The world’s best bank 2021: How DBS turned a crisis into an opportunity
It’s a sign of a well-run bank when it not only survives a pandemic largely unscathed but uses it as an opportunity to gain ground. Characteristically, DBS’s Piyush Gupta not only kept the bank on course but used the crisis to make two potentially transformative acquisitions, launch two new exchanges and think afresh about what banking should look like.
“People often say: ‘Never waste a good crisis,’” muses Piyush Gupta, chief executive of DBS. He certainly has not. DBS wins our highest award this year for not just surviving the pandemic, not just staying profitable and robust, but for using it as a spur to do things differently and better.
“The last 18 months have allowed us to demonstrate our resiliency and our difference,” says Gupta. “It’s not a great thing to say, but the crisis has been good for DBS. We have leveraged the opportunity to put more daylight between us and our competitors.”
Gupta had a longstanding role model in this. For many years he has spoken admiringly of what Jamie Dimon did at JPMorgan during the global financial crisis, using it as an opportunity to make changes that made the bank far stronger in the aftermath.
“I view this crisis as a platform to reposition the bank fundamentally,” he tells Euromoney.
“Back in the 2009 crisis, what JPMorgan was able to do allowed them to put daylight between them and everyone else. We took the opportunity to do what JPMorgan did last time: inorganic deals, which are normally not easy. But a crisis creates a good opportunity.”
Indeed, although DBS did plenty that was admirable in its existing operations, it was really the brazen new stuff that caught the eye. While others battened down the hatches and waited for the storm to pass, so far during the pandemic DBS has bought or taken stakes in two banks in potentially transformative acquisitions and launched two entirely new exchanges, one around digital assets and one around carbon markets.
No other bank has been so dynamic during the review period.
It will be intriguing to see which of these four initiatives has the greatest impact in the bank’s future; a case can be made for each of them.
The two bank purchases – amalgamating the whole of south India’s Lakhsmi Vilas Bank into DBS Bank India in November 2020 and taking a 13% stake in Shenzhen Rural Commercial Bank in April 2021 – are “game changers for us,” Gupta says. “They anchor us on growth in India and growth in the Greater Bay Area.”
They’re very different plays, however. Lakshmi Vilas is classic opportunism: a bank in such a state of disrepair that DBS only had to recapitalize it and assume its bad debts – and was then permitted to amalgamate it into DBS’s wholly-owned subsidiary in India.
But it’s also an illustration of Gupta and DBS’s willingness to learn. A few years ago, Gupta was boldly telling people that he could build a successful digital bank with about 40 people and no branches. But he learned that, although he could attract plenty of customers this way, he couldn’t really make any money out of them, a lesson he then applied when rolling out the same model in Indonesia to greater success.
“After three or four years of trying in India and Indonesia, we realized the pure branchless model is hard to make work,” he says now. “We eventually wound up with three million customers in five years, but two million were never going to make us any money. So what we’ve done over time is trimmed down the customer base and figured out the customers we can lend to.
“When we launched the business in Indonesia, 18 months after India, our customer profile was much better. It’s part of my learning.”
A pure digital bank will take too long and not get the business profile we want to build. Creating a phygital model is the sensible thing to do
When he launched digibank, you would have had a hard time convincing Gupta that he would buy a 600-branch fading south Indian bricks-and-mortar institution, but here we are. “We used to be a wholesale-funded bank, now we’re a retail-funded bank,” Gupta explains. “It allows us to get into the mass market, retail and SME. We had a digital difference; now we can back it up with a more entrenched point-of-sale presence. That’s a big difference for us.
“One thing I realized; if you look at the growth in India, notwithstanding the whole digital foray, who is making the biggest success? HDFC, Kotak. I came to the conclusion that a pure digital bank will take too long and not get the business profile we want to build. Creating a phygital model is the sensible thing to do.
“If I can get a brick-and-mortar player in south India or the Greater Bay Area, use digital as a point of differentiation and shrink down the branches, suddenly I have two million customers of a profile I need, who can borrow from me, and I have a much better likelihood of returns.”
