The much-anticipated post-pandemic growth rebound in China did not materialise even as its real estate sector underwent major upheaval. Geopolitics flared further with the Gaza conflict, exacerbated by supply chain disruptions in the Red Sea. The high US interest rate environment resulted in a run on several US regional banks, and a Global Systemically Important Bank was taken over by a peer bank over a weekend. Commercial real estate portfolios, particularly in the office sector, faced strains from relatively higher vacancies.

Risk reminders

We are constantly being reminded that the unexpected happens and of the need to be ever vigilant. There have been many useful ‘Risk 101’ lessons and reminders that we can also take from these events.

First is the natural inclination of assuming the status quo, and a lack of imagination or sense of history to challenge our assumptions. The case in point is the decade-long low interest rate environment that we had been used to since the US subprime crisis.

Even as the Fed signalled its policy intention to combat inflation, the market continued to bet against the Fed. The market assumed that such interest rate levels were transitory, and that the Fed would quickly unwind its interest rate policy.

However, the low interest rate environment over the past decade was an anomaly over a broader time horizon, even just counting the past three or four decades. This served as a reminder that we need to be prepared for a wide range of scenarios that could materialise, and to manage our risks accordingly.

Second is the amount of the risk taken at an aggregated level.

One of the US regional banks that experienced a bank run had significant sector and geography concentrations to the startup tech sector in California. The downturn experienced in the startup tech sector resulted in a confidence issue that was exacerbated by having to recognise mark-to-market losses on its bond portfolio.

This served as a reminder of the need for a well-diversified credit portfolio. Every economy and every industry would, over the course of time, run through a full credit cycle with both its attending booms and busts.

Banks in Asia also had concentrated portfolios and funding bases back during the Asian Financial Crisis. At OCBC, we have since strived to maintain a diversified business, both in our credit portfolio and in our funding base. It remains key that each loan is underwritten carefully, and the portfolio concentrations are actively managed to remain resilient.

We were fortunate that we were able to ride out the Covid-19 pandemic with the economic assistance provided by governments, and the sharp spikes in interest rates. This is evidenced in our credit costs being kept low at around 20 basis points and our Non-Performing Loan ratio at around 1%.

Nevertheless, there are leads and lags in the credit cycle, and we continue to test our portfolio for vulnerabilities.

Third and most importantly, while each of the risk events may be ‘unique’ and differs slightly from the previous crisis, they inevitably translate into financial risks for the Bank.

Collectively, the number of ‘unexpected’ risk events that have global repercussions have been occurring a lot more often in the past decade than in the past. Economic cycles have also become shorter. With increased interconnectedness, events often result in second and third order effects beyond the initial trigger.

In such an operating environment, the lesson learnt is that we need to remain constantly vigilant with measured, purposeful risk-taking. There needs to be buffers for the unexpected; otherwise, the Bank may find itself with far fewer strategic options when stress events materialise.

In addition to managing the financial risks to support sustainable growth for the Bank, it has also been equally important to continually invest in both operational resilience and sustainability.

In a digital world with growing reliance on technology, network connectivity, digital assets and a complex online ecosystem, service disruptions and other risks have become more prevalent. Investments have been made to enhance the Bank’s business continuity and manage third-party risks. Cyber defences have also been raised and safeguards implemented to mitigate the downside risk of phishing attacks and malware affecting our customers.

The advancements in artificial intelligence (AI) have brought about additional opportunities to strengthen our internal controls to better protect our customers. These include enhancing our fraud prevention and detection capabilities to deter potential attempts by fraudsters or threat actors targeting our customers.

However, AI has inadvertently allowed threat actors to have easy access to more sophisticated hacking tools, which could increase the cyber risk exposure of the Bank. Continued investment and constant vigilance are required to maintain and strengthen our cyber resilience, both in the physical and digital environments.

As part of our decarbonisation efforts, the Bank announced our Net Zero commitment and targets for six sectors – Power, Oil and Gas, Real Estate, Steel, Aviation and Shipping. This is part of our first steps to more actively manage climate risks that occur from our business operations. At OCBC, we are keenly aware that long term sustainability is not only about managing financial risks, but also contributing towards a more sustainable economy.

Looking forward

I expect 2024 to hold its share of surprises. Nevertheless, I am confident that the team stands ready to tackle the challenges in the year ahead. We have inculcated a strong risk culture and focused on the risk fundaments, strong capital and funding to buffer against any adverse developments in the operating environment. And, most importantly, we will continuously invest in our people and technology to enhance our risk management capabilities.