What's your view on the recent round of Singapore consolidation?
The consolidation ? five to three, maybe two ? two factors. In the short term it eliminates two of the more aggressive players in the local market, who have been the fiercest at focusing on the middle market and consumer. Eliminating them should be helpful in terms of improving the pricing of the Singapore banking market.
The second issue is recognizing that Singapore has gone ex-growth from a domestic economy standpoint. Having five banks was inefficient. You?ll now have three banks that will share 80% of the deposits. Foreign banks control 20%.
Three banks controlling 80% of deposits is actually unprecedented anywhere. Maybe Switzerland, and that is the model Singapore always looks at.
Achieving larger size and scale is helpful in terms of having the franchises that can compete and innovate, and look outwards. Clearly Singapore has very little domestic demand for capital. Most of that will come from companies going offshore, which need financing. But you don?t need more domestic banking capacity.
It also means the regulators in Singapore can feel more confident about deregulating and opening up the market to foreigners.
The mergers will change in the management ethos at these banks. Keppel, OUB, UOBs managements and staff have been accustomed to an environment where they can spend most of their time thinking about Singapore. A very inward looking philosophy. The mergers should enable management of OCBC, UOB and DBS to focus their attention outwards.
Will returns on equity trend up from 10% to 20%?
On our estimates, the Singapore banks, on a tier one ratio of 10%, already generate 20% core ROEs. After these deals, tier one ratios will be 10-11%; however, given goodwill charges Singapore banks should be able to achieve ROEs in the 15% range. The only way the Singapore banks can reach ROEs of 20% is when Singapore interest rates rise significantly which is unlikely for several years.
Would there be any sense in Malaysian acquisitions by Singapore banks?
Singapore banks, especially DBS, would be interested in the longer term, but Malaysian regulations at the moment don?t allow it. OCBC and UOB already have strong franchises in Malaysia so they are in no rush to expand further.
Will the Singaporeans be able to manage regional operations?
What the Singaporeans should be warned about is that banking is a very local business and a very competitive business. It?s very difficult to come in ? especially if you?re paying a premium ? and get a desirable return on these investments. The price DBS paid for Dao Heng is on the very high end of what you would expect someone to pay. That means without growth in the underlying market, and without a lot of cost and revenue synergies, you run the risk of overpaying for assets. It?s a difficult process and you have to be patient. If you take the example of HSBC, they have walked away from deals. In contrast, DBS made an aggressive foray into Thailand and paid the price for it. HSBC is about to close a deal in Turkey and it has taken them a year to get to a point where it makes sense. Patience is the most important thing.
The market wants to see them not overpay for expansion and get their cost income ratios in line with what?s appropriate for their market. The risk, as seen with DBS, is that the Singaporean banks are being too hasty and it would be better for them to slow down at this point.
Being in a hurry is a bad strategy?
It is a bad strategy. It?s a potentially risky strategy, especially for shareholders.
Do you think families owning banks is a bad thing?
It?s not a bad thing as long as you have good regulators. That?s the key message. Hong Kong and Singapore have good private banks, because they are well regulated markets. They regulate against bad lending, corruption, cronyism, and so family ownership is no risk to those banking systems. In other countries you could argue the problem wasn?t just the families but also the bad political and regulatory regimes.
One ratio I look at is the percentage of bank deposits controlled by government-controlled or -linked banks. Whenever that ratio is above 25% of deposits in my mind that is very detrimental to the banking system. This includes Korea, Taiwan, India, Indonesia and China.
What are probabilities that OCBC will be involved in future mergers in Hong Kong, or Australia?
Clearly the priority for them is greater China, which includes Hong Kong and Taiwan. They are not focused on Australia, and Alex Au [the CEO] also said that Hong Kong is a bigger priority than Taiwan. I think they?re focused on Hong Kong, but they?re very patient. The number of banks they can target is limited. It also comes down to whether the local Hong Kong banks and their families want to sell out.
In reality the Hong Kong private banks only control 8% of deposits. They will get squeezed out and it will be increasingly attractive for them to consider selling out, probably sooner rather than later.
Dah Sing, Wing Lung and even Bank of East Asia may have to think that being part of a regional financial group is better than being a solo bank in Hong Kong with a small market share.
