In the three years since chief executive Piyush Gupta took the helm at DBS, a dichotomy has developed within the Singapore bank’s strategy.
On one hand it remains a domestic, Singapore-focused organisation, leading debt and equity league tables and is a stalwart corporate lending bank. But it trails rivals United Overseas Bank (UOB) and Oversea-China Banking Corp. (OCBC) in areas such as small- to medium-sized enterprises (SMEs) and wealth management.
On the other hand, DBS is a bank with regional ambitions, forging a name for itself in money-making areas such as trade settlement and the offshore renminbi. From this perspective, its competitors are more the likes of HSBC and Standard Chartered.
The contrast has become more pronounced in recent years as DBS – long considered a safe play with conservative loan-to-deposit ratios, modest overseas expansion and reliable growth – has shifted its business development into overdrive.
The momentum can be largely attributed to Gupta. From day one, colleagues and analysts say he’s brought energy to the bank, promoting it as a hybrid player or a mix between a local and international bank. He’s advanced the bank’s domestic strategy, using its balance sheet to take market share, and has been bold offshore.
“Since Piyush came on board, DBS’ strategy is clearly more Asia [focused] and it has been more efficiently using its balance sheet, though it’s not necessarily behaving [in a] riskier [way],” says Alfred Chan, a financial institutions analyst at Fitch Ratings. “What’s clear is that it wants to be seen to be able to do better than the other Singapore banks.”
Raising efficiency is just the beginning. In an interview in DBS’ new headquarters in Singapore, Gupta tells Asiamoney that the bank intends to add to its capabilities in Singapore while expanding operations in China, Taiwan, India and Indonesia, the latter through its highly public bid for Bank Danamon.
“Singapore opportunities are finite. As a relative share of global GDP [gross domestic product] ratio it can only grow so much,” Gupta says. “We’re really trying to get a lot more business from India, China and Indonesia, which are much better margin countries than Singapore and Hong Kong.”
While analysts express optimism for the bank, there are fears that DBS could spread itself too thin, neglecting the very factors that have underpinned its strength to date.
For better or worse, Gupta is steering the bank into new waters as he seeks to boost return on equity (RoE). Along the way DBS will need to decide whether it has what it takes to be the first regional Asian bank, or if it should focus on the more modest goal of being Southeast Asia’s leading financial player.
The former would force DBS to grapple with the costs of bulking up its assets and staff, as well as increasing competition. The latter would mean that it has to settle for reaching only a portion of Gupta’s goals.
Gupta’s inheritance
The DBS of today is a different institution than the one Gupta joined in November 2009.
Historically the bank was conservatively run, playing on its broad customer and deposit base, at SGD231 billion (US$188.8 billion) by June 2012.
DBS’ caution was evident from its lending practices. UOB and OCBC have tended to operate loan-to-deposit ratios of 80%-90%. In contrast, DBS’ was 70%, a less risky level but one that provided lower returns. While DBS’ five-year average RoE was 9.36%, UOB’s was 12.49% and OCBC’s was 12.12%.
Despite its caution, DBS has enjoyed steady annual growth. The bank’s ample deposits enabled it to offer cheaper rates than its competitors plus DBS’ long-established relations with state-backed corporates have ensured it a steady stream of big-ticket deals. It was a comfortable, even indolent business model.
Gupta’s arrival has changed that. He believes DBS can make a lot more if it works harder to allocate its money.
“One of the downsides to being the safe play is that you get the lazy money. The return on that money is not that great,” he tells Asiamoney. “If you look at assets under management in Asia, banks typically have 40% in deposits and 60% invested. In DBS’ case, we’re the other way around. When I came in, we were around 30% invested and almost 70% in deposits. So in addition to the safe play we added on the smart play.”
From a corporate banking perspective, DBS’ best attribute is having its house in order in Singapore. It has strong local currency capabilities that give clients access to its intra-Asia trade flows and investments, as well as transaction banking and credit facilities [see box on opposite page].
Focusing on those businesses, combined with more aggressive lending, has led to quick results. Gupta set a 2015 deadline to raise DBS’ RoE to 12%. It hit that mark in the first quarter of this year, while profits for the first nine months were SGD2.6 billion, a record.
Branching out
While Gupta has made progress getting the Singapore business in order, he faces DBS’ single-largest challenge yet: its objective to become Asia’s first truly pan-regional bank.
Analysts praise DBS’ Singapore presence, but they say its approach to building its offshore capabilities has been less cohesive.
It’s a formula DBS needs to solve. Singapore will always be its anchor market, but Gupta believes the bank must channel resources into neighbouring markets while opportunities exist. His overarching goal is to create a 40:30:30 revenue balance between Singapore, Greater China and Southeast Asia by 2020.
