Mahathir Mohamad, Emerging Markets, October 2007
1 October, 2007
Simon Israel, Temasek:a fund apart?
1 December, 2007

Euromoney, December 2007

This month Jackson Tai will step down as chief executive officer of Singapore’s DBS Bank. With his departure to the USA, the continent loses a strident standard-bearer of the idea that a powerful pan-Asian institution can be built without the irksome distractions of a London or New York head office, or indeed more than a handful of westerners on the board or in management.

 Tai is well-known for his vision that DBS should be a pan-Asian bank, headquartered in Asia, run by Asians and for Asians. And he spent years working on it, starting as CFO when he joined from JPMorgan in 1999, and then, from 2002, as CEO. But did he manage it?

 It is true to say that DBS, the largest bank in southeast Asia by assets, is also the most regionally diverse locally-headquartered institution in the region. It is in 12 Asian markets; owns a significant business in Hong Kong; has a subsidiary in Indonesia; holds stakes in institutions in Thailand, India, Malaysia and the Philippines; and is now locally incorporated in China. In the first nine months of 2007, 36% of revenues came from outside Singapore, and if the China business takes off from the platform of its new local licence, that figure will get much closer to the 50% Tai and other DBS top brass have often targeted.

 But that’s not quite the same as being a pan-Asian bank – not on the scale Tai envisaged, anyway. “DBS is seen as just a Singapore and Hong Kong play, and not the serious regional play I think they were hoping for,” says Peter Sartori, a fund manager at Treasury Asia Asset Manager who used to hold the stock but sold out. And Tai himself acknowledges the sense of a job begun but not completed. “I think we have achieved an awful lot,” he says of the regional expansion. “We also know we can do a lot more.”

 Ask any fund manager or analyst about Tai’s tenure at DBS, and almost instantly the subject of its 2001 purchase of Hong Kong’s Dao Heng Bank comes up – along with the price. At just over three times book value, it seemed a big price tag at the time and looks bigger still in hindsight, coming in the brief euphoria between the Asian financial crisis and the tech stock crash. “Jack Tai will always be remembered for paying way over for Dao Heng: not a good legacy,” one fund manager says. (In fact the deal went through when Tai’s predecessor, Philippe Paillart, was CEO, but Tai – who at the time of its formal announcement held the title ‘president’ – is widely credited with driving it.)

 Still, that cost has long since been absorbed; while most feel DBS overpaid, none would deny that the deal transformed the bank, which was largely the idea. “Back in 99, we were highly dependent on Singapore for growth,” says Tai. “We needed to balance out and diversify our platform; we needed to build that diversity in our DNA.” Dao Heng, now called DBS Hong Kong, has given the bank a strong position in serving small to medium enterprises, a key driver of Tai’s philosophy for Asia as a whole: among other things it ranks second in Hong Kong for trade finance and is the leader in factoring, vital SME services. It also delivered a strong consumer banking franchise which has proven particularly effective in the marketing of structured investment products, an acknowledged DBS strength in Singapore. But it’s this diversity, “the importance of being able to navigate markets across Asia for the benefit of our clients,” that Tai comes back to as the transformational element of the deal.

 And it may be about to pay off in a different direction – China. Very few foreign banks have been granted licences for local incorporation so far, and it is likely, though not certain, that the Dao Heng franchise was vital to getting that licence. “I think it certainly helped,” Tai says. “If you are evaluating the application back in Beijing I’m sure you would take comfort in DBS…having a very strong, credible operation in Hong Kong.” If that operation can translate its SME business on to the mainland, it may yet turn out to have been a smarter buy than anyone thought, though that’s still a big ‘if’.

 The bank has struggled in some of its other regional adventures. Its involvement in Thailand predates Tai. DBS bought a majority stake in Thai Danu Bank in 1998, post-financial crisis, and Tai still speaks with some wonder about the woeful state of the asset they ended up with; its loan book was so bad that DBS reported 13 per cent non performing loans at a group level in its 2000 accounts. DBS cleaned it up, but realised the bank was too small to be meaningful, so merged it in 2004 with Thai Military Bank and Industrial Finance Corporation of Thailand. This made for a bigger bank but a smaller stake, just 16%; DBS clearly, and it turned out wrongly, believed it was going to be able to build from this into a position of control. When it found that it could not, DBS declined to take part in a recapitalisation, and is expected to pull out outright in time; Tai himself says, “We’ll have to see.”

 Indonesia, too, has faced problems. DBS has a bigger presence here than is commonly known, operating in 14 locations in eight cities (it hopes for 20 in 11 by the end of the year) and boasting strong growth in wealth management in particular. But it faced the significant embarrassment this year of losing a licence it had only recently been awarded as a primary dealer – for failing to live up to a promise to the regulator to participate in government auctions. “We regret it,” Tai says. “The fact of the matter is we disappointed the authorities who gave us that licence and I must say we disappointed ourselves. You seek a licence, you’d better go out and fulfil the obligations that come with that licence.”

