Singapore’s DBS dilemma: build or buy big

Saeed Azhar

Eight years after burning its fingers on a pricy acquisition in Hong Kong, Singapore’s DBS Group Holdings Ltd, Southeast Asia’s biggest bank, faces a dilemma — stick to growing its existing business or beef up its Asia presence with a significant buy.

Memories of the Dao Heng purchase — DBS paid $5.8 billion in 2001 and then had a big writedown in late 2005 — still haunt DBS as critics say the acquisition failed to deliver value for money.

DBS has since been super cautious, shunning expensive bank deals in growth economies like China and steering clear of the recent bidding race for ING’s Asian private bank that was snapped up by smaller rival Oversea-Chinese Banking Corp Ltd.

With ex-Citibanker and Southeast Asian expert Piyush Gupta taking over the reins at DBS, investors are looking for a new strategy that enables the bank to expand more aggressively in the region, where it has trailed rivals.

“It has to be an opportunistic strategy based on what exposure they can get at the right price,” said Mike Kerley, a London-based fund manager at Henderson Global Investors, which owns DBS shares.

“As a shareholder I would be cautioning them of growth at any price, I don’t want them to overpay to increase exposure elsewhere in the region.”

Investor concern is highlighted by a poor performance at its Hong Kong unit, its biggest market outside Singapore. Net profit there fell by a third in 2008 and its contribution to group profit dropped to 19 percent from 29-30 percent.

DBS is still carrying Dao Heng at 3 times price-to-book “which is totally unjustifiable given the inferior profitability of the franchise,” said Credit Suisse analyst Sanjay Jain. Most Hong Kong banks trade at 1.1 to 1.9 times book except for Hang Seng Bank, which trades at 4 times, Credit Suisse estimates.

DBS’s strategy under Chairman Koh Boon Hwee, who has run the bank since January, is to build market share in loans, debts and equity markets, while increasing its presence in China, India and Indonesia through more branches.

This has succeeded in that DBS has won market share from foreign rivals, who were scaling back in Asia as the global crisis forced the likes of Citigroup and Bank of America to take huge credit losses.

But as global banks return to take advantage of opportunities in a region that has outperformed the developed world and has shown resilience during the crisis, analysts question whether organic growth will be a viable option.


Government regulation has prevented DBS from expanding in Malaysia and India, while in Indonesia it is beset by a hefty premium that bank assets command and hurdles faced by its biggest shareholder, state investor Temasek.

Temasek, which owns 28 percent of DBS, has faced Indonesian regulatory pressure on its subsidiaries to divest or merge. Last year, Temasek sold a majority stake in Bank Internasional Indonesia to Malaysia’s biggest bank Maybank.

DBS says Indonesian regulatory policy does not affect the bank because it has a “single bank” presence in Southeast Asia’s biggest economy, but admitted that organic growth is slow.

DBS aims to double its branches in Indonesia in three years and will look out for an acquisition.

Analysts said building an existing business in Indonesia won’t be easy because of severe competition, and acquisition may be constrained by regulatory bottlenecks.

“Meaningful organic growth is unrealistic when the top five banks control 55 percent of deposits and are also not realistic M&A targets,” said Matthew Wilson, an analyst at Morgan Stanley.

He said the Indonesian central bank’s “single presence” policy is a difficult inorganic hurdle with Temasek a substantial shareholder in both Danamon and DBS.

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