And what about the quality of the book he’s inherited, in a country hit harder by the pandemic than almost any in the world? “The loan book is doing fine. I’m not seeing anything I didn’t expect to see.”
Shenzhen Rural is different again. This is a minority stake – albeit the biggest minority stake – in a solid but not widely-known bank. Shenzhen Rural (ignore the name, there’s been nothing rural about Shenzhen for at least 20 years and you’d be lucky to find a tree there these days let alone a tilled field) is a well-run mid-sized institution that serves five million active retail customers and over 170,000 active corporate customers, most of them in the small and medium-sized enterprise sector.
And it is in exactly the right place – the Greater Bay Area – at the right time. “The bank is at a stage where it wants to build an international presence; with clients seeking public listings,” says Gupta. “We have an international presence with strong digital capabilities and a good capital markets team. That’s why it finds us an attractive partner.”
And even if he did nothing else for a while but sit on the investment, it would still be a smart use of money. “The bank runs at about 17% to 18% ROE [return on equity]. It is high quality and pays good dividends. Based on economic growth alone, the investment will give DBS 25% return on allocated equity even if we don’t do anything.”
DBS will do something, however. Along with the securities joint venture DBS holds, it will use it to build out in Greater China and link to their existing operations. “We took the view that China is the big play, the biggest market, as big as the US in 10 years,” Gupta says of the joint venture. “We had a chance to build a business out.”
Then there are the two new exchanges. The DBS Digital Exchange is a three-pillar idea combining crypto trading, crypto custody and (perhaps the most interesting bit) an exchange for tokenized digital assets.
The crypto side is exactly what you would expect DBS, as the world’s most digitally successful bank over the last five years, to do. But it required confronting issues about the relationship between buyers and those who facilitate their investment.
“I am a bit ginger about who we let in,” Gupta says. “It’s accredited investors right now, but there are a thousand people itching to get in.”
Does one just let them in, recognizing that a free market must allow the facility for people to lose money if that’s the way the trade turns out? “Crypto is a story asset and people will get hurt with story assets,” he says. “When that happens and people lose money they will find a way to blame the provider and I don’t want to get into the middle of that. When I have other assets like a property token, I’m happy to let retail in there, with more real, tokenized assets.
“One part of me says buyer beware: as long as someone is not mis-selling to you, you are responsible for your own decision.
“But the fact is, as a provider do I have some model to make sure people aren’t investing blindly, throwing caution to the wind? I believe with the Digital Exchange I do.”
The custody side is safer ground, meeting a clear and obvious need that more banks should really have stepped into by now. “We provide bank-level custody,” Gupta says. “We are a great custody house and we don’t keep that function in the exchange but in the bank. Hacking is the biggest weakness of crypto because of the lack of controls and protocols about custody.”
The fourth landmark was Climate Impact X, the new exchange for carbon credits launched with Standard Chartered, Temasek and the Singapore Exchange. It combines a host of different ideas, from blockchain and machine learning to using satellite monitoring to ensure projects are being properly delivered, and the idea is to add rigour to a market that has never quite got started because not enough people have faith in it.
“The real challenge was that people don’t trust the exchange of carbon credits,” Gupta says. “The bar has been quite high. But this is what Singapore stands for: trust, integrity and it happens to be in the region of the world’s biggest supplier of nature-based solutions. We should be able to leverage this.”
It will take time to gain traction. The exchange and project marketplace should be launched by the end of 2021, with the exchange allowing multinational companies and the like to sell large-scale high-quality carbon credits to institutional investors, and the marketplace allowing a broader range of corporate issuers who want to participate in the voluntary market. Each project on the marketplace will be supported by transparent environmental impact, risk and pricing data, with an international advisory council overseeing it all.
None of this is going to be fast; it will take years before we know whether it’s going to work at scale. But “I’m quite confident this will be economically positive for us in coming years,” says Gupta.
