Question 1: What is the outlook for the coming year?

It is clear the global economy is slowing because of the aggressive tightening by the US Fed, which has occurred alongside ongoing geopolitical tensions and supply chain disruptions. The IMF has projected 2023 global economic growth to be at 2.9%, which would be lower than the 3.4% for 2022.

I expect US interest rates to increase to around 5% and stay there in 2023. The latest core Personal Consumption Expenditures price index of more than 4% is still above the Fed’s target. At the same time, job creation in the US remains strong, with the unemployment rate of 3.4% in January 2023, the lowest since 1969.

But several green shoots are emerging.

First, inflation is moderating. Energy prices have declined due to a warmer northern winter and the availability of replacements for Russian oil and gas. At the same time, supply chain constraints have eased significantly as port backlogs are cleared. With interest rates already in restrictive territory, financial markets have started to price in the end of the rate upcycle. If inflation continues to ease and a mild recession ensues in the developed economies, we will end up with a soft landing.

Second, China’s reopening will provide a substantial boost to economic activity, particularly in Asia. We have seen how other countries’ reopening in the past year created a resurgence in travel and tourism, which are major economic sectors. China is bigger than other countries in the region. I expect consumption to substantially increase and energies unleashed across the region in the coming year now that the short-term pain from China’s reopening appears to have passed.

Domestically, China has also corrected course on policies that clamped down on what it saw as excesses in key sectors. In the property sector, it has now provided liquidity support, including for the weakest companies. I do not foresee any property crisis there. In the technology sector, it has allowed major companies to release new games, sign up new customers and carry out new fundraising.

Third, geopolitical tensions have started to ease, although spats could occur from time to time. The tone has softened since Presidents Joe Biden and Xi Jinping met in Bali in November. China has subsequently appointed its ambassador to the US, who customarily spoke in more measured tones than his wolf warrior foreign ministry colleagues, as foreign minister. High-level exchanges with the US have resumed, with both sides’ foreign and finance ministers meeting in recent months. Relations with Australia have similarly improved with the resumption of senior government exchanges as well as the easing of trade bans, including for coal, a major export.

One consequence of these improvements will be the return of animal spirits to financial markets – well before their effects are felt in the real economy. Since the start of the year, financial assets led by equities and bonds globally have clawed back some of the losses incurred in 2022. I believe Asian markets, having underperformed US markets over the past two years, will lead the upturn.

The macroeconomic and geopolitical backdrop bodes well for our operating outlook in the coming year. A sustained level of high interest rates is beneficial to our established Casa deposit franchise. Our latest net interest margin is now running at more than 2%, which is the highest in more than a decade. The higher rates, together with structural improvements from transformation initiatives, will enable us to sustain a ROE of more than 15% in the foreseeable future. At the same time, the restored confidence in financial markets will lead to a significant recovery in our wealth management fee income, which was the major drag on our performance in 2022. These factors will more than make up for any potential increase in credit costs. Although idiosyncratic risks cannot be ruled out, our ongoing stress tests indicate that asset quality will remain benign in the coming year.

Question 2: Can ROE be sustained above 15%?

Our ROE reached a new high of 17% in the second half of 2022. Higher interest rates were a big tailwind, but the record profitability was also driven by significant improvements we made to the franchise.

If we look back to 2006-2007, when interest rates (and allowance charges) were at similar levels to the second half of 2022, our ROE was 12-13%. So there has been a four percentage point structural improvement in ROE.

The key to the improvement has been our digital transformation. In 2017, we laid out our thesis that digitalisation would enable us to increase wallet share with lower marginal costs.

In the consumer and SME businesses in Singapore and Hong Kong, where the benefits of digitalisation are most visible, we grew the proportion of digitally-engaged customers from 42% in 2017 to 60% in 2022. Over the past five years, these customers brought in more than twice the income on average than non-digital customers. They were also more cost efficient to serve. As a result, the ROE they generated was a significant 15 percentage points more than non-digital ones. The growing proportion of digital customers enabled operating profit of the consumer and SME businesses in these locations to grow at a compounded annual rate of 7% with ROE rising from 23% to 37%.

We also extended the digital transformation to other parts of the bank. In private banking, it enabled relationship managers to deliver hyper-personalised services to customers, resulting in more customer transactions. In corporate banking, the integration of our services directly into customers’ supply chains and networks using application programming interface software (or APIs) resulted in higher volumes at lower costs. In Treasury Markets, the full business process – from distribution to structuring to risk warehousing – was digitalised, enabling us to handle higher volumes with greater speed.

