MAS Capital Charge on DBS a Mere Slap on the Wrist

Yesterday, it was reported that the MAS (Monetary Authority of Singapore) had slapped a $230m capital charge on DBS as a 'penalty' for the massive systems failure that occurred last month and that affected more than 1,000 DBS and POSB automated teller machines, Internet and mobile banking services, as well as Nets and credit card transactions.

The MAS required DBS to set aside S$230 million additional regulatory capital for operational risk and told it to improve customer communications procedures. This was widely noted in the press that MAS as a 'censure'. Teo Swee Lian, deputy managing director, financial supervision, MAS, was recorded as having said: 

"We expect all financial institutions to put in place a robust technology risk management framework that will ensure the reliability, resiliency and speedy recoverability of the institution's IT systems and infrastructure, whether outsourced or in-house. We have recently written to the CEOs of all financial institutions to remind them of this."

But does this set of measures on the part of the MAS constitute a real 'censure'? And does the $230m capital charge amount to much of a 'penalty'? Not according to research analysts who have been covering DBS stock.

DBS Shares Rally despite the Passing of Richard Stanley; Singapore Economy in the Dumps

As DBS staff bid their final farewell to chief executive Richard Stanley, who died of leukemia last Saturday, the shares of Singapore's biggest bank continued to rally. DBS stock price continued its rise, even as Mr. Stanley's cortege passed through Shenton Way this afternoon. This is despite the fact that in the last four months, it has been Mr. Koh Boon Hwee, Chairman of DBS and a non-banker, who has been steering the DBS ship amidst Stanley’s absence and Singapore's steepest recession.

DBS' stock rise comes amidst a broader market rally. It is thus not clear if the stock rise indicates that investors are placing confidence in the bank's chairman, or if it is a simply a stock movement in tandem with the broader market. The DBS board, nevertheless, feels that Mr Koh is worth his weight in gold.

In comparison to Mr. Stanley who was paid almost $5 million for eight months of work in 2008, Mr. Koh has received $2 million in 'special remuneration' from DBS for assuming an 'active management oversight' role from Jan 1 to April 30 last year.

Jackson Tai to leave DBS

DBS bank has just announced that CEO Jackson Tai is to leave DBS at the end of the year to return to the USA to be with his family.

Said Tai: “Under my watch, DBS has established a sound platform for growth. Today, DBS has extended its geographic presence beyond Singapore with inroads into Hong Kong, China, India and Indonesia. I am confident the team will build on the strong momentum created in a resurgent Asia to further strengthen our position as a leading bank in this region.”

He added: “For more than eight years, I have dedicated myself to DBS and Singapore, even as my family remained in the States. There’s never a perfect time to leave but having been CEO for five years, I believe it’s now right for me to catch up with my family.”

This is certainly a surprising announcement that must be unexpected to many people. In fact, it seems that it is only now that DBS is starting to get its overseas growth plan going, having just emerged from the legacy of its expensive acquisition of Dao Heng bank and only just begun its official entry into the mainland Chinese banking market.

It is unlikely that Tai's departure has anything to do with the subprime crisis, of which DBS had little exposure. What seems more likely is that managing DBS's future is not exciting nor challenging enough for this former top investment banker to want to stay around in Singapore for the longer term. While it is true that Tai has established a platform for growth for the bank, there still is a lot to be done in terms of expanding the company's businesses in overseas markets; in many ways, Tai's successor will have his work cut out for him, to say the least.

But perhaps Tai's departure underscores DBS's difficulty in selecting the right talent to lead the company. Foreign candidates of Tai's calibre and experience may be lured to Singapore's shores for a period of time, but they will find it difficult to stay for the long term. Hanging around in Singapore for a few years may be an interesting experience, but the novelty wears off after a while.

In pursuing its global exective search for a new CEO, DBS may want to consider sacrificing international experience for someone who is more likely to stick around for the long term in order to give the bank a sense of continuity of leadership at the top. Constantly replacing CEOs without promoting from within makes the leadership disjointed, and top management has to constantly readjust and adapt to a new man or woman at the helm.

Of course, there is no better way to ensure continuity and consistency of leadership than by appointing someone who is homegrown and whom DBS can be sure of having his/her heart in Singapore.

Read DBS' press release here.

DBS, UOB & OCBC: A Comparative Snapshot

This research note is a brief comparative snapshot of the 1H07 performances of the three bank majors listed on the SGX.

Overview

As we can see in the table of comparative financials above, DBS is the largest of the three banks, with the greatest interest income, total income, and total assets of the three banks. OCBC, despite being a smaller bank, has a significant life insurance business in the form of its 87% stake in Great Eastern, and this boosts its non-interest income to comparable levels of both UOB and DBS. UOB is somewhere in the middle in terms of size between OCBC and DBS.

An interesting point of note is that while DBS and UOB both take charges profit while adjusting for allowances, OCBC actually takes an addition to profit from its allowances. This was a point of heated argument between Morgan Stanley Banking analyst Matthew Wilson (who like me is a Uni Melbourne graduate) and the CEO of OCBC, David Conner, during the latest results press conference.

