What are the synergies between the two banks if the merger with OUB goes ahead?
We believe the transaction is value-enhancing. Number one, we believe we at DSB have a strong track record in market consolidation, as well as integrating operations throughout the region. We know we can extract significant cost savings. Secondly, the transaction brings a lot of non-core assets and I think DBS has demonstrated that in Singapore, we have the capability and discipline to unleash unrealised gains and redeploy it for shareholders. In the last 24 months we have monetized $2 billion of DBS assets. So, with all humility, no bank in Singapore has our track record, both in monetizing assets or in market consolidations. Third, the transaction, at close, would bolster the capital ratios of both organizations. The transaction is capital accretive, and that will help the combined entity to have the growth potential going forward. Next, the transaction would bring the combined bank an important strategic stake in Malaysia the 12 branches of OUB. Thats a wonderful base for us to grow a franchise in Malaysia. Lastly, the transaction allows us to carefully moderate the government of Singapores stake in DBS, which is currently 37%. After the transaction, it would be 25%. This helps us achieve an important goal we believe a 25% ownership reflects our ambitions and that of the Singapore government. It will allow market indices to re-weight the DBS stock because of the greater public float. That should be good for all shareholders.
Do you think, even with the 25% stake, DBS will still be perceived as a government bank?
Its hard to shake off ones heritage or ignore ones traditional background. But over time, people will realise that we are run as a commercial enterprise and that we have the objectives of all our shareholders in mind, and not just that of what is currently the largest shareholder.
But what would be the attitude of the Malaysians to a Singapore government bank owning branches in Malaysia?
We are trying to run this bank so that we are not viewed as an instrument of the government. We are running this bank on commercial terms, and we are increasingly at the forefront of transparency and full and timely disclosure. We are responsive to the usual Western-type values such as return on equity. So it will become apparent to many that even though one of the large shareholders is the government of Singapore, this instution is run with commercial objectives.
What do you estimate to be the overlap in branches between the two banks in Singapore?
Its really hard to say what the overlapping branches are. If we dont have a branch in location X and OUB does, we may be covering that location through ATMs, or cash acceptance machines, or kiosk. But I would say when you look at the whole concept of consolidation, that implies branch closures and right-sizing. So we are not at all afraid to say that this exercise is predicated on consolidation. There will be overlap of branches. We have done a careful study and we are confident we can take away some of the duplication.
Actually, there is a misconception in the marketplace that DBS was slow or ineffective in the consolidation of POSbank. The record shows that when DBS acquired it in 1998, there were 178 branches combined. Today, there are 107 branches. So weve taken out 40% of the branches. That is not bad in three years, especially when you consider it is a national savings bank in the minds of many social-services organizations. Even given that sensitivity, we were still able to reduce the branches by 40%. We were also able to reduce the headcount from 13,500 to 11,500, and thats before adjusting for new business and the extension of our treasury operation. So even with new businesses, the number falls.
And people forget that within seven months of the POSbank deal closing, we took the DBS platform and imposed it on the POSbank business. In other words we completely integrated the plumbing and wiring in seven months, which is quite fast.
Therefore, that gives us the confidence that we can deal with the downsizing that is implicit in a consolidation.
The question that bank analysts and fund managers will ask is whether there will be a similar percentage of cuts after this merger?
If you look at the number of OUB branches and our existing ones, the first thing you do is look at the optimal mix and pick the best branches. From there, you decide where to shed. If we could take out 40% of POSbank branches in three years, one should not be concerned about our discipline or courage in reducing branches.
At the same time we were doing POSBank, we were integrating DBS Thai Danu Bank, our much-maligned operation in Thailand. We decided to rightsize the operation in 2000 and in the space of four months we reduced the branch network from 95 to 61. Thats a dramatic cut. We reduced the headcount from 3500 to 1850. Thats a pretty large rationalization. We also sold three quarters of our non-performing loans to third parties at 28 cents in the dollar. That brought us to a net profit in the first quarter this year. So if we can consolidate POSbank at the same time as we rightsize Thai Danu, which is a foreign market to us, then why cant we be disciplined about our takeover of OUB?
Is it accurate to describe this as a hostile takeover or do you think of it in a different way?
I think of it in a different way. First, you havent seen a hostile takeover until youve been to the US. Second, we approached the management of the board and the target and expressed the desire to work together. The target company chose not to respond in the affirmative and we decided it was time to bring it out in the open and let the OUB shareholders decide. We wanted to let them know what we were offering and the upside opportunities. So its not so much a hostile situation. Its about letting all the shareholders decide whether the upside benefits we project are fair and generous. We think they are.
Apart from the controlling family, are there other big shareholding blocks you need to convince?
We like to believe this convincing applies to all shareholders. But to answer your question, the family has a significant ownership.
Is there a particular fund manager that owns a big chunk?
Not to my knowledge. Although obviously we have a list of all the fund managers that own stock.
The price of this transaction is 1.83 times book and in Hong Kong you paid 3.1 times book. What accounts for the difference in valuations between Hong Kong and Singapore?
The answer is very simple. The markets, banks and circumstances are different. In Dao Heng you have the fifth largest bank, but it will become the fourth largest when we combine the DBS operation. The combined bank will be the third largest issuer of credit cards. This transaction will therefore be truly transformational for DBS and reduces our concentration in Singapore. It gives us a leadership foothold in another market and fulfills our ambition of having a two pillar strategy in Singapore and Hong Kong. These are the two markets that have the best regulatory environment with the highest savings rate.
Compare that to the situation in hand. In OUB, we have a fine franchise. We respect it. But OUB is the fourth largest and we are the largest in Singapore, which means the transaction is not transformational for DBS. We are already number one. OUBs franchise does not change us dramatically. Second, the OUB shares were trading at 1.3 times book before the recent run-up. Even DBS is trading below two times book.
Another aspect is we have offered shares of DBS to the OUB shareholders. The deal is structured predominantly with DBS shares, which means they can enjoy the upside of the DBS stock. That is something we did not include in the Dao Heng offer.
The market capitalization of DBS and OCBC is currently almost identical and yet DBS has a far larger asset base than OCBC. Is that a sign that the market doesnt like your acquisition strategy so far?
It could be. We have to take note of that. It is equally possible, that the markets assigning of a higher price earnings ratio to OCBC may be factoring in some short-term speculation as opposed to investors who understand our long term strategy of being a bank that has a true pan-Asian strategy, its products, and our cadre of some of the best graduates from Singapore universities supplemented by internationally trained managers. Nowhere in Asia do you have a bank with a dominant position in Singapore and a top five position in Hong Kong.
Was the timing of the OUB bid influenced by the fact that OCBC made a bid for Keppel?
There were several factors. We were very concerned that we did not in any way jeopardise gaining the approval for the Dao Heng deal. Thats because that deal is strategic and transformational. Secondly, the market is aware that OUB was engaged in discussions with a foreign bank, and one had to wait 'til that was sorted out before we could make an approach. Lastly, when OCBC decided to make an unsolicited bid for Keppel Tatlee bank, they put a stake in the ground.
Are you planning to do an ADR to finance this deal?
We are considering listings in other locations, including Hong Kong and New York.
But do you have any immediate plans to do an ADR?
If by immediate you mean in the next two days, then we have no immediate plans.