The decline of the family bank

Michael Tan, the head of FIG at CSFB talks about this and other issues.

Finance Asia: Do you think we are seeing a trend away from family-owned banks in Asia?

Michael Tan: There's a broad movement away from that type of structure, particularly as the next generation gets a little older. The desire by that generation to own and operate a bank has diminished. There's a generational shift. That's a net positive, in terms of the way banks are managed around the region. Having said that, when you look at the performance of Asian banks, in many ways they've performed adequately and some exceptionally, even with the family structures. The primary area where there will be a benefit is the fact that major strategic decisions such as M&A strategy will be affected under a more open and accountable governance structure.

But just to stress, if you look at a UOB, a Fubon or a Dao Heng, these are very well-run institutions that have performed exceptionally even throughout the crisis.

If the banks aren't controlled by families, that is a radical change for Asia Inc too. Is this a positive development for Asia?

Part of what we are seeing in Asia is a move to regional strategies. On that basis, having significant resources to build a regional platform means that some of the smaller family-owned banks can't compete. We're seeing the formation of three different structures: the pan-Asian franchise, the dominant in-market franchise and the niche-focused institution. And if an institution doesn't fit into one of those three categories, it will probably do something to change its strategic direction to fit into one of them. 


The issue with family-owned structures is they don't naturally fit into the pan-Asian structures.

CSFB is very big in Indonesia. How do you see the Indonesian banking situation playing out?

There are some challenging times ahead for a number of the institutions. There is likely to be further capital raising, as there is a need to bolster capital positions and we may also see M&A activity, as we saw with the proposed Bank Mandiri and BII transaction.

Do you see a situation similar to Malaysia where five to 10 strong banks will be created by government fiat?

That's a medium or longer term outlook. Progress has been meaningful, but it will be some time before we do get a more stable infrastructure. In many ways, the banks in Indonesia are a number of years behind where Malaysia is, which in turn is a number of years behind some developed banking sectors, such as Singapore and Hong Kong.

What's your view on the Malaysian approach to bank consolidation?

I have always been a big believer in market reform and market-driven activity, and I feel the best way to get consolidation in a marketplace is to allow forces like competition or efficiency gains, or scale issues to drive the process. The only time I feel it helps to have governments intervening is when there are concerns about the stability of the banking sector. In the absence of that, while governments can encourage consolidation, I would argue that the preference is for them to not have any specific role within the evolutionary process.

How many years are we away from a situation where you could envisage a merger between a Singapore and Malaysian bank?

We are some time away from that. I would expect other significant mergers to happen before that – for example, between Hong Kong and Singapore banks, and after that, between Hong Kong/Singapore and Australia. Those are the more likely major cross-border deals.

The Australian banks haven't shown much interest in Asia. Why do you think that is?

I wouldn't say they haven't shown much interest. They have been a bit more cautious and careful about building platforms within this marketplace. They have been focused on their own competitive positions in Australia, and now that has played itself out, they need to think about their next step, and diversifying outside of Australia. The most logical place is Asia.

ANZ sold one of the better banks in India, however?

You can make the argument that India is a separate region from South East Asia and North Asia. The issue for the Australians is they need to build scale. In the near term, we'll see more Australian managements thinking about Hong Kong and Greater China strategies, as well as South East Asia. What's going on in Singapore should alert them to the fact that there is an opportunity here.

Would the Australian banks need to do much capital raising to launch bids?

One of the benefits the Australian banking institutions possess is size. If you put HSBC to one side, you really then have strong Australian institutions and then Singaporean institutions dominating the Asia-Pacific region. So they may not even require material capital raising for them to think about building in Asia. They do have some leverage in terms of their balance sheet capacity.

The drivers for them are the ability to generate growth in other markets. In Australia, the market is mature and competitive. Asia is about growth and penetration levels.

There are at least four to five Hong Kong banks that are regularly spoken about as acquisition targets. Can you see two to three of those deals happening in the next year – perhaps involving a Singapore buyer or an Australian buyer?

