Using Technology to Diversify Net Interest Margin (NIM)
The top corporate banker at DBS wants her clients to get on board the bank’s A.I.-enabled DLT platforms.
Tan Su Shan, group head of institutional banking at DBS, is augmenting traditional lending-based revenues with fee income derived from budding digital platforms.
At a time when banks’ net interest margins are under pressure, digital platforms offer the possibility of generating subscription fees, if they offer enough value to big corporate clients.
New NIM normal
Net interest margin (NIM) is the difference between what a bank earns on lending and what it must pay depositors, and a positive NIM is generally a sign of stable profitability.
Bank NIMs have been declining worldwide because global interest rates have fallen to almost zero (and in some cases, gone negative). The global recession caused by COVID-19 is making the situation worse.
A July 15 report by S&P Global Market Intelligence predicts Asian banks won’t return to 2019 “normal” conditions until 2023. This is weakening banks’ asset quality and hurting earnings. Next year, as government support to companies begins to unwind, banks are likely to report higher non-performing loans. S&P GMI predicts DBS will see its NIM decline by up to 20 basis points by summer 2021 and its NPLs could rise to 3% in 2022.
That difficult backdrop is adding urgency to DBS’s ongoing digitalization strategy.
Tech to the rescue?
Digital strategies can lead the bank into lending to smaller businesses that would have been uneconomic in a paper-based world, primarily by leveraging anchor clients to reach their suppliers and distributors.
DBS is turning to digital platforms, including blockchain-enabled trade-finance solutions, to realize this goal.
“Corporate banking is still relationship-driven, but technology creates means of access and gives potential customers a history that lets us make better decisions and fulfil transactions,” Tan told DigFin.
This interview took place shortly before DBS posted word on Monday, October 27 of its launching DBS Digital Exchange for digital tokens and cryptocurrencies – an announcement the bank swiftly retracted from its website. Separately, J.P. Morgan also announced this week that it facilitated the first international payments transaction using its digital JPM Coin.
Leading banks are jumping into blockchain, and it is not hard to envisage how an enterprise DLT could connect to a broader digital-asset play.
DigFin did not ask Tan about tokenization, but blockchain-inspired platforms are at the heart of her approach to adding value to corporate clients. One example the bank has announced is with Keppel Corporation, with which it is building digital supply-chain financing solutions. DBS and Keppel are also partnering on 5G projects and will connect Keppel’s customer-facing utility and telco businesses with DBS’s consumer bank.
The consumer angle is important: Tan, before taking the institutional banking role, led DBS’s consumer and wealth management banking business for 10 years. This is where the bank first began to digitize, and she has spent the past two years transferring that experience to the corporate side.
“The problems big Asian corporations and multinationals face are industry-specific,” she said. The bank can’t build a solution to cater to treasurers across the board. But it uses its bankers’ knowledge of specific sectors to build industry-level solutions via distributed-ledger technology.
DLT, the private, permissioned enterprise version of blockchain, helps automate workflows at the industry or network level, so its value is in getting disparate players to automate on a common platform.
COVID-19 has accelerated the business case for DLT deployments, and DBS is an early adopter of some third-party vendor platforms such as Contour for trade finance.
In July, the bank completed the first secured letter of credit on Contour’s platform, between Nanjing Iron & Steel, Singapore Jinteng International, and Hope Downs Marketing Company (a joint venture between Aussie miners Rio Tinto and Hancock Prospecting).
Under Tan, however, the bank wants to help clients in certain sectors address particular problems.
For example, DBS has helped connect Indonesian nickel and cobalt miners, Chinese battery makers, and Korean electric vehicle manufacturers, via Contour’s trade platform or other venues.
Not every problem is solvable. Tan acknowledges some setbacks: the bank tried to build a DLT solution for healthcare around insurance claims. It didn’t take off.
Adding value, charging fees
But the model remains attractive because once DBS (or other platform provider) can convince others to use their system, it generates subscription revenues from the anchor user (such as Keppel) as well as new lending opportunities up and down the corporation’s value chain.
By making connectivity to the platform open to anyone who use DBS’s APIs (again for a fee), the bank can even extend loans to companies it doesn’t know, in markets where it doesn’t operate.
The next step over the coming years – other than making these platforms valuable enough to get clients to pay for them – will be for DBS to connect its own verticals, creating a network of networks.
Currently all of these platforms, both the bank’s and others’, are limited by their lack of interoperability. Tan reckons it will be a while before M&A begins to consolidate this new scene. DBS could generate new competitive advantages if it can at least scale across its own networks. “Interconnected systems are still two to three years out,” Tan said.
Banker experience, data insights
Scale these is key to getting these software solutions to deliver revenues. At the end of the day, they rely on data and analytics. The more activity, the more interconnections – the more data, and therefore the more insights, which can serve anchor corporates and lead to attractively priced products.
This is where Tan’s experience in consumer banking is helping: she helped oversee the launch of DBS digibank in India, the first all-digital bank in that market, which relies on data and artificial intelligence tools to make quick credit and pricing decisions.
She is now deploying these tools to corporate banking platforms, where she can also use the data to flag potential problems in a value chain that an anchor conglomerate might not otherwise notice.
DBS is working with tech company Quantum Black to harness data and analytics, so it can get a deeper understanding of its clients.
Conglomerates are so complex – involving various arms, sub-accounts, boards, signature approvals, charging limits – that it takes A.I. to detect patterns.
“Using A.I., our network analysis can stress test a client’s finances, identify cashflow issues, and see where their own customers might have problems,” Tan said. “The possibilities are endless.”
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This article was first published by DigFin in Oct 2020.
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