So that’s the new stuff. But whenever one interviews DBS executives (and Euromoney met at least a dozen in deciding upon this award) one occasionally has to coax them away from bold visions of the future to discuss the dull realities of the present day. This has been a brutal environment in which to operate. Reassuringly, DBS excelled at the boring stuff too.
In financial 2020, DBS grew operating profit before allowances by 2% to a record S$8.43 billion ($6.21 billion) and kept total income stable at S$14.6 billion. For every area where revenue was lost, another business line made it back, and then some. Where institutional profit fell, treasury and markets boomed. When consumer and wealth declined, a government bond portfolio built specifically to benefit from low interest rates trebled its gains. This reflected the breadth of the franchise.
“Last year we had a complete wipeout in interest rates,” Gupta says. “The old DBS, if you look back slightly more than 10 years ago, would have been in trouble: the last time rates collapsed we suffered dramatically.
“This time around, in 2020, we held income stable, profit before allowances was up a couple of percentage points, we grew our CASA [current account saving account] book; we lost fees from credit cards, which is to be expected as people stopped travelling, but we made it up on the wealth and retail side.
“At the same time digitalization gave us the ability to shave costs. It speaks to all the end-to-end digital connectivity stuff we have done. It’s clear to me that the capacity we built over the years put us in good stead.”
Last year we had a complete wipeout in interest rates. The old DBS, if you look back slightly more than 10 years ago, would have been in trouble
Indeed, the pandemic was a testing ground for many of the things DBS has been trumpeting for years. Consistently, the bank’s executives have told us it has the best digital business anywhere in the industry. So when the pandemic changed everything about the norms of banking and eliminated so much face-to-face contact and even the ability to come to work, there was a temptation to think: right, DBS, put your money where your mouth is.
This needed to be proved at every level from transaction services to the ability of staff to work from home. And in practice across the bank the eight years DBS has spent building a digital operation did pay off. More than 90% of staff transitioned quickly to work-from-home arrangements without any loss in productivity when government lockdowns kicked in. The bank launched digital business loans for SMEs and social enterprises, and a digital relief package for almost a thousand food and beverage businesses, helping them find new income streams online during the pandemic.
It was telling that the state turned to DBS in order to distribute emergency payments to Singapore citizens. “The government came to us to do more than S$30 billion of payments,” Gupta says. “That required a massive spike in volumes. Why did the government come to DBS? Because our digital capabilities are well up to snuff. They said: ‘Can we do S$2 billion overnight?’ We were able to do it.”
There are so many stats about digital adoption through DBS that one’s eyes start to swim: 99% of applications now cloud-enabled, 18,000 employees who have completed data training, 57% of customers now considered digital (generating more than twice as much revenue per person as a traditional one at a cost-to-income ratio 30 percentage points lower), digital payments volume up 95% in Singapore and 120% in Hong Kong in 2020, customer signups for the digibank mobile app up 216% between June and August 2020. The list goes on.
But, as always, it’s principally about what is learned along the way. “There was a focus on supply chain resiliency,” Gupta says by way of example. “For a lot of companies, we found the problem was not the first level supplier but the second, third or fourth. When you digitalize, you start getting transparency on where the roadblocks are.”
To keep learning, DBS created a task force to work on two ends of the same situation: leveraging the crisis in order to build for the future and thinking about the future of work. From February 1, 2021 bank wide, employees were permitted to work from home 40% of the time. “I believe that gives us an opportunity to reimagine our workspace. Over the next five years we could reduce 20% of our workspace.”
But contrary to what you might expect, Gupta doesn’t want an office-less world. “There are people who think the office is over. I don’t agree with them. There are important and profound reasons the big office would stay. But the nature of work is changing: reducing the footprint, creating flexibility. We are thinking hard about that.”
One example is job sharing, hard in an analogue world but achievable in a more digital world.
“In the early days of the crisis everybody was so happy to work from home. But sometimes it’s not that easy. The challenges are: how do you keep the soul of the company? How do you onboard new people joining the company? It changes the way you manage people, the way you keep spirits high.”
