Lee Kwan Yew was in Fighting form. The former prime minister of Singapore, now armed with the intriguing title of senior minister, had already made some disparaging remarks about the “local Chinese banks” during his speech at a dinner towards the end of last year, but now he was homing in on one in particular. If anyone present happened to hold shares in United Overseas Bank, he said, they might like to consider selling them.
It took a few seconds before the audience – many of them journalists since the dinner was at the foreign correspondents’ club – digested his comments. It seemed an extraordinary statement for any minister to make, but for Lee to say it meant there had to be a big rift between the government and the bank.
Lee has dominated Singapore political life since the early 1960s. He also regards himself as the architect of the Financial reforms introduced since 1998. He joined the advisory board of JP Morgan in 1992, and over the next few years his experience there led him to regard Singapore’s protectionist approach to Finance as increasingly counter-productive.
To pick on UOB seems unfair. The bank is historically the most Financially successful in Singapore. Analysts describe the management as sound and the CEO, Wee Cho Yaw, as one of the best. Admittedly his reputation stems as much from his calls on the property markets – he was one of the First to exit before the slump in the late 1980s, and one of the First to jump back in during the early 1990s as the market improved – as from his skill as a banker.
The twin towers of United Overseas Bank are at the heart of the city-state’s Financial district. They stand on the water’s edge of Boat Quay, host to many of the bars for the post-work banking crowd. On the other side of the quay are government offices, including parliament and the treasury. In the past two years, the quay has become more than just a physical divide, as the government and the executives of UOB have developed widely differing views on the future of banking in Singapore.
The government spent much of the 1990s encouraging local companies, many of which it had a stake in, to expand abroad and become international leaders, but it barely touched the Financial sector. That changed in 1997. Since the Asian Financial crisis, the Monetary Authority of Singapore, the central bank, has encouraged domestic consolidation and regional expansion, simultaneously liberalizing the Financial markets as a whole. One of the chief architects is the deputy prime minister, former brigadier general Lee Hsieng Loong, who is also chairman of the MAS.
In 1999, after almost two years of research and discussions, he announced a Five-year plan to modernize the banking and Financial system. He has liberalized the forex markets and internationalized the Singapore dollar, encouraged the development of a more robust bond market, overseen the demutualization, merger and public offering of the derivatives and stock exchanges, and is beefing up the insurance industry.
He also introduced the Foreign Talent Programme, which encourages businesses to look abroad for senior managers and skilled workers. This is a controversial and potentially inflammatory programme that has left some Singaporeans with the impression that their government does not consider them up to the job. It has, however, met with much success.
One of the higher-profile foreign talents recruited is the American John Olds, whose three-year stint as chief executive of DBS Bank has seen the bank embark on exactly the strategy of domestic mergers and regional expansion the government espouses.
While encouraging the banks to consolidate at home, the MAS found a stick to goad them to action. It has given wide banking privileges to four international banks by granting them qualifying full branch licences. Issued in 1999, the licences do not put the four – ABN Amro, Standard Chartered, BNP Paribas and Citigroup – on a wholly equal footing with the local banks, but it is a start.
The MAS also wants to see the locals expand abroad to become regional players. And it is forcing them to sell off non-core assets, mainly property companies, with some other investments. For one or two of them, built as mini-conglomerates by design, it is like being told to hand over the family silver.
Only room for two?
This is where MAS’s grand design starts to come unstuck. One of MAS’s more infamous statements, made in May 1999, claims that there is room in Singapore for no more than two strong, large banks. At the time, there were Five. There still are. The problem lies in the ownership. Although almost all the non-Financial companies of note encouraged to expand were government-linked, only two of the Five banks are: DBS and Keppel TatLee.
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Lee Kwan Yew |
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The other three – UOB, Overseas Union Bank and Overseas Chinese Banking Corporation – are family owned to varying degrees. And in the eyes of the MAS, family control is not synonymous with an open, transparent system. Nor do any of the three show a desire to enter into a merger. And that is why Lee Kwan Yew is so incensed.