It’s a sizeable task. In the first nine months of the year, DBS made SGD526 million in revenue and SGD133 million in net profit in China and Taiwan, or 8.6% and 5.1% of its total, respectively. In South and Southeast Asia, excluding Singapore, it made SGD444 million in revenue and SGD225 million in profits, 7.2% and 8.6% of the total, respectively.
In fairness, DBS already has something of a regional presence, managing offices scattered across 15 markets. While these offer breadth, DBS clearly intends to dedicate the most capital and energy into developing China, India and Indonesia. Gupta believes they are the key markets for DBS to keep making better returns.
DBS’ most headline-grabbing attempt to grow in these three markets has been its US$7.2 billion bid for 99% of Indonesia’s Bank Danamon [see box on page 20]. The acquisition would make DBS Indonesia’s fifth-largest bank, and would boost the share of revenue that it gets from South and Southeast Asia from 7% to 27%, while dropping its Singapore share from 62% to 49%.
DBS now has 40 branches in the country in 11 major Indonesian cities, which offer both trade finance and wealth management capabilities, and was the fifth-largest foreign bank in wealth management last year. Indonesia is the only country outside of Singapore where DBS rolls out its full cachet of financial services, including corporate and consumer lending, money market and foreign exchange services.
Aside from its Danamon bid, DBS also wants to buy 14% of Alliance Financial Group in Malaysia. It’s unlikely to end up paying ridiculous amounts for either, as both bank stakes are owned by Temasek, the Singapore investment fund that is also the largest holder of shares in DBS.
Targeting emerging Asia
Elsewhere Gupta says the bank is relying on organic growth.
The strategy is a difficult one to follow in China and India, as both possess tough regulations designed to stifle rapid bank expansion. But DBS is making a go of it regardless, believing forging a presence early will pay off in the long run.
DBS aims to selectively engage in key businesses in both countries, predominantly capitalising on the markets’ trade relationships through large corporate and SME clients and its wealth business – all areas that Gupta thinks DBS can benefit from as the two increase engagement.
“The China/India trading relationship has gone through the roof. China has become India’s fourth-largest trading partner in less than a decade,” says Gupta. “It’s from a low base, but that’s the opportunity.”
DBS hopes to grow in both. It has 12 branches in India, claiming a larger presence than Deutsche Bank, and was the third-largest foreign bank as of October 2012, behind Citi and Standard Chartered, up from eighth a year earlier. Its assets in India grew from INR178.37 billion (US$3.26 billion) last year to INR276.25 billion as of September.
But DBS’ real prize is China, which will play an increasingly prominent role in its operations.
Growing onshore lending is key to the bank’s strategy. Gupta says DBS identified approximately 1,200 mainland companies it plans to reach out to, and make 80-100 of them clients, principally for trade finance and corporate banking.
Raising its profile in the offshore renminbi business is vital, too. Through its Hong Kong operations the bank engages in trade finance, short-term renminbi lending, buys dim sum bonds and explores arbitrage opportunities. It has simultaneously built its offshore renminbi deposit base in Singapore to focus on trade finance and create new structured products.
Despite these developments, DBS remains a far smaller player in China than international rivals, particularly HSBC and Standard Chartered. It was only the 62nd largest bank in the country by assets in 2011.
Gupta argues that this is not necessarily a disadvantage. “One of our strengths is our smaller size. We have 18,000 people, so relative to the big globals we are nimble,” he says, noting that DBS can quickly access new Chinese regulation and act on it expediently.
The strategy has led to some success. DBS boasts an offshore renminbi deposit share of 4%-5% in Hong Kong, well over the proportion of regular deposits it has in the city. At certain points the bank enjoyed a 20% market share of the interbank FX space in renminbi, an almost 15% share of the treasury customer flows, and an 8%-10% share of trade finance.
The key question is whether the bank can maintain its advantage as competition intensifies. Gupta admits that DBS’ lead in the offshore renminbi market has levelled off as more banks expand their footprint. In 2011 it had a 15% share of the offshore renminbi interbank market, but that has dropped closer to 10% and is likely to fall further as more international banks get into the space.
Striving for share
The offshore renminbi experience offers a telling fact: nimbleness may be a virtue, but it doesn’t necessarily lead to lasting market share if a bank cannot support it with a rounded set of services.
As long as DBS lacks real scale in China and India, it stands at risk of losing ground against its rivals. It’s a particular risk given its organic growth strategy, which is cumbersome and could reach a ceiling in terms of returns.
Gupta says he looks to organic growth because there simply aren’t many assets available to buy in key markets, while minority stakes offer a minimal voice at high cost.