Then there’s blockchain. A rather useful trinity has emerged between DBS, Temasek (its largest shareholder) and JPMorgan in this area, most clearly demonstrated by a new open-industry blockchain-enabled platform called Partior aiming at transforming interbank movements for payments, trade and FX.
Our review period also saw the first fully digital end-to-end secured letter of credit by DBS through the Contour Beta Network, an approach that is now in genuine production in Australia, China, Hong Kong and Singapore.
“Blockchain’s time has come,” says Gupta. “And the idea that its time has come prompts people to allocate capital to it and create big outcomes over the next two to three years.”
Weathering the storm
Risk management has of course been essential throughout the pandemic and DBS, like all the Singaporean banks, appears to have weathered the storm with prudence. It started with heavy provisioning and Gupta takes the view that the banks that had built up the buffers to be able to deal with an environment as unexpected as this one deserve credit.
“The fact that some banks had the capacity to be able to buffer their provisions is something you need to look at, you cannot discount it,” he says. “The banks operating with low coverage levels and low capacity to be forward looking are unable to buffer up. I think that makes a difference. If JPMorgan can take $20 billion of provisions, or us $3 billion to $4 billion, and do it without compromising overall performance, that must speak to financial strength.”
In fact, non-performing loans at DBS have barely budged at all and in the bank’s first-half results provisions began to be freed up as the environment improved.
Frequently Covid prompted a combination of the good and the useful. A good example was Singapore’s migrant worker population, a constituency hit hard by Covid, confined to cramped dormitories for months at a time.
In a practical sense, they had a banking problem: there are stores below these dorms where people shop, but they didn’t have cash. DBS put ATMs in the dorms to help and also took the opportunity to convert migrant workers – who were particularly keen to send money home, having no chance to spend – to digital tools. This was a win-win: a humanitarian benefit, a colossal cost saving and also a way to avoid losing money on a segment of the population DBS has taken it as an ethical obligation to serve, stemming from DBS’s government-prompted acquisition of Post Office Savings Bank and its customers back in 1998.
This brings us to sustainability, which Gupta talks about today with the same enthusiasm he previously reserved for digital subjects.
He speaks of three pillars for a sustainable future: responsible banking, responsible business practices and creating social impact. The first of these includes lending practices targeted towards less carbon-intensive borrowers: the “carbon finance taxonomy,” as he calls it. The bank has already stopped onboarding customers who get more than 50% of their revenue from coal. Meanwhile, more is being committed to solar, with DBS committed to zero carbon in its own operations by the end of next year.
Among other things, DBS has built a transition finance framework to guide customers; increased its commitment to sustainable financing to S$50 billion by 2024 and to zero coal exposure by 2039; and has used its Portraits of Purpose platform to reach out into the community. Through the pandemic this programme reached 120,000 healthcare workers and over 60,000 beneficiaries through the provision of care packs, meals and personal protective equipment.
DBS Foundation is one of the more well-resourced and effective philanthropic arms in the region.
And in gender diversity DBS is already a leader in representation at senior levels, at least by the dismal standards of the banking industry. It is routine to find oneself speaking to a very senior woman when dealing with the top ranks at DBS – including head of institutional Tan Su Shan, head of capital markets Eng-Kwok Seat Moey, head of SMEs Joyce Tee and CFO Chng Sok Hui – and there are very few financial institutions where this is the case.
DBS, like everyone else, still faces a challenging operating environment. “We don’t think the short end of the curve is going up in the next two to three years, so we need to re-architect for a world with low interest rates for longer,” says Gupta. “Despite the fact that the pandemic has consequences, I am a big bull on Asia’s secular long-term growth.”
But the truth is DBS is emerging from the pandemic in better shape than it entered it, and that is no small achievement.
“Nobody else has been able to demonstrate the ability to use this crisis as an opportunity,” says Gupta. “We have had the capacity to work through it and see the opportunities. That’s the standout.”