, UOB also aims to make banking simpler and safer with the use of financial technology to create innovative banking solutions for clients.

Porter’s 5 forces for full-service banking in Singapore

Threat of entry for full-service banks (High): Despite the high costs of entry and the traditionally stringent regulations governing the banking industry, recent developments have made the threat of entry higher compared to the past. The liberalisation of the banking industry (Qualifying Full Bank Licenses) in Singapore since 19991 has resulted in an increasingly competitive environment not just amongst the domestic banks (DBS, OCBC, UOB), but also long-standing foreign banks (SCB, HSBC). Newer entrants originating from China (BOC, ICBC), with their large balance sheets, have no issue setting up branches and automated teller machines (ATMs) and are starting to chip away at the deposits of the domestic banks, by offering attractive deposit interest rates and other services such as yuan-trade settlement. This decreases the amount of loanable funds for the domestic banks, eating into their interest income. Power of suppliers for full-service banks (High): Banking infrastructure suppliers include information and communication technology (ICT) providers, ATMs suppliers, online banking systems and real estate for offices and branches. However, as banks earn profits by lending out the deposits they collect, their main supplies should be money, which comes from the depositors that they provide services to.

Due to the loosening of banking regulations in Singapore and the entrant of new players, depositors now have a wider range of products to choose from and no longer depend on a few banks for their savings accounts. In addition, there is no substitute for what the depositors provide, giving the customers high power as a supplier of deposits. Power of buyers for full-service banks (Moderate): The main revenue generator for full-service banks are from the interest income that they collect from their lending business, and fees from other ancillary services. Due to the low revenue concentration in the retail clients, the loss of one or two customers from this segment is usually negligible, thereby reducing their power. In the case of corporates and larger local businesses, the effect of gaining or losing one or more of these key clients might be more significant, giving these clients more buyers’ power. However, a mitigating factor is that switching costs for corporate clients might be high as there are often early exit fees charged if a client decides to refinance their existing loan early or to partner with another bank instead. Banks also often provide integrated services that can have an impact on the operations of the business client decides to make a switch. Threat of substitutes for full-service banks (Low): FinTech start-ups have often been touted as a disruptor to banking, but they provide very different services, which ranges from e-payments, investment solutions to financing solutions. In the case of financing solutions (lending or capital markets advisory), which is the main revenue driver for banks, there has not been a real breakthrough for FinTechs. This is because Fintechs have not yet gained the trust4 of regulators and they still lack the ability to facilitate the large-scale transactions that corporate clients require. Furthermore, banks are recently using a more adoptive approach towards technology by acquiring FinTechs and developing in-house technology solutions.

Despite the emergence of FinTech, their small size makes it difficult for them to compete directly with the banks, making the threat of substitutes for banking services relatively low. Rivalry amongst competitors for full-service banks (Low): Despite the large number of foreign competitors, from major corporate-investment banks (Citi, JPM) to other smaller lending institutions (HLF), the strong brand and the large size of domestic deposits in the deposit-taking banks (UOB, OCBC, DBS, SCB, HSBC) gives them a much stronger competitive advantage in the local lending business. This often leads to additional domestic advisory/capital markets/wealth management businesses, allowing them to further dominate banking in Singapore5. As a result, most foreign investment banks focus on larger multinationals as the smaller domestic deals are not attractive enough to them. Aside from the low foreign competition, different client segments (retail/small-medium enterprises (SMEs)/local corporates) in Singapore allows further specialisation for the domestic-focused banks. The lack of serious competition in the domestic lending space, and the ability to differentiate by segmenting the market makes rivalry low.

Banking industry life cycle

The highly competitive banking industry in Singapore is in a mature stage, as Singapore is a developed economy with slowing market growth. Due to the 2008 financial crisis being mostly driven by financial derivatives, global regulators are now slightly warier of complicated financial structures. This has inhibited product innovation (financial innovation)6, pushing most of the innovation done within the banking industry towards process innovation (digitization and operational efficiency). Although financial innovation has already reached its regulatory threshold in Singapore, the same cannot be said for the rest of SEA or China. Due to regulatory concerns hindering investors from investing in the banking industry of those areas, it has led to a lag in financial openness and technological advancement. This makes the banking industry in developing economies in a growth/shake-out stage. Singaporean banks have identified this trend as an opportunity to seek growth in an already saturated Singapore market, and to differentiate their services from competitors.

Key value drivers for UOB – differentiation strategies

As banking is a mature industry with minimal product innovation, UOB’s competitive advantage comes from its differentiation strategies, by using complements with other banking products, its network effect from its geographic coverage, and its family business branding. Complements: Unlike the U. S where many banking clients are originated from multinational corporates, Asian clients are mostly SMEs. While large corporates are willing to hire external companies for advisory services such as consultancy or investment banking, SMEs in Asia are more reluctant to do so due to their lack of belief in advisory services and a high price sensitivity.

However, many local SMEs have indicated that the top barriers to overseas expansion is unfamiliarity with the standards and processes of foreign markets. UOB targets this gap by offering both lending and advisory services, allowing clients to gain access to financing as well as local expertise for their overseas expansion plans, all at one price. Network effect: The banking infrastructure in SEA is still considered underdeveloped as the GDP density does not justify the opening of a bank branch in less developed countries/cities. This has hindered SEA businesses in the untapped parts of SEA from gaining access to a full suite of banking services and makes it difficult for Singaporean companies to execute cross-border transactions with SEA companies.

