This article first appeared in The Edge Malaysia Weekly on October 4, 2021 - October 10, 2021

WITH nearly four decades as a banker, HSBC Bank Malaysia Bhd CEO Stuart Milne has a front-row seat to the evolution of banking. And the future of banking is all about digital enablement, he says.

Starting out in HSBC Group as an international manager trainee in 1981, his first job was as a savings account teller at a branch in Bandar Seri Begawan, Brunei.

“Those days, we had customers — tribesmen — who, unable to read or write, would use their thumbprint to withdraw money,” Milne recalls.

As a teller, his job scope entailed checking the thumbprints on the withdrawal slips against physical records. He also had to update passbooks as well as balance the debits and credits manually — a time-consuming task compared with today.

“If you wanted approval to do something — for example, a large loan — it had to go to Hong Kong. You would have to write a letter that went by mail to Hong Kong. We always had a rule in HSBC Group that nothing sits in the head office for more than 24 hours and if it’s really urgent, we could use telex — which was coded and had to be uncoded physically.

“Nowadays, there’s email, full computerisation and instantaneous worldwide coverage,” Milne notes, adding that the adoption of technology has been the “most dramatic change in banking” with a steep learning curve and pace of change that is getting faster every year.

With the future of banking equated with digital enablement, HSBC wants to be a leader in this space, earmarking “digitising at scale” as one of the core pillars in its four-pronged strategy. It expects more than 90% of its corporate transactions in Malaysia to be done through digital channels by the end of this year.

With regard to the adoption of electronic trade and electronic foreign exchange transactions alone, among corporate customers in Malaysia, HSBC has seen a notable increase — by 20% and 14% respectively since January 2020. As for its retail transactions, it expects more than 90% to be done through digital channels by the end of 2022.

In 1H2021, for retail customers specifically, the bank saw a more than 80% growth on mobile active users from the same period last year. E-payment transactions saw a 42% increase in transactions in 1H2021 from the same period last year.

In Malaysia, HSBC has invested US$40 million (RM167 million) to equip its branches with enhanced digital capabilities and new technology from 2021 to 2023, which is in addition to the US$18 million that was invested from 2018 to 2020. This will enable the group to develop innovative branch formats and champion new ways of serving its customers.

“We are scaling our self-service digital journey implementations to our branch channels in the form of a digital-assisted experience where customers are provided with a consistent experience across their touch points with HSBC,” Milne says, noting that the group was the first bank in Malaysia to launch a digital account opening journey with a 24/7 self-service machine that can handle identification and verification.

With more digitalisation, will there be branch closures moving forward? HSBC has already announced the closure of 13 branches, bringing its network tally to 54 by the end of 2021. Will more jobs be cut?

Milne assures that there will be no job-cut plans for now, following on from what was announced in June regarding a voluntary separation scheme that the bank has just completed in Malaysia, declining to share specifics on the exercise.

On the branches, he believes it is about footprint today, rather than numbers. “Going forward, we will be a mix of real estate and digital, but the emphasis now is on digital as opposed to just real estate.”

Milne — who was appointed as HSBC CEO on May 24, 2018 — will retire on March 31, 2022. “We are in the process of looking [for a successor]. We are looking internally as well as outside, including in and out of Malaysia,” he shares.

On captaining the ship through a pandemic, the HSBC lifer observes: “If anything, what we have learnt from Covid-19 is that there is a massive acceleration on two fronts — digitisation and sustainability. Both form key elements of the group strategy and part of the Malaysia focus, and will continue after I leave.”

Under Milne’s watch, HSBC has been driving the sustainable finance agenda forward, with initiatives that include the bank acting as joint lead manager and joint bookrunner on the government of Malaysia’s US$800 million 10-year Sustainability Sukuk and US$500 million 30-year Sukuk, as well as HSBC Amanah Malaysia acting as the joint sustainable development goals (SDG) structuring agent on the 10-year tranche, which represents the world’s first sovereign US Dollar Sustainability Sukuk.

