How did the Bank navigate through the risk and credit portfolio challenges of 2022? How is 2023 going to look like?

2022 had its own share of challenges, with the withdrawal of Covid restrictions in many economies offset by multiple headwinds and event risks. Pent-up demand as economic activities returned, supply bottlenecks caused by Russian-Ukraine war and labour shortages, for instance, led to sharp spikes in inflation. Central banks responded with several rounds of interest rate increases, sharply raising borrowing costs. Other challenges included China’s rolling Covid lockdown and property malaise, as well as escalating geopolitical and economic tensions with the US.

In the face of this, we managed our risks well and our portfolio quality has remained resilient. We proactively assessed the vulnerability of our credit portfolio from emerging headwinds and event risks via thematic and portfolio reviews and stress tests. Appropriate and timely actions were then taken to manage potentially vulnerable borrowers and portfolios identified. We grew our portfolio cautiously through careful client selection and tightening of underwriting criteria for sectors-at-risk. We also increased hedges in our bond portfolios to manage the sharp corrections in major financial markets.

In 2023, headwinds from the polycrisis are expected to continue. The macroeconomic environment remains uncertain and financial markets volatile.

That said, there are growth opportunities via foreign direct investments in ASEAN and Greater China as global businesses attempt to diversify their supply chains. China has removed its zero Covid policy and is rebooting its economy. Inflation appears to have peaked, though expected to remain elevated compared to the pre-Covid period. We will continue to closely monitor our portfolio and the evolving operating environment and cautiously capture growth opportunities by leveraging on our regional footprint and the strength of our core client relationships. With our strong capital, funding and liquidity position, backed by our strong corporate culture, we are well-positioned for sustainable growth.

How did the Bank protect its investments and that of the customers in light of uncertain and volatile markets?

To protect the value of our investment portfolio, we shortened the interest rate duration and increased interest rate hedge positions. We prioritised investments into sectors that were resilient against recession risk and remained selective over names in the late cycle economic phase. We also implemented controls to limit the downside capital impact and entered into macro hedges to protect against tail risks of our portfolios.

For our customers, we have been advocating defensive positioning and portfolio diversification to include investments that exhibited lower volatility and stable earnings. We also tracked the price changes and adverse news on our customers’ investments to provide relevant and timely communications for them to make better-informed investment decisions.

We will continue to stay nimble and advocate caution for the various investment portfolios in the coming year.

How has the Bank responded to the growing calls to reinforce the financial system’s resilience to climate risks?

Our approach to this challenge is two-pronged.

First, fulfilling our responsible and sustainable financing commitments to minimise our contribution to climate risks. In 2022, we expanded our prohibitions on coal power generation and thermal coal mining by not financing corporates that derived more than 50% of their revenues or production capacity from these activities.

We joined the Net-Zero Banking Alliance in October 2022 to reinforce OCBC’s commitment towards a net-zero economy. We also leveraged our strengths in sustainable finance to support our clients’ net-zero transition efforts.

Second, adequately addressing the potential impacts of climate change on business and operational resilience. Climate risk is transverse and can amplify credit, market, liquidity, operational and reputational risks. To bolster our resilience, we embedded climate risk management in relevant governance structures across the Bank.

We enhanced climate scenario analysis capabilities to better understand the implications of climate change on portfolio resilience. We also actively participated in industry capacity building initiatives, including a pilot study on applying the Task Force on Nature-related Financial Disclosures’ framework for addressing nature and biodiversity loss.

What non-financial risks are high on the Bank’s radar?

We embarked on a strategy to bolster operational resilience by uplifting day-to-day risk management practices, particularly for hotspots that warrant heightened attention due to the challenging macroeconomic conditions, unrelenting pace of digital transformation, and increasing regulatory requirements. We also continued to strengthen our engagement with our people especially with the Great Resignation impact seen across the industry since 2021.

Fraud prevention and detection is also high on our agenda. We have integrated and centralised our fraud risk management capabilities into Group Financial Crime Compliance to unlock synergies and step up vigilance in combatting scams, frauds, and financial crime. We strengthened our risk mitigation and controls across the Group, particularly in the areas of detection, prevention and transaction surveillance.

To emphasise its importance, we have elevated Information Security and Digital Risk as a principal risk type, managed by a dedicated risk management function and oversight by a newly formed group risk committee. Other enhancements made include the strengthening of cybersecurity controls and the roll-out of a Cyber Smart Programme to raise employee cyber vigilance and competency.

Given the increased regulatory expectations and scrutiny over the management of third-party service providers amidst high profile data loss incidents, we have rolled out initiatives such as the expansion of the third-party risk management programme to include ecosystem partners, and extended our education and awareness efforts on key topics such as data loss prevention to service providers.

For more information on how the Bank is managing the Climate, Fraud, Information Security and Digital and Third-Party Risks, as well as Talent Management, please refer to our Sustainability Report 2022.