To be fair, OUB and OCBC have both made some headway in their reforms. Both are run by professional bankers and not by family members. OUB’s chief executive officer, Peter Seah, is a Citibank veteran, and Alex Au left his job as CEO of Hang Seng Bank in Hong Kong to take up the same role at OCBC. Of the two, OUB has done more to eliminate family influence. The family has no say at all in day-to-day matters, and only has one seat on the board. OCBC has been somewhat slower, but its family owners, too, now have a minority of board seats – the bank reduced them from Five to three last spring.
OUB’s story has been somewhat eclipsed by the senior minister’s comments. It might be the smallest of the big four, but just nine years ago the Keppel Corporation, part owners of Keppel TatLee (or Keppel Bank of Singapore as it was then called) tried to take over OUB, which then had a poor performance record. Having secured its independence, OUB, with Seah installed as president in 1991, set about putting itself back on track. To start with, it bought Chase’s Singapore credit card franchise in 1992, raised more capital and increased its earnings-per-share growth each year.
“We’ve built a strong management team, and have increased our income base Fivefold over the last 10 years,” says Seah proudly. OUB is aggressive without being reckless in starting price wars, it has made good use of technology, and is battling for the number two spot to DBS in domestic securities underwriting. Seah himself is an active CEO, on the verge of going on a three-week global business trip when Euromoney visits. “He’s a very proactive salesman, and is behind many of their project Finance and corporate loans in Asia, including Australia and New Zealand,” says CSFB bank analyst Roger Lum. “He’s also built quite a bit of clout locally and regionally – chairing the review sub-committee on Singapore bank reforms and sitting on the board of Siam Commercial Bank.” He is also thought to be keen to enter politics.
Alex Au, chief executive of OCBC, has been rather less impressive. Soon after joining in 1999 he went public with his plans for the bank. “He came out and made a lot of noise over what he called OCBC 3.0,” says an analyst at one of the international investment banks in Singapore. “He was going to sell off all the non-core assets, and turn around the traditionally sleepy bank to get top-quartile results for an Asian bank. But very little happened.” He rightly learnt the lesson not to overpromise and underpay, but has of late gone too much the other way, refusing to be vocal about the changes he has made. So the changes to the board and the hiring of foreign talent have been treated as low-key affairs and hence largely brushed over by the market. He’s hired over 60 mid- and top-ranking bankers, many from overseas, and revamped management, but this has been under-appreciated by investors, who, largely because of 3.0, have a pretty low tolerance for the bank’s claims.
Internet difficulties
Both banks have also been caught on the hop by the rapid change in the fortunes of their internet initiatives. “There’s been two distinct approaches to the internet among Singapore banks,” says Lum. “There’s the integrated approach adopted by UOB and DBS, where the internet is treated as one of several distribution channels. Then there’s the internet-only pan-Asian model touted by OUB and OCBC, which has clearly fallen far short of the earlier hype. First-e is in trouble and we suspect that customer acquisition at finatiQ has been limited so far. In addition, we think OCBC’s approach suffers from trying to do too many things at the same time.”
The big sin, of course, is that neither bank has entered into a merger, although they did court each other for a few weeks at the end of 1999. That they contemplated it, and that they have made some progress with reforms, probably saved them from being named and shamed by senior minister Lee as well.
UOB is a different matter. The bank is staunchly independent, family owned and family run. It First opened its doors in 1935 as the United Chinese Bank, founded by Wee Kheng Chiang, an overseas Chinese from Sarawak, then a British protectorate and now part of Malaysia. He passed the reins on to his son, Wee Cho Yaw, who is still the bank’s CEO. His successor, waiting in the wings, is his son Wee Ee Cheong, who for now is the deputy chairman and president.
Wee Ee Cheong’s views on the role of family are clear from the start: he presents Euromoney with a book, The Encyclopedia of the Chinese Overseas, in which he has marked with some pride the page that deals with how his grandfather built his business empire in Malaysia and Singapore. The grandson is determined to continue the family tradition. “There is a Chinese saying that a business never lasts beyond three generations,” he says. “The First generation builds it, the second maintains it, and the third generation destroys it. I don’t intend for that to happen to UOB. UOB management is about performance and results. A bank should be run well and managed professionally, whether or not it is under family ownership. If I can Find a better man to run the bank and make money for shareholders, why not? And if the person running the bank happens to be a well-qualified family member, then we also have the added advantage of long-term commitment in the business.”