It's quite possible. There has been some short term dislocation. What's just happened in Singapore has taken some logical buyers out of the game for the near term. But on a one-year view, the Asia strategy has been highlighted and for the Australians -- now they can't play a Singapore strategy -- Hong Kong is the next logical step.

What damage was done to the consolidation process by virtue of the fact that DBS paid such a ripe price for Dao Heng?

People recognize that was a special situation. There was clearly a strategic premium being paid for that particular franchise. There are aspects of Dao Heng's business that aren't replicated in other Hong Kong institutions. So I don't think there is an expectation that we'll see the same level of pricing, although people realize that strategic premiums may be necessary with some Hong Kong franchises.

CSFB recruited Chester Kwok to improve its Hong Kong relationships. Do you have many sellside mandates for Hong Kong banks?

I am not sure that anybody would say they have active sellside mandates within the Hong Kong banking sector. What we have are a number of banking institutions exploring their broader strategies. No one is advertising that they have a 'for sale' sign.

A lot of FIG heads are very excited about prospects for consolidation in Taiwan?

The passing of the financial holding company act was a very progressive move for the financial services sector. We saw at our Taiwan Financial Services Conference that many institutions have been positioning themselves in advance of this reform. Now it's been passed, we'll see a meaningful increase in strategic activity, and this may lead to a convergence in banking, insurance broking and asset management. A number of the larger institutions are moving towards that.

Do you think this process will be driven more by the insurance companies than the banks?

To a certain extent. Taiwan is unique in Asia in that it has very strong insurance companies, and they are capable of building financial services conglomerates.

Will this be the solution to the NPL problem the banks face, or will they still need to find capital?

It doesn't immediately solve some of the NPL challenges, particularly for the government-owned institutions.

Do you foresee them being privatized?

I believe there will be a general move towards reducing the government ownership and control in those banks. There will be some privatization activity in the next two to three years.

Is FIG going to be a dominant proportion of CSFB's investment banking revenue this year?

It's going to be a meaningful proportion. The medium-term outlook is that – as in the US or Europe – FIG tends to produce a significant proportion of investment bank revenue, whether it is 20% or even greater. Asia will be the same.

Is your FIG revenue mostly coming from Singapore and Korea?

It's actually a pretty even mix between North and South Asia, in terms of our current bank and insurance mandates. Korea and Taiwan will be places where there will be meaningful activity and Singapore has been active in recent times. The Greater China region will clearly be very important in the medium term.

What are the Japanese banks going to do in Asia? Will they be buyers?

On a limited basis. Many of those Japanese financial institutions are dealing with issues they are facing in their own market. There will be limited activity, but more in the wealth management and consumer and credit card type businesses and less so in full scale banking type opportunities.

Will Basel 2 and the increase in tech spending it requires be another factor driving bank consolidation in Asia?

It will contribute to it. The clarity that Basel 2 provides in terms of appropriate capitalization levels will force certain financial institutions to recognize they are undercapitalized, and to take strategic steps. It will be one of the drivers. But many of the same global themes that occurred in the US five years ago, we are now seeing in Asia. Those themes include new forms of competition, and margin compression.

These are going to be interesting times.

Why have private equity investors only bought into banks in Japan and Korea? Why not the rest of Asia?

When you look at some of the more developed markets, and I would include Singapore, Hong Kong and Taiwan amongst those, the ability to generate levels of return and growth required by financial investors just aren't there. Financial investors need to be able to identify markets where there is about to be some level of reform or restructuring where you can identify relatively attractive opportunities with limited risk. Korea logically falls into that category. However, there are large question marks over Korea in terms of the relative level of risk.

Are Asian banks capable of becoming regional players? Do they have the management resources?

I see no reason why they can't and why the Asian management team can't be the driver for the regional strategy. The alternative to that really are Australian or European institutions. An Asian management team has the advantage of understanding Asian issues in certain markets. We all recognize that Singapore is not the same as Hong Kong which is not the same as Taiwan. However, there is some overlap in the cultural compatability.

Australian and European institutions have the advantage of third and fourth layers of management, and this helps when you're building regional franchises.

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