 As interesting as the acquisitions that have gone through are those that have not. The one that clearly stings is Korea Exchange Bank, from which DBS withdrew as a potential purchaser in June. “There are certainly transactions or acquisitions you wished would happen, otherwise why would you spend so much time on them?” he says. “On KEB we spent a lot of time making sure our analysis was correct, structuring it in a way that it would be accretive to our shareholders. We negotiated an understanding with the sellers, and we believe we won the hearts and minds of the rank and file of Korea Exchange Bank.” But at the end of May, Tai himself took the decision to go to the board and pull out, “based on the prevailing market conditions surrounding KEB.” By this he appears to mean the politics in Korea about selling the asset at all; it is held by the US private equity group Lone Star, which has faced frequent investigation in Korea as to its right to be the owner in the first place. Tai is vindicated to some degree by the fact that nobody else has managed to buy it either, with HSBC now fighting its way through labyrinthine issues between Lone Star and various Korean political interests. “If another bank succeeded in closing a transaction with KEB there would be serious regret, but no-one else has succeeded since then.”

 For Tai, KEB would clearly have meshed with his broader visions of an Asian powerhouse. “The transaction, I emphasise, would have been very accretive to our shareholders” – this has become rather an important point post-Dao Heng – “but more importantly there was industrial logic there,” he says. By that he means that KEB’s strengths in Korean forex and trade finance mesh with DBS’s own capabilities in treasury and SMEs. “You can see the synergy that is possible,” he says. “You can also see this would fulfil part of the vision of being a pan-Asian bank. We are the leader in Singapore, we are a leading bank in Hong Kong, and I hope increasingly in South China; KEB is by far the class act in Korea. This pattern of Singapore, Hong Kong and Seoul, that to me had a lot of logic.”

 But does it? To some analysts, buying pricey assets in developed markets is missing the point. “Hong Kong is a developed market, small population… they should have been buying in Indonesia,” says one. “They spoke for so long to Guangdong [Guangdong Development Bank, with which DBS was linked in 2005], and that’s the one acquisition they should have done. Instead they went to Korea. What value can you add in Korea? You don’t know the language, the culture, the unions.”

 On China, Tai says: “Yes, we would very much view the ability to buy a minority stake in a Chinese bank to be attractive. But because we have a national licence, and the people and the products and the skills, we don’t have that urgency or fixation to win the next expensive auction.” His next comment, again, appears to carry the legacy of the Dao Heng buy: “If we don’t win an auction because our price was not high enough, I hope our shareholders and the public will say OK, this bank is disciplined and has alternatives.”

 He adds: “If we could acquire access to a distribution network which is clearly light years ahead of what we can achieve, yes, we must pursue it. But it better be accretive. It better be attractive to our shareholders.”

 Temasek, the investment arm of the Singapore state, is an interesting part of the DBS story. When the bank was formed it was half owned by the government, with the remainder being held by local banks. By 1999, when Tai joined, Temasek’s stake had fallen to 40%, and has since dropped to 27.7%. In the meantime the presence of international institutional investors has grown to account for more than half of the overall shareholding. Tai insists (as does Temasek) that it does not exert control over the bank; of DBS’s 12-person board, only two have any connection to Temasek and even then are not Temasek employees (half of the board, incidentally, is non-Singaporean, as is just over half of the management team).

 But even if Temasek doesn’t call the shots, the problem is that elsewhere in the world there is a perception that it does, or at least that DBS in some measure represents the Singapore state. It is said that when DBS approached the Korean regulators over KEB, one response was: you’re already here, through Hana Bank (in which Temasek holds a stake). For his part, Tai says that “it’s quite expected that anyone looking at our portfolio or background might ask the question about the connection with the government of Singapore, but we do pride ourselves on being an independent bank.” The perception probably won’t be helped, though, if Lee Hsien Yang, reportedly one of a shortlist of candidates to replace Tai, gets the job; in addition to being a former CEO of SingTel, he is also the prime minister’s brother.

 At home – still the majority of revenue – most see performance as positive. Deutsche, UBS, CLSA and Credit Suisse, among others, have buy or outperform recommendations on the stock, with CLSA impressed by fee income (up 38% year on year in the third quarter), Deutsche impressed by loan growth, and UBS arguing that “DBS has a franchise that has the depth and breadth to capture earnings beyond just the lending business.” It’s unquestionably a strong player at home, leading on savings deposits, credit cards, retail customers, internet banking, ATM transactions and unsecured loans, among other things.