Some say there already was a smarter man near the top, a non-family banker called Ernest Wong, whose role became redundant once Wee Ee Cheong had worked his way up.
That explains in part why Lee Kwan Yew is not happy with the bank, but not why he chose to speak out so strongly and so publicly. Some claim that it is simply because he was frustrated at UOB’s inaction. Others believe Messrs Lee and Wee senior fell out over Lee junior’s statements about the need for just two banks in Singapore. (The deputy prime minister is Lee Kwan Yew’s son. Apparently political dynasties are acceptable where banking ones are not.) Yet others date the falling out of these two erstwhile friends as far back as 10 years ago. Prior to that, Wee Cho Yaw had been a supporter of Lee Kwan Yew during the precarious early independence years of the 1950s and 1960s when Lee founded the People’s Action Party, which went on to win seven elections under his leadership between 1963 and 1988.
The deputy prime minister takes a more restrained line with Euromoney. “Our assessment,” he says, “is that there is room for at most two large domestic banks in Singapore. The ideal therefore is for some of the banks to merge, but we cannot force them to do so. It’s not easy. The question of whether to get there, and if so how, is up to the banks and their shareholders, not the government.”
Relations with UOB, he says, are perfectly proper, a point echoed by Wee Ee Cheong.
Onlookers tell another story. “Relations between the two are frosty, and that could be bad for UOB’s share price,” says one. “It’s more than a war of words,” says another. “And although the government doesn’t want to be heavy-handed, the senior minister’s comments were about as coercive as you could get.”
Even while asserting that relations are Fine, both the deputy chairman of UOB and the deputy prime minister clearly draw their battle lines. “We regularly outperform the competition on earnings and return on equity,” says Wee, “so if anything, the government ought to be encouraging us to do more of the same. If we can all survive, then why not. And if we can’t all make it, then we know what to do.”
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Wee Cho Yaw |
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Deputy prime minister Lee begins by trying to claim that all is quiet on the UOB front: “Our relations with UOB are completely proper. There is no tension. It’s not for us to tell them how to run their business.” But some of his father’s rhetoric has clearly rubbed off on him. “The market will exert some pressure on them,” he says. “And within half a generation it’ll probably become clear that the family-owned route is not the best one.”
For now the government has to rely on the two banks it still has stakes in to show the way. One of them is Keppel TatLee, the smallest of the Five. It would be more likely to be taken over rather than force a deal itself. Its structure is complicated by its crossholdings with the Keppel corporation, as well as by the manner in which Allied Irish Banks has taken a stake. This involves a low-interest loan of S$350 million which after three years can become, if AIB so wishes, the basis for a call option on a 20% stake in Keppel TatLee. There are about 18 months left to go on this arrangement.
That leaves DBS, the old Development Bank of Singapore, as the Flag bearer for the government’s plans. And thus far it’s doing a good job. Initially the government took an active role in the bank’s progress when, in 1998, it persuaded the board to allow the people’s savings bank, POSBank, to be folded into DBS. “We went round telling the banks that they had to consolidate and the other banks said: ‘What about you?’,” says deputy prime minister Lee. “So the government decided to put its our own house in order, and folded POSBank into DBS.”
If the government intended the deal to spur on those it had no stake in, it was to be disappointed. It has instead continued to repeat its calls for consolidation, while allowing executives at DBS to forge the path on its behalf.
The next step was to hire a new CEO. The government chose John Olds, a 24-year veteran of JP Morgan who had gone into semi-retirement in 1997. The government says that it has not been dictating to Olds and his executives. “We went out of our way to say and show that DBS had a free rein to progress as it saw Fit and that it would not become a political football,” says the deputy prime minister. “In fact, John Olds insisted on this before taking the job.”
The government-engineered POSBank deal worked out well for DBS, handing it all of POSBank’s retail account holders as well as effectively taking it out of the consolidation game the other four main banks have since found themselves playing. POSBank customers might have a different view. Many regarded it as the people’s bank and untouchable. DBS has closed some 80% of the branches, and still fields hostility for this.
