A Thai military makeover

THE HEADQUARTERS OF Thai Military Bank (TMB) just opposite Chatuchak Park in Bangkok give the impression that the institution has survived rather than thrived since its foundation in 1957. More reminiscent of a civil service department than one of the country's mid-size banks, TMB's offices are redolent of the legacy the bank's management is so keen to shrug off.

Subhak Siwaraksa, TMB's president and chief executive officer, emphasizes the changes that have already taken place.

"Twenty years ago the bank rose from the bottom to become the sixth-largest bank in Thailand," he says. "Over the years the military shareholding has gradually diluted as the assets have grown, and the capital base had to grow too. The bank has always been under non-military management."

He sounds apologetic and he has good reason. Like most Thai banks, TMB was hit hard by the Asian financial crisis and the devaluation of the Thai baht. Perhaps because of its name and associations with the military juntas of Thailand's past, however nebulous these might be, TMB seemed to be locked in the past, limping along under the weight of non-performing loans while the country's bigger banks got on with the task of modernization.

Now, however, Subhak and his management team might just have stolen a march on the opposition. Effective September 1, TMB merged simultaneously with two other medium-size Thai banks, DBS Thai Danu (DBSTD) and Industrial Finance Corporation of Thailand (IFCT). It is the first three-way merger in Thailand and, understandably, management is proud.

"On a voluntary basis," says Subhak, "we're the first and only merger to happen [in the banking sector]." There is added emphasis on the word "voluntary".

Contrary to some speculation at the time the merger was announced, the deal, claims Subhak, was not forced on the management, but generated through its own initiative. It is clearly an important point to him.

"You can go and ask the ministry of finance," he says. "We didn't get pushed by the MOF. They didn't see this as a government enterprise, they recognized the bank needed to be changed and long term, they want to exit. So the government encouraged the deals."

According to Subhak, after talks with Australian bank ANZ on an investment in TMB broke down at the end of 2003, management took a long hard look at the bank's strategy.

"Under the new government master plan, you either have to be a large bank, what they call a universal bank, or a restricted one. We were seventh largest, with a market share of about 7%, too big to be restricted, too small to be universal. So around October, we went to Singapore to talk to DBS. We recognized they had a presence in Thai Danu and under the new plan, they were going to have to reorganize too."

So well did the talks with DBS go, claims Subhak, that a deal was struck almost immediately. "We could have signed a deal [with DBS] by early January," he says. "But we wanted [additional] scale to leapfrog the competition, so in January we initiated talks with IFCT. They'd been in talks with Bank Thai and we'd heard they weren't going smoothly. In February we got the green light from the board [of TMB]."

The transaction, structured as an acquisition by TMB of DBSTD and IFCT, creates a bank with combined assets of approximately Bt679 billion ($18 billion) and 460 branches nationwide. Perhaps more important still, given management's ambitious growth plans, the deal will leave Singapore's DBS holding 16.1% of the bank's equity, although the ministry of finance is still the largest shareholder with 31.2%.

From a position of seventh largest bank by assets, the enlarged TMB will become fifth largest in terms of assets, loans and deposits, according to Moody's Investor Services. It's perhaps not spectacular progress but Subhak and his management team have ambitious growth plans now that the ink is dry on the merger.

"This deal is quite beautiful," he says enthusiastically. "IFCT has strong project finance credentials but they had no deposit base, so they couldn't offer the full range of banking services. We can provide those services to IFCT's corporate and SME customer base. Thai Danu is more retail and had already become more a retail metro bank by the time DBS came in. We intend to make use of their retail banking systems and risk management controls."

There does indeed appear to be little overlap between the three banks in products, network and staff, and management claims that there will be no forced redundancies or branch closures. Perhaps the most significant benefit for TMB from the merger, however, will be the chance to tap Thai Danu's erstwhile parent.

"We've signed a master services agreement with DBS," says Subhak, "to develop products and processes, for example risk management. We might hire some people from DBS."

They might need them. Although much has been achieved cleaning the balance sheets of all three banks since the 1997 crisis, the combined entity has not reduced its NPL ratio, which is still about 10%. That is not high by Thai banking standards but not good enough for Moody's to upgrade its financial strength ratings for TMB post the merger, despite issuing an upgrade on its debt and deposit ratings.

Deborah Schuler, vice-president, senior credit officer, at Moody's Singapore Pte Ltd, explains. "The bank loans were cleaned up ahead of the merger," she says, "but Moody's disagrees with the Thai authorities as to how much is being done on NPLs. They think the job's done, we think there's more to do. We're more suspicious about the restructured loans on the books. Time will tell who's right."

Although Schuler's comments apply to Thai banks generally, they are especially relevant to TMB, says Paramet Tongbua, banks analyst with TISCO in Bangkok. "In terms of loan quality, I have less confidence with TMB," he says, "mainly because of the lending policies at the bank in the past. They may have to restructure those loans again and again and again. That would be the risk going forward."