HSBC Amanah is also on its way to become HSBC Group’s first sustainable banking entity globally by Dec 31, 2022, with a target of having more than 50% of its loan portfolio being in compliance with environmental, social and corporate governance (ESG) standards.

At home, the group has committed to becoming a net zero bank — which is another pillar of its four-pronged strategy — by reducing its footprint through its operations, supply chain and financing portfolio.

Its third strategy will see it building on its strengths in its wealth business on the retail side, while for corporates, HSBC will leverage the reach and value of its global network. Its fourth strategy is to focus on group talent, culture and future skills.

As the group aims to align the financed emissions from its portfolio of customers to net zero by 2050, what is HSBC’s position on lending to important business sectors in the country such as the oil and gas (O&G), and plantation sectors that may not be 100%-compliant by the deadline?

Milne acknowledges that this is a matter of concern for all the participants in the industry.

“What we are doing with our commitments is to effectively finance the transition to net zero. That is recognising that most [of our] customers today are not net zero but want to be net zero by 2050. So, how do we help them? This is not about excluding sectors; this is about how to do work with customers in those segments so that we achieve our objective of getting to carbon net zero by 2050,” he explains, adding that this means there will probably also be carbon emissions from the customers that the group banks with, but on a net basis, it will be netted down to zero.

Milne points out that Malaysia’s plantations are a significant carbon sink, where the oil palm trees absorb carbon from the atmosphere.

“The issue that we don’t want is people draining swamps and cutting forests to plant new oil palm, and that is where certification comes in. So, as far as the palm oil industry is concerned, the MSPO (Malaysian Sustainable Palm Oil) Certification Scheme is the standard in Malaysia and the banking sector will at some point expect all its customers to be MSPO-certified. Players that are not certified will not be able to operate effectively,” he says.

Meanwhile, Milne reveals that the Association of Banks in Malaysia is working on a set of principles that will cover all segments, including the O&G and palm oil industries, and recognise the role of banks in helping their customers make the transition.

HBSC Group’s “pivot to Asia” strategy will see investment amounting to US$6 billion in the region. How much of that will be flowed into Malaysia? Milne is unable to provide specifics but affirms that “Malaysia is a priority market for HSBC Group globally”.

Registering RM497 million profit before tax (PBT) in FY2020, the Malaysian franchise is the sixth-largest Asian market contributor to HSBC Group.

In Malaysia, as at Dec 31, 2020, the gross outstanding loans, advances and financing extended by the group to individuals under its targeted relief assistance programme amounted to about RM1.6 billion, or 3.15% of its total gross loan, advances and financing.

HSBC’s FY2020 earnings saw a 62% year-on-year drop in PBT due to a rise in provisioning and margin compression. Gross impaired advances rose to 3.5% from 1.9% a year earlier.

As the country is still in the midst of a targeted loan moratorium, would asset quality deteriorate further when that lifts?

“We are very well funded by retail deposits … And the way impairments work in the banking sector is you need to run your models and estimate your future losses ... It’s not to say that all of that will ultimately result in actual losses because if the recovery picks up in the last quarter, we may see an opportunity to write back some of that over time,” Milne says.

“The good thing is that we have a very strong capital ratio, our liquidity is fantastic, and we are very keen to grow our assets as quickly as we can in a safe manner and in a way that supports customers getting back to doing business post-crisis,” he adds.

Milne opines that the vaccination rates and continued reopening of the economy have been “encouraging” as they will lead to a recovery taking hold in 4Q2021 and 1Q2022.

As far as bank earnings and credit quality is concerned, he believes that it is crucial that banks support this reopening with an adequate flow of credit, supported by government guarantee programmes where appropriate.

“The faster the recovery takes hold, the quicker citizens will be able to get back to normal with household income rising back to pre-pandemic levels. When customers have a job and an income, they meet their financial commitments and this will lead to a normalisation of bank profits.”

“We are all in this together and we will get out of it together,” he adds.

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