Since Olds was appointed, the government has kept its promise and been happy to leave deal-making to him. If the stock price is any indicator, he has been a great success. The stock stood below S$5 a share when he joined, and, although it had been higher, was around S$20 last month when he said he would step down. He has hired some accomplished bankers from some of the top institutions.
The bank is making progress in offering a wider variety of consumer products from a modest starting point (see box on page 48). It has increased its share of the domestic IPO business, consolidated its position as the leading debt capital markets house, and become the First bank in Singapore to securitize some of its loans.
But it still faces challenges: it has high capital reserves, which are dragging down its already low returns; its consumer business, despite recent improvement, still lacks broad and deep penetration; and its forays into foreign acquisitions have not been successful.
Financial services is one of Singapore’s least advanced sectors. For such a small state it has more than its fair share of world-class leaders in other industries. Chartered Semiconductors is based here. Singapore Airlines is in a class of its own. It has a market capitalization approaching $10 billion, roughly Five times bigger than United Airlines in the US. “If you were to look just at the profit margins of the two Firms without knowing who they were, you’d never think they were in the same business,” says Nigel Jones, an executive director in Morgan Stanley Dean Witter’s Singapore investment banking department.
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OCBC in Singapore: reducing the family influence on the board |
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The relatively poor state of Singapore’s banks is something that anyone in danger of becoming overly optimistic about the Asian recovery ought to take a closer look at. If Singapore’s banks are still at this early stage, how solid are the systems elsewhere in Asia?
It’s not that Singapore’s banks are in a crisis, or suffering, or under threat of suffering, from a major credit meltdown. Nor are they run by incompetents. In fact, most have able managers, and the only problem with their loans is that the margins earned on them aren’t particularly good.
Excluding the major international banks such as HSBC, Standard Chartered and Citigroup, the Singapore banks are probably the best the region has, better even than rivals in Hong Kong whose loan books are less diversified and more concentrated in property loans.
But this is precisely the problem. The region’s best indigenous banks are ones that have got this far by virtue of a conservative, risk-averse culture and an overly protective regulatory environment that has bred complacency and stagnation. Exceptionally high capital reserves and virtually no distinction between their products and services characterize them: hardly the features needed to create the regional leader the government wants.
That is why the MAS is so keen to see domestic consolidation take place sooner rather than later, and ahead of regional expansion. A larger bank would have an easier time muscling its way into other markets.
But deputy chairman Wee has found the Flipside of that theory, and it is one his peers share. There is little incentive for any of the banks to enter into a domestic merger. Wee says: “I am a businessman, in any merger/acquisition it’s about pricing and strategic Fit. The same principle applies for domestic or overseas acquisitions. In a small domestic market like Singapore, what’s the point of paying a premium simply to be able to close branches? Surely it’s better to use those resources to drive regional expansion First.”
This is part two of the government’s grand design for the banking sector. “Clearly the future for our larger banks does not lie just within Singapore,” says deputy prime minister Lee. “So they have to look abroad. They have a good chance to become regional players. But it’s not easy. There are political and cultural sensitivities to be considered, and other governments in the region will, like us, want to maintain or build a strong local banking system and not simply sell out.”
To be a regional centre, Singapore needs to have a strong local banking presence. Its banks need to be able to compete at all levels with the more sophisticated international banks, and this was hindered by excessive protection in the past. Singapore is in itself too small a market for the banks to rely on to remain independent and become strong players, so they need to look abroad. But to do that effectively, they need to have a strong domestic franchise.
The banks and the government take opposite sides on this. The banks fear getting bogged down in a messy domestic merger that could result in them missing opportunities abroad and, worse, relinquishing control. The government on the other hand would rather see the two done side-by-side, or a domestic deal First to create a stronger bank, at least on paper.
The banks have the edge. The government cannot, or will not, intervene beyond stern words. So it has had to watch while the three family banks construct individual strategies that have scuppered, for the time being at least, any chance of another domestic merger.
