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Asia-PacificNovember 3 2003

CEOs with eyes on expansion

The heads of the top three banks in Singapore tell Karina Robinson about their strategies for growth – three different routes to overseas expansion.
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The dilemma for Singapore’s dominant three banks is clear. “Singapore

is a small market; if you want to continue to grow, you have no

alternative but to expand abroad. Once you go overseas, there is some

risk – but we have to manage it,’’ Wee Cho Yaw, chairman and CEO of

UOB, the island-state’s second-largest bank by assets, tells The

Banker.

All three top banks have been moving that way. DBS, the largest, has

seen the percentage of its revenues derived from overseas (mainly Hong

Kong, China and other Asian markets) increase to about 39% from only

20% five years ago, says Jackson Tai, DBS vice-chairman and CEO.

David Conner, chief executive of third-largest bank OCBC Bank and a

veteran Citibank executive, is the only banker who de-emphasises the

alliance approach to expanding overseas. “The fundamental question for

me is what do you get for a 20% stake in a bank? History shows such

alliances do not lead to much,” he maintains.

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David Conner: de-emphasises alliance approach

Different routes

Each bank has chosen a measurably different way to expand, although

there is some overlap in the choice of countries. From the bolder

decision by DBS to the varied selection of UOB and the caution of OCBC,

all are staking their future growth on overseas expansion. Yet there is

one small possibility that – although it would not change the long-term

foreign trend – may lead to some domestic activity.

Five years ago there were six banks in Singapore. A wave of mergers,

finished earlier this year, left three. Might two banks be the final

result? “In the last years, consolidation was driven by the

authorities, but going forward there is no magic number,” says Adrian

Chee, associate director at Standard & Poor’s in Singapore.

Local press coverage implies the interventionist government would not

accept the lack of competition inherent in a market dominated by two

big banks. This thesis is disputed by Mr Tai, whose bank was rumoured

to be interested in taking over OCBC. “Banking is still about scale,”

he says. “The preoccupation that local reporters have about three banks

being two is misguided because foreign banks have big penetration in

this country. Our competitors are not just the other two local banks.”

Citibank, ABN Amro, HSBC and Standard Chartered, among others, provide

strong competition. However, there is a fear that small and

medium-sized enterprises (SMEs) would be worse off if dealing with an

oligopoly. Ultimately, though, the decision rests with the government,

which controls about 30% of DBS.

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Jackson Tai: “Banking is about scale”

Brave move

On the foreign front, DBS’s brave move in taking over Dao Heng Bank

in Hong Kong puts it at the forefront of expansion. But the acquisition

of the territory’s fourth-largest banking group (including the merger

of Dao Heng with DBS Kwong On Bank and Overseas Trust Bank) has its

detractors, since the price was 3.6 times book value. A top analyst

voiced the concerns: “They have over S$5bn-worth [$2.9bn] of goodwill

on their books to amortise over 20 years so they need a higher return

on equity. The one acquisition is critical.”

In his hearty way, Mr Tai dismisses any suggestion of overpayment. “It

is not how much you pay, it is what you make of it. The synergies are

in new revenue opportunities, not just on costs. We have transformed

the bank.”

Although his theory on payment is arguable, there is no argument about

the latter assertion. For instance, Hong Kong now out-sells Singapore

in wealth management products, an area where DBS shines due to its

product innovation. Buying Dao Heng gave DBS the third-largest credit

card franchise in the Special Administrative Region and a 12% market

share in SME, says the bank. This should give it a higher exposure to

fast-growing mainland China as it follows its clients, even as it uses

its branches in cities such as Shanghai and Beijing to service larger

corporate customers, a traditional area of expertise for the bank. Its

treasury department is a leader in the regional currency market and it

was responsible for the first real estate investment trust for a Hong

Kong issuer.

Footprint in Philippines

DBS’s other major foreign exposure is a stake in Bank of the

Philippine Islands (BPI), the second-largest bank in the Philippines,

which at 20% makes it more than a financial investment but without any

management control, say critics.

“Twenty per cent of BPI is relevant as the biggest shareholder owns

30%. The two parties are the leading shareholders. It is a long-term

investment and we have already been able to co-operate on capital

markets, remittances and sharing information,” argues Mr Tai.

Meanwhile, the bank’s cost/income ratio continues to be the highest of

the three at 46% for 2002. Arch-rival UOB has the lowest at 35%,

underlining an emphasis on costs that extends to their overseas

expansion. “Its management is the most prudent and they never overpay

for acquisitions,” says one analyst.

Net profit from UOB’s overseas operations was 36% of total profit. Mr

Wee tells The Banker he is hoping to increase this to “40% to 50%; it

depends on how aggressively we expand.” It had the best profit growth

of all the banks (see table below).

The sprightly 74-year-old, whose family officially owns 15% of the

bank, has no plans to retire. “Banking is in my blood. I will continue

to work,” he says. His son, deputy chairman and president Wee Ee

Cheong, may have to be very patient – and by the time he inherits the

leadership, UOB will have a different profile overseas.

“I think India might be our next step. It is the second biggest

population in the world. We are a bit behind there,” Mr Wee senior says.

