Why is this a good deal?
Tai: It's apparent that banking is about scale, distribution, access to customers, and risk management. If you apply that formula to a very strong country like Thailand - strong in the sense of culture, people and pride - then local content and local contacts are important.
Even outside of Thailand's financial masterplan, it became apparent that our subsidiary, DBS Thai Danu doesn't have the scale and ability to use its distribution might in the same way that we have been able to demonstrate our distribution power in Hong Kong. We are a relatively small player in Thailand, so we don't have the access to customers. However, we have decent risk management.
The government was putting into motion bank consolidation and when that happened we saw there could be a stampede and we wanted to make sure we were at the front of the line and had some say about the destiny of our franchise.
So that's the logic behind the deal. We feel that the merger with Thai Military Bank brings additional scale. It will be the sixth largest bank by assets, and if the IFCT transaction also goes ahead, we'll have the fifth biggest bank. That will give us the ability to operate with more efficiency across the system and ability to harness a distribution network which brings over 400 branches, plus 1000 ATMs - and TMB already has two million debit cards, and a tonne of SME customers. Plus these guys, because of their shareholders, and corporate position have great contacts. Shareholders include Shin Corp, Thai Life, and, of course, the Ministry of Finance. So we will have great access.
We have the risk management, we have the products, and I hope we have shown that the way we have taken our treasury and financial engineering to Hong Kong. But for treasury business you need flows, and that is what this brings in Thailand via the TMB network.
What will the deconsolidation of Thai Danu from DBS mean. The NPL ratio will fall?
The way it's phrased puts too much emphasis on the after-effect. It makes it sound like it was the reason for doing it. It's a side-effect or ancillary development. We are doing this deal because we feel we create a more meaningful, relevant franchise for our customers in Thailand and for our customers elsewhere - when they increasingly transact with Thai counterparts.
It turns out that by doing this transaction and doing a share swap - whose details were not disclosed but as you will gather from the Thai press - we will have less than 20% and we will equity account it. So we will deconsolidate the current investment in Thai Danu, which has already been largely written down to zero. So we will be able to reverse excess provisions, and there is not the same usage of capital. So there will be a material and positive impact on our P&L, but that is not the reason we did it. It's wonderful, but the real rationale was to make the franchise more relevant during the forthcoming consolidation. When the music stops we will have a front row seat.
Is the idea for DBS to buy back some of the government's stake and buy control over time of Thai Military Bank?
In our framework we have expressed a desire by DBS to increase our shareholding. However, there is no obligation on our part and no time schedules. No one should worry that we are going to jump in and buy a lion's share.
This is a transition period. Let's see if things pan out the way we think they will. Number one, it's important there is sustainable growth in Thailand.
Number two, let's look at the profitability of the bank; there's a lot to do here. We feel there are a lot synergies on costs and revenues. Thirdly, let's look at the ability of the merged bank to continue to resolve NPLs. TMB has done a marvellous job of reducing NPLs. We looked at all of this in our due diligence and it is good stuff.
Lastly, we want to see that we will continue to have the influence we wish to have in the bank through technical service agreements and strategy. If those conditions are met, we feel there is plenty of time to increase our shareholding. There is no obligation on either side but we have made the point in our negotiations that we desire to buy more.
Your latter point about management is the one which analysts have focused on. Damien Wood, the bank credit analyst at ING who has been covering Thai banks since 1994, said today your biggest problem will be influencing management at TMB, since it is quite set in its ways.
We spent a number of weeks and months working through this. Number one, we have proportional representation on the board, and a subset of that is there are committees that we sit on. We are going to sit on the Executive Committee, the Compensation Committee and the Nominations Committee. Plus we have these technical service agreements.
These are in key areas like risk management, technology and operations. And then we have agreements in consumer banking and corporate banking. They'd like us to help them with SME banking and credit scoring.
And lastly we will have seasoned bankers from DBS working at TMB on secondment, including Michael Hague [formerly CEO of RHB Bank] who will be head of the integration committee.
Equity analysts must be asking: ANZ looked at TMB and walked away, what does DBS know they didn't?
Number one, you should ask ANZ that question too. Number two, we are very different. They are looking to come into Asia. We have an operation in Asia. Number three, since the time ANZ decided not to go ahead, TMB raised a bucket of money in a rights issue and has brought down their NPLs from Bt38 billion to Bt28 billion. So they raised capital, reduced NPLs, and also redeemed some of their subordinated paper.
A lot of things happened since ANZ was in town. I would think that while we are not perfect, we are not that naïve. We've been in Thailand a while and I think we know our way. Our colleagues at DBS Thai Danu were involved in the due diligence.
Your stock has doubled since April. Is that a vindication of your regional strategy?
I've always thought we should run the bank on long term principles, and be aware of our shareholders needs. With humbleness I think the market overreacted to difficult economic times and SARs and whatever else that besieged us. I felt the market was too severe in its pronouncement of our acquisition of a major bank in Hong Kong [Dao Heng]. The PE of the bank we bought was very similar to our PE. And frankly, when you buy something you get what you pay for. We don't have a lot of problems at DBS Hong Kong that I spend a lot of time worrying about. The NPL rate is lower than the group average and we have a higher utilisation of our funding than in Singapore, and the margins are higher than the group average. In wealth management Hong Kong is now outselling Singapore with the same technology. That's fabulous.
We had a little bank called Kwong On which we bought at one times book value. We spent two years pumping in resources, people, services and after two years it was still number 13. Now we have bought a decent bank and you get what you pay for.
We have a 12% market share of the SME business in Hong Kong and while we are in Shanghai, we are also doing well in South China by following our customers - as those SMEs migrate into Southern China.
I believe that this franchise is sound.