 There is an alternative view that a preoccupation on regional domination has led to neglect of grass-roots business: that treasury should be making more money, that the cost base is too big. In particular, the bank took a kicking from the market after its haphazard disclosure of sub-prime mortgage exposure earlier this year, despite a small direct exposure (S$275 million, or 0.1% of assets). One analyst argues DBS’s market cap “should be one quarter more”, and the market itself has punished the stock, with DBS underperforming the Singapore Straits Times index by 25.6% in the year to October 26.

 But the numbers overall look very healthy, with record annualised earnings per share, 11 per cent compound annual growth rate in loans since 2002, all-time-high net interest income and margins, and nine consecutive years of fee growth. NPLs at 1.2% are clearly doing fine; return on equity, after a blip in 2005, is climbing again and stands at 13.2%, now marginally higher than UOB, which in recent years has usually outstripped it. “Right now the bank is in a sweet spot, capturing loan growth and market share, and it’s all down to things he implemented: back room, risk management, that sort of stuff,” says one analyst. “He’s done a lot that doesn’t get much credit.”

 Then there’s people. When Koh Boon Hwee took on the chairman’s role in January 2006, he stressed the importance of teamwork. This was, after all, an organisation of differing backgrounds and values: the DBS long-time staffers; the people who came in with the stodgy national savings bank, POSB, in 1999; the Standard Chartered alumni brought in by Paillart, the Citibankers in consumer banking, the JP Morgan crew that came with or after Tai himself. Throw in the different streams of commercial, consumer and investment banking and the legacy of government ownership, and it is easy to see why there was much to do in making these elements gel.

 So what sort of man was Tai to take on that task? An interesting figure, he champions Asia but was raised in New York (and is soon to move back to Greenwich, Connecticut), and he sings the praises of local banks over western multinationals despite having earned his stripes at one of Wall Street’s finest. The stories he tells of his early life and career suggest a certain underdog spirit: there’s the often told one about his first day at JP Morgan in New York when he arrived for his investment banking job only to be shown, mistakenly, to the mailroom, symptomatic of attitudes towards Asian Americans at the time. And there’s the one about his days as a drummer in the city’s Chinatown, in which he effected his first merger – between two rock and roll bands, in order to corner the market and control his own bookings, moving from a position of weakness to a position of power.

 He’s certainly a workaholic, well known for spending Singapore public holidays visiting overseas branches so as not to waste the day, and many who have worked with him consider themselves to have been pushed hard (rebutting claims by some outside the bank that it’s a place Citibankers and JP Morganites go to retire). It’s interesting that westerners often describe him as a very witty man – he has a dry, deadpan sense of humour – while locals sometimes report being nonplussed by his manner, unsure whether or not to laugh.

 So did this complicated man unite DBS? “There were a lot of good people there but certainly a lot of different cultures,” says one who worked there. Tai himself argues: “I think we have a much better chance at working horizontally than most other banks, particularly the large multinationals.” He can argue that the best profit announcement in DBS’s history came on his watch, so if there’s a lack of harmony internally it hasn’t visibly dented performance.

 In the final analysis, the house that Jack built is not the regional powerhouse he pictured, but nor is he leaving the purely Singaporean institution he joined. It’s a journey started but not completed. “You’ve got a bank that has broken out of the mould of being a one dimensional, one colour bank,” he says, and he thinks his successor will likely continue down that path. But who to take it on? “I understand there are two or three American CEOs available,” he dead-pans. “Stan O’Neal, Chuck Prince…”

 BOX: The Stanchart rumour

There is a rumour that Temasek would like to combine Standard Chartered with DBS in order to create a true, global, Singapore-headquartered powerhouse. It’s a great theory. But does it stand up?

 At the moment, Temasek doesn’t have the clout in Stanchart to make it happen even if it wanted to: it holds 13% of the stock. Besides, according to Temasek itself, that’s not its style. “The option you point out is an option among many others,” says Simon Israel, executive director. “Standard Chartered conceptually could be combined with many other banks, and we have an interest in some of those banks. But ultimately the decisions on these things are in the hands of the boards of individual companies. We would be much more looking at the parties to recognise opportunities for themselves than for us to sit there as the puppet master trying to orchestrate these things.”

 But would it make sense? From the Singapore end, sure: it would give global scale to the institution, and build a stronger presence in all sorts of Asian markets. “But put yourself in the shoes of Standard Chartered,” says one analyst. “DBS is Singapore and Hong Kong; Standard Chartered already has a presence in both and they’re the two most saturated markets in Asia. They want to look at high growth, Pakistan and Vietnam, not Singapore.” There are theoretical alternatives – Stanchart becomes the subject of a hostile bid from someone else, and DBS comes in as a white knight, whereupon the bank agrees to a Singapore headquarters but still runs the show – but for now it’s fanciful. “In the long term it can happen,” says an analyst. “In the near term it’s going to be challenging.”

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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