Comparative Ratios

The table above lists some key performance ratios of the three firms, as well as the average of the three, as a comparative benchmark.

In terms of revenue mix OCBC clearly has the highest proportion of income coming from non-interest income. This can be attributed to the operations of Great Eastern which forms a significant portion of its balance sheet and income statement.

On the commercial banking side, we see that DBS is able to squeeze more out of its assets than the other two banks, and this manifests itself in the highest net interest margin of the three. DBS also has the lowest NPL ratio of the three banks.

OCBC has the lowest cost/income ratio of the three banks and DBS has the highest.

In terms of ROA and asset turnover, it would appear that UOB has the strongest position. UOB also has strong capital adequacy ratios. However its ROE is the lowest of the three.

Relative Valuation

Given that there is not much space left in Singapore to expand operations for the banks, the primary space for growth lies overseas, in the greater China region and the South East Asian region. Furthermore, there is intense competition in Singapore, with Citibank Sg recently mounting an aggressive campaign to grow its consumer business in Singapore. In greater China it would appear that all three banks have opened up operations, with DBS and UOB seeming to be the most aggressive in wanting to expand there.

In terms of non-interest income, DBS seems to be the most aggressive, and it has hired experienced investment bankers and appears to be trying to remodel the bank into a full-fledged universal bank. It will take some time for DBS to build up its capital markets network and capabilities.

Valuation wise there is not much to choose between the three. DBS and UOB are very similarly priced in terms of P/E and P/B. OCBC is priced slightly differently and this is probably due to its insurance assets.

An investment in the banks at current prices will therefore have to depend on the investors’ view of the recent turmoil in the credit markets and the broader economy, and the impact this will have on the banks going forward.

DBS ends talks to buy S Korea's KEB

News just out - DBS has decided not to buy S Korea's KEB.

SINGAPORE - Singapore's DBS Group Holdings, Southeast Asia's largest bank, said on Monday that it has ended talks with Lone Star about buying a stake in South Korean lender Korea Exchange Bank (KEB) .

The statement came after Korea's Yonhap news agency on Sunday quoted Lone Star chairman John Grayken as saying that the US investment firm had stopped talks with DBS.

Mr Grayken didn't say why the talks ended, but said that the Dallas-based fund would keep looking for a buyer for KEB, despite a legal battle over the 2003 purchase of the bank.

'We notified Lone Star that we would not be going forward due to the uncertainties in the market surrounding the local issues that have been going on for over a year,' DBS said in a statement. -- REUTERS

Acquisitions are a major source of growth in the banking industry. However, it is not exactly clear why DBS should be seeking an acquisition in South Korea. South Korea is a well developed economy with a highly developed banking market so the growth and revenue enhancement opportunities of entering the South Korean market via an acquisition are not clear. Furthermore, it is not immediately clear where the synergies are between the South Korean banking market and DBS' main operations in Southeast Asia and its fledgling operations in China, which just opened earlier this year.

In order to justify the acquisition, there would need to be significant value-enhancing opportunities that the KEB acquisition would bring to DBS' international banking services, such as investment banking or trade finance. But given that there is rather small amount of international trade between Singapore and South Korea and the main opportunity in this deal for international finance is between China and South Korea, DBS should focus much more on its organic growth in the mainland rather than seeking an acquisition in a market that is non-core to its operations. Southeast Asian companies are unlikely to list on the South Korean stock market, and similarly South Korean companies are unlikely to list their shares on the SGX. M&A activity between the two regions is also unlikely.

Furthermore, given the Singaporean origins of DBS and its predominantly Chinese culture, there would probably be several integration issues when it comes to merging the corporate cultures of KEB and DBS, the least of which being the different languages being used.

All in all this is probably good news for DBS shareholders that Jackson Tai has pulled away from the deal as any prospective deal would likely be risky and involve the winner's curse - destruction of shareholder value.

Mergers and Acquisitions: Acquiring To Gain Market Access

Companies seeking to break into markets sometimes do so via acquisition. If the market is established and there are high barriers to entry, establishing a sizeable beach head through an acquisition is only the feasible way to do so, and can often be a costly exercise.

Take for example DBS Bank which acquired Dao Heng bank in order to gain access to the Hong Kong banking market. Or SingTel which acquired Optus to gain access into the Australian telecommunications market. Both paid high premiums to make the acquisitions, and both parent companies have taken large write-downs to their respective holdings.

A similar seems to have happened with OSIM. Osim acquired Brookstone, and paid a hefty 20x earnings to acquire the company. And now it looks like the acquisition is underperforming. Does the argument of acquiring to gain market access make sense?

Well the problem with doing so is that the acquiring company often pays too much for a second best asset that do not justify the premiums paid. The market leaders are hardly candidates for buyouts. Perhaps a better strategy is to pay a fair price for a smaller player and grow market share organically. Or the competitive nature of established markets may mean that a prospective entrant should stay away altogether.

Osim is likely to make a significant write-down of its acquisition of Brookstone in the future, if it doesn't divest the company at a loss.