As the Singapore market becomes more saturated and companies seek further growth opportunities outside of their domestic countries, the ability of banks to be able to provide cross-border expertise adds tremendous value to their service. UOB recognizes unserved market by utilising its extensive network of SEA branches to bank SEA companies and facilitate deals between them and other Singaporean companies. Branding: Due to the size of the transactions involved in corporate/business banking, the industry is very dependent on intangibles such as trust, loyalty, and excellence to a point that customers can become less price-sensitive, if a bank provide them with the confidence to achieve desired results. UOB leverages on its roots as a family business by focusing its marketing initiatives on SMEs or other family business with similar values. 11 With UOB’s abilities to understand the challenges and needs of a family business, and their regional financing capabilities, SMEs can enjoy a comprehensive solution for both their advisory and financing requirements.

Core competence of UOB

Established and integrated network across South-East Asia: UOB’s Foreign Direct Investment (FDI) advisory unit and its extensive geographical coverage of SEA allows them to provide all companies looking to set up regional operations in Asia with customized banking consultancy services. In 2017, UOB became the first and only bank in SEA to sign memorandum of understanding (MOUs) with various Chinese government agencies to jointly help Chinese companies, to benefit from the Belt and Road initiative and to expand into SEA. Through these collaborations, it allows Chinese companies to access UOB’s suite of local and cross-border solutions, as well as an ecosystem of strategic partners across UOB’s SEA network. 1 This further enhances the network effect that UOB has set-up, combined with capabilities in credit financing support, trade financing, cross-border settlement, UOB can assist not just Singaporean clients, but also Chinese clients in their SEA expansion.

UOB and its competitors

Despite the presence of foreign deposit-taking banks such as Citi, HSBC and SCB, they should not be considered as UOB’s main competitors, as they each have a different corporate agenda for their presence in Singapore, which is to leverage on their Asian network to boost their business with other larger multinationals. UOB’s main competitors in Singapore banking are OCBC, DBS or potentially other South-East Asian banks such as CIMB and Maybank as they compete on similar segments (retail deposits, SME loans, mortgage loans, local corporate loans) and have South-East Asia as a core part of their strategy. Competitive positioning of competitors (Geographical focus): UOB’s main banking competitors DBS and OCBC also have made their own forays out of the mature Singapore banking market to seek growth in other developing countries. Instead of focusing on SEA like UOB, both DBS and OCBC have bought into the Chinese growth story and are more focused on expanding their capabilities in Greater China. This can be seen in Table 1, where both banks have a much larger Greater China loan portfolio as compared to UOB, and, OCBC’s acquisition of Wing Hang Bank in Hong Kong in 2014.

Competitive positioning of competitors (Products): Both DBS and OCBC have chosen different competitive positioning methods from UOB. As observed on the table above, both UOB and OCBC has considerably lesser loanable funds available when compared to the market leader, DBS. Through its strong branding and low cost of loanable funds, DBS uses a Cost Leadership strategy by focusing its revenue stream through its lending products to earn a superior interest margin. Like UOB, OCBC is unable to compete with DBS on lending, so it diversifies its income streams by offering complementary products through its private bank subsidiary (Bank of Singapore) and insurance subsidiary (Great Eastern). This can be seen in Table 1 where both UOB and OCBC have a lesser portion of their income derived from interest income, as compared to DBS.

Isolating mechanisms for UOB: As Singaporean SMEs and family businesses continue to expand into SEA to seek growth opportunities, UOB’s competitive advantage in its SEA network cannot be underestimated. This competitive advantage is difficult to imitate mostly due to its path dependence. With UOB’s roots as a family business and its decision to pursue SEA as a growth strategy, it has established a competitive advantage that provides economic value to clients (as seen in its ability to charge higher interest margins in Table 1), is rare compared to competitors, is costly to imitate (due to high infrastructure costs) and organized to capture its key strengths, which are family businesses and SMEs. Financial performance over the past three quarters: On Table 2, the financial performance of all three Singaporean banks has been improving over the last three quarters, as seen in its ROE and Net Profit improvements. However, due to trade disputes in China, it has resulted in a fall in stock prices for all three banks. UOB with its larger SEA exposure, and DBS with its larger balance sheet, have been spared of the extensive capital losses that OCBC suffered. Aside from profitability, it should also be noted that UOB has consistently maintained the highest Capital Adequacy Ratio, because of its business model of having a smaller loan portfolio and its focus on non-lending products. UOB’s strategy can also help them manoeuvre the tightening Basel III/IV regulations on bank capital, possibly allowing them to outperform its peers that derive a larger portion of their profits from interest income.

Conclusion

In a mature industry such as Singapore banking, growth opportunities are very limited. As emerging economies open their markets to investment, UOB has been successful in identifying SEA as an outlet for growth, while avoiding direct competition other major banks. Leveraging on its strong family business brand and its integrated banking services business model, it allows UOB to decrease competition in an already saturated retail deposits market by focusing on non-interest income sources. With an established key competency in the SEA markets, UOB will continue to thrive in years to come.