The results are clear. Our assets under management grew at an 8% compounded annual rate since 2017, outpacing the market in Asia. Transaction services fees also increased at an 8% compounded annual rate, while GTS deposits rose almost 40%. Treasury Markets income growth and returns for the past five years surpassed the performance of global peers that we track. Wealth management, transaction services and treasury customer sales – which are low-capital-usage and high-return businesses – now make up a greater proportion of income compared to five years ago, resulting in higher ROE for the group.

We have also improved credit processes through the use of data and artificial intelligence for underwriting, early warning and portfolio management, which we expect to drive lower cost of credit going forward. In our key growth markets, we are scaling up organically and through acquisitions.

The announced increase in quarterly dividend payout to 42 cents per share and special dividend of 50 cents per share are part of our ongoing efforts to bring our CET1 ratio closer to the target and benefit ROE.

To be sure, there will be a cyclical impact to ROE from changes in interest rates. If interest rates peak in the coming year, part of the ROE improvement so far will come off, but the structural gains will remain. We expect that as our digital transformation becomes more pervasive, an ROE of 15% is sustainable if interest rates do not return to the unusually low levels seen during most of the past decade.

Question 3: Will the collapse of technology valuations and crypto asset prices in particular have any bearing on your strategy?

2022 saw a major sell-off in the market, particularly of technology stocks and crypto assets. However, this has little bearing on technology as a continued driver of the global economy. The dot.com crash at the turn of the century testifies to that. Between March 2000 and October 2002, the Nasdaq Composite Index fell by more than 75%. Twenty years on, more than 60% of the global population are Internet users. Social media is a cultural phenomenon. Mobile and online technology have fundamentally reshaped business models.

The fact is that valuations are not necessarily the best indicator of the underlying promise of a technology. Indeed, some technologies we see today have the potential to be truly game-changing.

For example, digital technology is here to stay because it has fundamentally altered the way we live, work and play.

As for artificial intelligence (AI)/ machine learning (ML), it is already a big part of our lives today. We use conversational AI through our interactions with Siri or Alexa, and AI-powered recommendation engines in our Spotify and Netflix selections. With ChatGPT taking the world by storm recently, 2023 is set to be a year of generative AI.

Blockchain/ distributed ledger technology allows us to reimagine workflows, such as those pertaining to clearing and settlements. This could dramatically change back-office operations by reducing costs and boosting overall efficiency and effectiveness. Tokenisation and digital monies will also be a part of our future.

Against this backdrop, our fundamental thesis is that DBS needs to be a technology leader. We have been building our technological prowess over the years, and will continue to do so in two ways:

• Internally, DBS has more than 10,000 technologists, as well as two tech centres in Singapore and India today. A third centre will be established in China in mid-2024, giving us access to new tech talent even as we continue to train thousands of our people in AI/ ML and other new technologies. We will continue to invest in strengthening our technological muscle in areas such as cloud computing and site reliability engineering so as to improve scalability, automation and speed to market, while enhancing system resiliency at reduced costs. We will also build on our AI/ ML capabilities, adding to the 260 use cases we have to improve productivity, streamline work processes and offer hyper-personalised insights and nudges to customers.

• Externally, the bank has sponsored several new businesses, such as Partior and Climate Impact X (CIX). Leveraging blockchain technology, Partior seeks to streamline inefficiencies in cross-border clearing and settlement, while CIX enables the trading of high-quality carbon credits. We have also established DBS Digital Exchange (DDEx) and FIX Marketplace. DDEx is a bank-backed crypto trading exchange, while FIX Marketplace is Asia's first fully digital and automated fixed income execution platform. These initiatives not only provide valuable insights into emerging technologies but are also medium-term bets on the future of finance.

At the same time, we continue to trial new initiatives. In 2022, DBS collaborated with the Monetary Authority of Singapore on two applications. The first involved using programmable money and retail central bank digital currencies to distribute purpose-bound vouchers. The second experimented with the trading of tokenised assets. Both pilots allowed us to test new capabilities including the use of smart contracts and the integration of traditional finance with decentralised finance.

In an ironic way, the collapse in valuations is also helpful to us as it reduces unsustainable market competition. With cheap money flooding markets in recent years, a lot of tech companies had been competing irrationally. The latest correction makes for a more rational marketplace. We may also find that as tech valuations become more reasonable, there may be opportunities to enhance our capabilities.

The financial services industry is on the cusp of being reshaped by technology, and we must continue to be at the forefront of change for the benefit of customers and society-at-large.