Further afield

This would represent a move further afield from its current regional

diversification, which includes Malaysia, with the largest branch

network among foreign banks; the Philippines, where a dispute among

minority shareholders is disrupting banking operations; plus China,

Thailand and Indonesia. In the latter two countries, several banks are

for sale that could be of interest to UOB.

In China, where the bank has five branches and one representative

office, UOB has been talking to a number of local banks and to Fujian

Industrial, the 12th largest lender, but “nothing has come out of that.

I think there are a few parties talking to them,” according to Mr Wee.

The bank certainly has the funds for further expansion. Its non-core

assets, which are worth an estimated S$1.4bn, have to be disposed of

within two years, according to rules laid down by the Monetary

Authority of Singapore (MAS).

OCBC, meanwhile, is also evaluating the sale of some of the S$2bn-worth

of its non-core assets. “The idea is to unwind our non-core investments

and to invest in growing our core businesses in financial services,” Mr

Conner says.

OCBC is the leader in bancassurance in Singapore, partly due to

synergies from its 49% stake in insurer Great Eastern Holdings, which

contributed an average of 15% of the bank’s net profit over the past

three years. OCBC cross-sells about 2.5 products per consumer and aims

to raise this to four by increasing its wealth management capability.

Like all Singaporean banks, OCBC is trying to increase non-interest

income. This is because the net interest income ratio in the island

state has fallen to about 1.8% from 2% three years ago, according to

S&P, while credit growth in this mature market is forecast to grow

only about 3% this year, fuelled largely by consumer lending. It is a

welcome change from the negative credit growth last year, however,

which was due to the lag effect from the 2001 recession and the pruning

of exposure to marginal borrowers, says Nancy Koh, an associate

director at S&P.

Business limits

Mr Conner also wants to grow business banking but knows OCBC’s

limits. “I am not talking about M&A capability when I talk about

investment banking. Let’s be clear, we are a commercial and community

bank,” he says, mentioning products for SMEs such as mezzanine and

trade financing. The bank has held seminars for SME clients on the Free

Trade Agreement between Singapore and the US, which presents an

opportunity for them to export more and which becomes operational in

January.

The bank has been going through restructuring and a cleaning-up

operation in the past few years, actions that were boosted by Mr

Conner’s arrival in April 2002. As the smallest of the three banks, it

represents an interesting target for one of the others, or perhaps a

foreign bank, although Mr Conner says the government has made it clear

it will not allow local banks be taken over by foreign banks. Also the

Lee family, with a 20%-plus stake, is not interested in selling.

It is far from obvious what a bank such as Standard Chartered or HSBC

would gain from acquiring OCBC, when the local market has low growth

and a population of only about four million.

Meanwhile, OCBC is concentrating most of its foreign energies on

Malaysia, where it has 25 branches. It will grow the business there in

the next 18 months and then “we will experiment in another ASEAN

[Association of South East Asian Nations] country, perhaps Indonesia.

We might spend S$10m-20m and, if it works well, we would grow it like

crazy,” muses Mr Conner.

OCBC currently lags its peers. The bank’s profits on average capital

were 13.6% in 2002, according to The Banker, compared with 15.3% at DBS

and UOB at 16%.

JP Morgan predicts return on equity will be stable in 2003 and rise to

8.4% in 2004, while Mr Conner has promised 12% by 2005. He only joined

a year and a half ago and has so far “instilled confidence in

investors. But in his new strategy for the bank he has set the bar very

low,” says a local analyst.

Only choice for growth

As with the other two banks, the bottom line is that to achieve

future growth there is no choice but to go abroad. All these banks will

be judged on their foreign adventures.

“OCBC could be a dark horse if it manages to convince the market it has

the management capability to regionalise,” says John Wadle, head of

Asian banking research at UBS.

The same goes for DBS and UOB, although both banks have already

acquired more credibility in the investor community. However, the basic

dilemma remains: the search for growth abroad is a risky business.

“When Singaporean banks have gone into some regional markets, even with

the most thorough due diligence, they usually had to take some

write-offs on their investments,” says Robin Tomlin, vice-chairman of

Asia for UBS.

Well capitalised

DBS and UOB have an A+ rating from S& P, while OCBC has AA. All

three have high non-performing loans, but this is only because they are

outstandingly prudent in their classifications. They are well

capitalised – arguably enough to withstand foreign mistakes – because

of the high standards set by the MAS. These may be relaxed slightly but

by world standards would still be high.

“We have Tier 1 requirements among the highest in the world,” says Mr

Conner, who is hoping for a slight reduction following the current MAS

review. (The three banks see the Basel II regime as neutral to positive

for them).

The other issue is management depth. Running banks in countries that

have less than outstanding records in bank management implies that a

large chunk of management time may be required, as well as having to

send Singaporean bankers out to run the new operations. However highly

educated the population, the island state’s small size is a

disadvantage when it comes to buying assets that need proactive

management. This is the case whether the banks expand in south-east

Asia or north Asia, where some analysts see more opportunities.

“As you look across the region, south-east Asia does not provide good

opportunities but north Asia does. Singapore culture has been about not

taking risks. How can they seize Taiwanese, Korean and other

opportunities to be a regional player?” says Mr Wadle.

The jury is still out – but the challenge remains daunting.

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