UOB simply refuses to budge on the question of family ownership and leadership, while consolidating its international holdings and keeping an eye out for more. OCBC has the luxury, from a defensive point of view, of capital reserves above 25% and more to come once it sells off its non-core assets (OCBC has the largest holdings to be sold off). It also has a big stake in Great Eastern Insurance, and is starting to tap that market – leading investors to wonder whether this could be the merger it eventually pursues.
Meanwhile OUB is exploring the possibility of selling a stake of up to 25% to a foreign Firm. BNP Paribas is assumed to be the interested party, although no formal announcement has yet been made.
None of the Singaporean banks seems to consider expansion abroad to be a bad idea. That’s surprising given that these banks have almost no track record of successful acquisitions abroad. In fact, recent experience suggests that it’s a sure way to destroy shareholder value. Yet so many of the parties concerned, from investors to the government, feel it is a good idea, and are willing for the banks to keep their excess capital, and even to raise more, just in case a target comes along. When rumours circulate that a target might be on the horizon, it is often the shares of the would-be acquirer that rise.
The record thus far is patchy at best. Outside of Malaysia, where UOB and OCBC especially have been active for years, the banks have nothing more than a footprint, and nothing near approaching a franchise. DBS has been the most active. It owns Thai Danu Bank in Thailand and Kwong On Bank in Hong Kong, and has nearly a 20% stake in the second-largest bank in the Philippines, Bank of the Philippine Islands.
The most disastrous acquisition was Thai Danu Bank, bought for $200 million before Olds came on board. Its bad loan portfolio was worse than initially thought, and restructuring it has taken time and money. “In retrospect they bought too early and too high,” says Robin Hammond, banks analyst with ABN Amro. “And you could say the same about their stake in BPI, which looks like bad timing as the stock got hit after they bought the stake off JP Morgan. As for Kwong On, it’s a very small bank, and of marginal importance to DBS’s bottom line.”
It’s not all bad news. Lum says that although Kwong On’s “contribution is currently not meaningful to the group’s bottom line, growth potential is there over the longer term, especially for a new player with deep pockets and better technology. The key is to get a foot in the door – the bank licence – and then aggressively grow market share either organically or through further acquisitions”.
Olds himself takes an upbeat approach to the investments. “Timing might have been bad for the BPI deal, but you can’t pick the time to be offered a 20% stake in the second-largest bank in the Philippines. It’s not a short-term investment for us. As for Thai Danu, one thing it has brought us is extensive knowledge of how to integrate, which is a crucial skill for a bank wanting to be a regional player by acquisition. And we also have a Thai operation which is ready for action.”
That DBS wants to increase its Hong Kong operations was made clear last year when it put in a bid for the retail business that Chase had decided to sell – made up mainly of about 750,000 credit card accounts. OCBC also put in a bid, thought to be higher than DBS’s $900 million. But the winner was Standard Chartered, which bid $1.32 billion. “We like the market to think we’re disciplined,” says Jackson Tai, DBS’s chief Financial officer and also, as of last month, president and COO. “We need to acquire to grow quickly but we won’t overpay. We’ve now launched our own credit card from scratch in Hong Kong, and are doing it more cheaply than if we’d won the Chase franchise.”
Serving the Chinese diaspora
Each of the big four banks has a slightly different target range for overseas expansion. All bar OUB got caught out in Indonesia, although only in small joint ventures. UOB deputy chairman Wee talks about “serving the 55 million Chinese in south-east Asia”. Thus far his bank has, like DBS, invested in Thailand and the Philippines, also with mixed results. Wee also says that “we are very interested in Greater China”. This means Hong Kong for now, where the regulations are more palatable. Greater China is also a goal for OCBC, but apart from its aggressive pursuit of Chase’s retail business, it has done little about it.
DBS splits its target markets into three. “Our prime focus is Asean and Hong Kong,” says Tai. “From there we will scale our business into Greater China, Australia and India, and then, assuming we have a big enough market cap, we’ll consider Japan and Korea.”
OUB is a different case. Before the crisis, up to 40% of its revenues came from outside Singapore, most notably from its Malaysian operations. That is now down to 25% to 30% at best. In considering the rest of the region, executives are cautious.
