What if…Temasek merged DBS and StanChart?

Standard Chartered has announced bad results and major staff cuts. Its largest shareholder Temasek must wonder whether it would do better merging with DBS, a stronger performer.

Temasek cannot be the happy with Standard Chartered right now. The Singapore state investment company, which has been StanChart’s largest shareholder since 2006, has watched the UK bank’s share price tumble over the past five years.

At the beginning of 2011 StanChart’s shares stood at £17.26; on November 5 this year they closed at £6.27, after the bank announced yet more disappointing results and suffered a credit rating drop. Overall, its shares have fallen by 63.67%, and are less than half the bank’s share value at the time Temasek bought into it.

StanChart’s well-publicised woe is partly a consequence of what it once extolled as a major virtue: its concentration in Asian markets, although it has sizeable operations in the Middle East and Africa too. It revelled in this light following the global financial crisis of 2008, when emerging markets flourished while much of the Western world was in the doldrums.

But money has since returned money to the West as the US economy has roared back to life and the eurozone has pulled back from the brink, and StanChart has failed to benefit from these trends.

Meanwhile, it has reported a worrying rise in bad loans, partly a consequence of its earlier aggressive expansion.

On November 3 the bank posted its latest set of disappointing quarterly results, revealing a $139 million loss on the back of an $832 million drop in income to $3.68 billion. It blamed the poor figures on lower client activity and volatile markets. It also put aside $1.2 billion in provisions for bad loans.

New chief executive Bill Winters, who was tapped to replace former CEO Peter Sands in February last year, knows drastic change is needed. The bank was already cutting staff but now says that it will cut 15,000 employees as part of a restructuring effort that aims to cut costs by $2.9 billion between 2015 and 2018 – up from $1.8 billion between 2015 and 2017. It is also embarking on a $5.1 billion rights issue to prop up its balance sheet.

The measures make sense but such high management and staff changes and the need to raise so much capital raises its own challenges. Fitch said as much on November 6, when downgrading the bank from AA- to A+.

A more proactive measure would be for StanChart to seek a merger with a healthy peer. And its biggest shareholder just happens to have a potential partner in hand.

DBS’s appeal

DBS Bank shares similarities to StanChart. It is Asia-focused and combines retail banking with wealth management, corporate banking, and investment banking operations. Temasek owns around 29% of it.

Under CEO Piyush Gupta, DBS has a clearly stated strategy of focusing on six core markets: China, Hong Kong, India, Indonesia, its home market of Singapore, and Taiwan.

Unlike StanChart, however, it is also a strong performer.

The bank beat analyst expectations in its most recent third quarter results, announced on November 1, posting a 6% rise in net profit to S$1.07 billion ($761.77 billion), while revenues increased 8% to S$2.71 billion. Its nine-month net profit figure is 8% higher than the same period of 2014, at S$3.45 billion. And its share price has risen 24% since the beginning of 2011.

Crucially, DBS has kept its non-performing loan ratio down at 0.9% despite lending to emerging markets that have endured a volatile time of late. At 45% DBS's cost-income ratio also compares very favourably with the 59% reported by StanChart in its last annual results (it didn’t provide a figure in its latest quarterly update).

The rating agencies love DBS and its strong shareholder backing; it is rated Aa3/AA-/AA- by Moody’s, Standard & Poor’s and Fitch, respectively.

The market has certainly made it clear which institution it favours. StanChart’s market capitalisation at £17 billion compares with DBS’s at S$44 billion, which at today's rates is equivalent to about £20 billion.

Powerful combination

Would a merger of StanChart and DBS make sense? There would undoubtedly be a lot of synergies – read more job cuts. Both have big Singapore businesses, for a start.

Yet a combination of the two could create a powerful Asian player with a lot of financial heft. DBS had customer loans of S$285.15 billion ($202.93 billion) and customer deposits of S$318 billion as of September 30. StanChart had $269.54 billion in customer loans and $366.55 billion in deposits.

StanChart enjoys a strong franchise in India, a market in which DBS has a relatively small presence. It also has a good Hong Kong fixed income business.

Perhaps key to DBS, StanChart also possesses decent Indonesia links, partly courtesy of its 45% stake in Bank Permata. DBS was blocked from buying a full 67.4% stake in Bank Danamon from a Temasek subsidiary in 2013, which led to it cancelling its takeover attempt.

DBS, on the other hand, has greater penetration in Singapore that StanChart cannot hope to match. It also has a decent a retail and corporate banking presence in Hong Kong and used the acquisition of Societe Generale’s Asia private banking business in 2014 to bulk up its wealth management capabilities.

The Middle East and African parts of StanChart’s business might not seem a natural fit from DBS’s perspective. But, then again, Africa is taking over Asia’s mantle as having the fastest-growing economies on earth, and there are rising trade and investment links between China and the continent. Much of this trade is comprised of commodities, which are in a slump today, but that won’t remain the case forever.

StanChart’s long-labouring Korean retail banking business would probably be a sticking point in any merger. Korea is a low-growth economy and the unit is not very profitable. Yet perhaps, even here, the Southeast Asian contacts offered by DBS would create more trade and investment links between the region and Korea’s chaebols – at least on the corporate banking side.

Of course, the current situations of both banks make such a merger a challenging prospect. DBS does not seem keen to grow into markets that it knows little about. And StanChart’s new chief executive will want to show he has what it takes to turn the bank around. Plus, Temasek has been patient so far.

Yet as the Singapore investment company eyes the success of one bank investment and the struggles of another, it would be forgiven for wondering whether value could be found from combining the two.

What if… is a column that analyses unusual M&A ideas in Asia. These deals might not take place, but perhaps they should. 

¬ Haymarket Media Limited. All rights reserved.
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