Is the consolidation over in the Singapore banking sector, or is there more to go?

That's a hard one to call. Put it this way, there is no reason why there shouldn't be another round of consolidation in the near future. There's no reason why a country the size of Singapore needs more than two banks. On the other hand, there's no compelling reason why the existing three should merge. You reach a certain size and certain mergers can become counterproductive. So it's a hard one to call. You could end up with a steady-state of two, or a steady-state with three.

Is it politically difficult to have another merger now, because of the unemployment issues?

I don't think that anyone would be wanting to look at something right now. We're just cleaning up now, and merging departments and going through retrenchments. So I don't think anyone is in a position to do anything now.

I don't think anything would happen - if at all - till later next year, maybe later, when the economic situation could be very different. It could happen in five years time.

Switzerland is the analogy that everyone uses, and is where I used to work, and initially the system worked with three banks, but then later it worked with two as well.

Can we talk about the issue of bank capital. Do you feel OCBC's bank capital position is optimal now?

It's never optimal. It's like my other hobby, model railways - you never stop tinkering. It's not optimal, but it's a lot better than it was. From a tier one capital point of view, we're in a comfortable position. We're not running a capital surplus. We're at a margin over the legal minimum that is sufficiently close that it is not uncomfortable, but also makes us think about how we're using our capital and not wasting it. It's at a nice point. We've always targeted 10% as a tier one level for the group. You then start thinking about the components of tier one. You can think about having some hybrid equity instead of all core equity, you can then look at your tier two position.

At the group level, we're actually over on our tier two position. Our target is 14% and we're more like 17-18%, but the reason for that is we're constrained at the bank level. As I try to explain to analysts, we have to meet the capital adequacy of both the bank, standalone, and at the group level. However, it is only the group numbers that are published. The acquisition [of Keppel Tatlee] is the same number of dollars at the bank level as the group, but the bank is by definition, smaller than the group, and therefore the percentage impact on the bank must be bigger - because it is the same number of dollars divided over a smaller base. That's why we're running what would appear to be a slightly high tier two level at the group level. It's because we're not running a high tier two at the bank level.

So I can do some internal cleaning up that might bring the group and the bank numbers into line.

What's in the group, that is not in the bank?

All our subsidiaries: the finance company, Malaysia. They are the two big ones.

Where is the property held?

Most of the property is held either in the bank, or in small subsidiaries. The property is held at depreciated book cost and not market value. The only way you free up the capital, under MAS rules, is by disposing of it. MAS rules does not allow us to revalue property. We can't use revaluation gains and redeploy that capital elsewhere in the business.

You've looked at disposing the property in the past. Any plans for disposing of it this year?

It's premature to talk about plans. Our new CEO needs to settle in, and work out his agenda.


The MAS says the banks have to dispose of property by 2004?

Yes, July 2004.

Back to the capital issue. If you wanted to do an acquisition, would you need to raise new capital, or would the existing position allow you to absorb a deal?

No. The existing capital base is not sufficient to cover anything other than very small acquisitions. The capital ratios are pretty much optimal. So, if the bank were to look at an acquisition - and I'm not saying we are looking at one - then we would need to issue new capital one way or another. So we would either need to issue shares, or raise capital to pay cash, or some combination thereof.

Fundamentally, is OCBC committed to expanding via acquisition?

It's one way. We're committed to expand. Acquisitions is only one way. We can do it organically, or through alliances and joint ventures. I wouldn't want to exclude any option.

Acquisitions are always an easy and quick way to expand, than going through organic growth, but they tend to be value-destroying, because most people tend to overpay. So we've always said we are going to be very rigorous about our valuation disciplines.

Broadly speaking, what are the drivers behind this regional bank concept? Is it just an economy of scale thing?

There are two arguments for it. One is economies of scale. Although in retail banking that is not always easy to achieve because retail banking platforms in different countries can be very different. So it's quite hard to take one retail banking platform and use it cross-border, unlike investment banking where you can use the same trading systems throughout the world.

The other thing which is beneficial is risk diversification. People often don't appreciate how much diversification you can get out of a large credit portfolio. Regional expansion allows a bank to smooth out some of the lumps in its risk profile, by getting greater diversification across industries and segments.

Overseas Chinese Bank is your name. What is the interest in China?

We've got about 200 people in China across our branch network. We've been in China longer than Singapore, because the history of the bank was as a merger of three Hokkien banks back in 1932. OCBC has been in China since 1925 and it has been there consistently.

We have a strong interest in that market, but we appreciate it's a game that evolves very slowly, and you have to consider your moves and your partners very carefully, and not rush in. China is littered with the corpses of people that have rushed in. However, it is a very attractive market to us.

And because of OCBC's name, culture and history, we are well placed to benefit from the opening up of the financial services industry in China. But it's not something that is going to hit the bottom line this month.