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.
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.
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.