• DBS Group achieved record net profit of S$2.35 billion for the first half of 2017
  • The stellar profit came despite the non-performing assets loan ratio on its South and Southeast Asia portfolio ex-Singapore increasing by one full percentage point in just three months, to 4.6%
  • A key reason for the profit growth was that digitisation and productivity enhancements resulted in a 1% improvement in the cost-to-income ratio, to 43%

Digital branches drive costs lower

A key catalyst for the reduction in the ratio is distribution, said CEO Piyush Gupta, as branches have become far more digital. DBS has rationalised automated teller machines (ATMs), for example, so that customers now use one new-generation ATM to deposit and withdraw cash rather than using separate machines for deposits and withdrawals. Along with reducing capital costs with fewer machines, the new ATMs reduce staffing levels for cash replenishment because they recycle cash. With the total cost of cash for DBS in Singapore at almost S$100 million annually, the savings are significant. Moreover, branches have virtual and video tellers, and the contact centre uses data analytics. As one indicator of the impact, Chng said underlying headcount is more than 2% lower than at beginning of 2016.

And eventhough the bank hasn’t reduced the number of branches significantly yet, Gupta expects to rationalise the branch footprint over the next 3-5 years. His mention of Scandinavia having just 45% of the number of branches it had not long ago and the Netherlands having an even lower 25% of its previous total implicitly acknowledged just how low the branch count could eventually go. Eventhough World Bank data shows that Denmark still had a relatively high 24.7 branches per 100,000 adults in 2015 compared to 9.4 in Singapore and 22.3 in Hong Kong, the important point is that digitisation reduces the need for branches anywhere.

A key reason that the number of branches will fall, Gupta explained, is that footfall has already dropped 3-4% and is continuing to come down. “As more people use i-banking, “PayLah!”, they don’t come to the branch.”

Along with making branches more digital, DBS has also digitised processes end-to-end. It is moving to digital customer acquisition for most consumer products, from credit cards and bank assurance to mortgages and small and medium-sized enterprise origination. Last quarter, for example, more than half the mortgages came through indirect sources and online activities. “As you acquire online, your cost of acquisition goes down lots,” Gupta observed. Straight-through processing also reduces manual entries by staff, since new accounts are handled digitally from customer interaction to the back end.

Additionally, the bank’s technology strategy is changing. The move from old legacy systems to the cloud has a massive impact on hardware, data centres and software, Gupta said. And on top of that, the bank is reducing outsourcing, which in turn reduces cost from vendors. “As we insource more, moving away from data centres to micro services and commoditised services’ we’re seeing the benefits.”

Wealth management goes digital too

Perhaps surprisingly, digitisation has extended to wealth management as well. The cost-to-income ratio for high net worth clients is below 58%, Gupta said, compared to an industry average of about 70%. “We have been successful with i-wealth. More customers are happy to deal online. Feedback is strong. Wealthy customers are beginning to do self-service.”

The reason wealth management is more efficient, Gupta explained, is the wealth platform. The bank runs everything from its treasures mass affluent products to high net-worth services on a single platform, albeit with different front-ends.

Along with improving efficiency, having a single platform enables internal staff mobility and promotions. When you promote staff internally, Gupta explained, “you don’t pay the (same) cost as when you hire from the market. Efficiency ratios continue to improve.”

digibank in India – A model for Singapore and Hong Kong

DBS digibank in India is perhaps a model for the future. There, the cost-to-income ratio is in the low 30s. Customer acquisition costs and back end costs are low because there is no branch infrastructure, the bank uses straight-through processing, and support units use artificial intelligence and chatbots rather than just people. digibank now has about 1.4 million customers, and the bank is handling them with 60 people rather than the 400-500 it would normally need. Even though it’s acquiring about 100,000 new customers every month, Gupta said that by year-end “we’ll be down to 30 people.”

Even with those low costs and a good balance build-up, Gupta quipped that “like every good fintech, we’re losing money. We expect to lose money for three or four years. If you try to do the same building in a branch model, you need 15-20 years. In digital, break-even is in three to four years.”

The ten-year vision

Gupta believes that digitisation will continue to propel costs lower. “We hope to bring cost-to-income to 40%, from 43%” within three to five years, he said. “We’re headed in the right direction” and there are still significant opportunities to take costs out, so “we should be able to get cost efficiencies every year.”

In comparison, data from S&P shows that banks in the Middle East and Africa have the lowest cost-to-income ratios globally at 43.4%, with Egypt the very lowest at 27.3%. Banks in Asia average 50.6%, ranging from a low of 34.2% in China to a high of 65.7% in Korea, while banks in the US average 61%.

While Gupta said it’s not possible to reduce the cost-to-income ratio in locations such as Singapore or Hong Kong to India’s levels immediately due to their legacy base of customers, he expects to be at similar levels in Singapore within ten years. It could occur even faster, however, as Oliver Wyman has said that a 15% cost-to-income reduction in three to five years is a realistic goal for banks that leverage “deep digitisation.”

As long as it keeps those NPLs in check, the continuing digitisation and dropping costs bode well for bank profitability in the decade ahead.