“We didn’t buy anything in the crisis,” says Seah. “We looked at them, and walked away. To go ahead would have been like walking into quicksand.” And he holds the same view now. “We’ll continue to look at them as they come up, but we have to be extremely careful as the region still hasn’t stabilized. We’d rather wait until the banks are safer and pay a premium.”
His outgoing counterpart at DBS takes an opposite view. Despite the problems he inherited with Thai Danu – or perhaps because of them – Olds thinks one valid way for DBS to expand is to buy up bad banks. “Not enough banks in the region have done enough to avoid problems if there is another crisis. So if the US slowdown is more severe than people think, and if Europe can’t pick up the slack, Asia’s going to be hit again, and in the shakeout more banks will become available.”
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Time will tell, though investors in Asian banks will take little comfort from either Seah’s or Olds’s views.
For now there are no suitable banks available, not within the price range of the Singapore banks. Morgan Stanley analyst Alina Chiew believes this could spur a different kind of development. “Since there’s nothing for sale at the right price, we might see the banks move away from buying whole institutions. There might be more room for buying business lines as other banks shed them, or more likely look for tie-ups and joint ventures in Asia to expand their distribution networks.”
This leaves the Singaporean banks with a lot of excess capital on their books looking for a home. All have very high ratios in any event, and DBS has even raised S$1.25 billion in tier-two capital in preparation for any acquisitions. And that may well increase this year once the government passes the legislation to allow banks to sell off non-core assets. OCBC and UOB have the most to sell off, although OCBC has said that it will return any profits from the sales to its shareholders, assuming there is no stock offering. That could be as high as S$3 billion.
None of the banks seems keen to return the rest of its excess capital to shareholders yet, even though it depresses shareholder returns. “The question of what to do with their excess capital always comes up in meetings with the banks,” says Chiew. “The banks prefer to keep it for potential M&A targets, but investors are becoming impatient and would like to see it returned through share buy-backs or special dividends. But they’ll probably give the banks between 12 and 24 months to deploy it before getting too vocal.”
The reason for keeping the excess capital, says one banker, is “because a lot of Asian shareholders prefer to get cash rather than stock for their shares in an acquisition”. Olds at DBS is keenly aware of this: “A lot of what we’ve bought into are family-owned banks, and their mindset is often for cash.
And that eats up your excess capital pretty quickly. Some investors have told us to return the capital to them and that they would then hand it over again when needed. I’m not prepared to take that risk of potentially limiting our funding methods.” It does make sense to keep the options open, but a more aggressive investor might not take too kindly to a bank which keeps returns low by hoarding cash for acquisition sprees of doubtful Financial merit.
Don’t compromise your capital
The banks aren’t completely ignoring calls to manage capital more efficiently. “Managing capital is a three- to Five-year process,” says Olds “You don’t relinquish primary capital until you have secondary capital in place. One thing I’ve learnt is never to compromise your capital.”
For its part, OCBC made a bold move in hiring Chris Matten as CFO last year. He used to run capital management for National Australia Bank and is the author of Managing bank capital: capital allocation and performance management, one of the top works on the subject.
The Singapore banks are left struggling to determine their strengths. None wants to merge at home, there are precious few acquisition targets abroad and their excess capital is mounting. Meanwhile their costs continue to rise, and their search to increase fee income in their home market and to engender customer loyalty with new products is only just beginning. Price wars are surely around the corner. And for UOB and OCBC the impending loss by forced sale of their non-core assets will strip their businesses down for all to see the real value of the banking franchises.
To do nothing risks stagnating; to do something risks making a big mistake. At least one option is still closed to them: they can’t yet sell out to a foreign bank, at least not entirely. “That would be a big step, and not one that we are prepared to take just yet, although we will consider smaller stakes,” says deputy prime minister Lee.
“The real question is whether a foreign link-up strengthens our banking system, which has always been our goal. We don’t want to Find ourselves in an economic crisis with no local banks to support the market. But if it turns out that belonging to a larger international institution is the only way forward, then we will of course be compelled to go that route.”
Investors seem prepared to give the banks up to two years to sort out their priorities. Some are starting to wonder if Mr Lee, whether Hsien Loong or Kwan Yew, will share their patience.