The bank has already opted to cut back on at least one market. On October 11 DBS earned US$619.9 million by cutting its 20.3% stake in Bank of Philippine Islands to 9.9%. Given Gupta’s philosophy about the limited use of minority stakes, DBS could end up fully withdrawing from BPI if the price is right.
That mentality suggests that there’s a cap to DBS’ ambitions in Asia.
The bank’s key issue is scale, or rather lack of it. DBS is Southeast Asia’s biggest bank by assets with US$353 billion under management as of June 30. That’s no small fry, but it isn’t massive on a global scale.
HSBC, for example, has approximately US$660 billion of assets in Asia, while the region accounted for 63.8% of its US$8.4 billion global net income in the first half of 2012. Standard Chartered has US$441 billion of assets in the region, which accounts for more than 75% of its US$2.86 billion of net profit for the first half of the year. DBS’ net income was US$1.43 billion.
The ability of HSBC, Standard Chartered and other giants such as Citi or J.P. Morgan to invest in assets, make acquisitions and move markets outpaces that of DBS in many ways. And while the latter’s strength lies in its local-Asia knowledge, competitors are making gains as they cultivate their own Asia strategies.
“Piyush has legacy acquisitions in North Asia and has established a presence up there, but when he talks about having a true regional presence rather than a series of branches and business focuses, DBS has a way to go,” says one analyst at a Southeast Asian bank. “In the pretence of what DBS would like to do across Asia, it certainly makes a lot of sense to consolidate its presence in Asean [the Association of Southeast Asian Nations] first before extending.”
Gaining ground?
DBS’ desire to make more money from India and particularly China is understandable, but the bank should (and probably does) recognise it lacks the size to become a top player in those markets.
Analysts estimate it will take billions of dollars over years to bulk its presence in India and China, outpacing the US$364 million Gupta pledged to China in April.
What DBS should do is keep its China and India business for its growth potential, but Gupta’s time would probably be better spent focusing primarily on Southeast Asia, with the aim of raising revenues above the 30% revenue target that he has set for the bank.
This will also be a challenge. Analysts say DBS’ Singaporean rivals have done better here, focusing their capital on acquisitions and penetrating their existing markets of Indonesia, Malaysia and Thailand. Their strategy is clear: amalgamate their businesses under a cohesive Asean umbrella.
In contrast, DBS’ Southeast Asia strategy is more opaque.
“The problem for DBS is that the India market seems too distant from the whole Asia theme, and some of what it does in North Asia and other branches outside Asean seems to be very individualistic,” says the Southeast Asia-based banks analyst. “There are historical legacies but what’s important for Piyush is the regional strategy. In Asean, DBS’ strategy is fine, and now he must amalgamate these markets together to give clients a cohesive business.”
To succeed across Southeast Asia DBS must maintain its edge in Singapore and define its plan for Indonesia, as Gupta is doing, but it must also push into the more competitive markets of Malaysia and emerging ones such as Vietnam, allowing DBS to leverage its natural multi-product strengths.
For all its strength and influence in the region, DBS should not rule out acquisitions. Gupta is right that suitable targets for its size, scope and value are few and far between. But analysts believe that minority stakes can be beneficial.
ANZ’s 49% stake in Malaysia’s AMMB Holdings has generated referral business for the Australian bank, for example. ANZ may lack management control but it still benefits from cross-selling between its global clients looking for business in Malaysia.
In addition to beginning its Asean question with Bank Danamon, DBS should focus on Malaysia, where it already has capabilities in capital market, strategic advisory, mergers and acquisitions and structured financing. It’s a start, but it will surely get bigger with a planned 14% stake in Alliance Financial Group in Malaysia.
Likewise, the bank has a representative office in Ho Chi Minh City where it focuses on credit facilities, trade finance and treasury advisory. For all the country’s current economic volatility it is bound to be a lucrative growth market at DBS’ back door – seeking partnership and growth activity there could be a valuable endeavour.
And even taking note of Laos (which counts China as its second-largest trade partner at 13.3% of its trade activity in 2011) could be a sound strategy to marry its geographic interests. The opportunities will only grow, as Laos has been granted its own renminbi clearing bank.
Under Gupta’s guidance, DBS has performed well and etched out a solid path in its home market. Add to this the progress that it has made in areas such as the renminbi and trade finance, and that it has a foot in the door in key emerging countries, and it could enjoy a profitable future.
His biggest decision now is whether to focus on Asia at large (and in particular the appealing but troublesome giants of China and India), or to concentrate on the potentially more attainable goal of building a pan-Asean presence.
The former is understandably tempting, but DBS’ physical limitations in both markets make it tough to pull off. Instead it should exercise patience, expand on its impressive capabilities in Asean, and wait for China and India to liberalise.
That may take longer, but it will ensure DBS is more likely to achieve Gupta’s vision of becoming Asia’s first truly regional bank.
