I’m surprised to learn that the State Bank of India is bigger than DBS. And that Bank Central Asia is bigger than OCBC and that ICICI Bank and Bank Rakyat Indonesia are bigger than UOB.
I’m surprised to learn that the State Bank of India is bigger than DBS. And that Bank Central Asia is bigger than OCBC and that ICICI Bank and Bank Rakyat Indonesia are bigger than UOB.
United Overseas Bank (UOB) posted a 4.4 per cent fall in first-quarter net profit, as lower wealth management fees and trading income more than offset higher net interest income. (CNA)
OCBC had a 14 per cent decline in quarterly net profit. Unlike UOB and DBS it has adopted a bankassurance model which depends on income from its life insurance division.
Oversea-Chinese Banking Corp (OCBC), Singapore’s second-biggest lender, announced on Friday (Apr 29) a 14 per cent decline in quarterly net profit, as its insurance income dipped and allowances rose.
For the three months ended March, net profit was S$856 million, down from S$993 million a year ago.
Profit from its life assurance unit plummeted 58 per cent, a fall of S$116 million, largely due to unrealised mark-to-market losses from subsidiary Great Eastern Holdings’ bond and equity investment portfolio, the bank said.
Wealth management income, comprising income from insurance, private banking, asset management, stockbroking and other wealth management products, was down 17 per cent to S$482 million, from S$583 million a year ago. (CNA)
DBS’s results should be a lot closer to UOB’s than OCBC’s, unless there’s something really nasty at DBS’s Indonesian business.
Too much capital: The average Tier 1 capital ratio at OCBC, DBS and United Overseas Bank was a unhealthy 14% at the end of last year.
each dollar of Oversea-Chinese Banking Corp.’s assets earns only 1.2 cents in operating revenue before provisions, compared with 1.6 cents for Hang Seng Bank in Hong Kong.
The narrow wiggle room for liquidity calls for caution. Hang Seng Bank’s loan-to-deposit ratio is less than 72 percent, by Bloomberg’s calculations, and 85 percent for OCBC. It’s hard to see Singapore lenders aggressively expanding their loan books if deposit growth doesn’t keep pace. But as Bloomberg Intelligence analyst Diksha Gera noted recently, HSBC and Malaysia’s Maybank are joining Citigroup and Standard Chartered in locally incorporating their Singapore retail banks. Growing competition for deposits at home could whittle away margins.
They are tiny in private banking, not only globally but refionally too.
In October lat yr, it was reported by CBA DBS’ private banking arm is now the eighth largest in the Asia Pacific, according to a widely followed industry ranking released on Friday (Oct 16), after assets under management (AUM) grew by by 35 per cent last year.
Private Banker International (PBI), an industry journal, said DBS’s AUM for high-net-worth clients rose 35 per cent to US$73 billion last year, helped by the Singapore lender’s acquisition of Societe Generale’s Asian private banking business.
No where near the global giants
See if you can spot OCBC or UOB.
Citigroup plans to double the number of wealth management clients in Asia in the next five years to one million, as the bank seeks to capitalise on an emerging middle class in the region.
Going by Citi’s track record in joining any party when it’s about to end (sub-prime lending, commerical property lending etc) our local banks who are trying to get big in privaye banking should be wary.
DBS’ private banking arm is now the eighth largest in the Asia Pacific, according to a widely followed industry ranking released on Friday (Oct 16), after assets under management (AUM) grew by by 35 per cent last year.
Private Banker International (PBI), an industry journal, said DBS’s AUM for high-net-worth clients rose 35 per cent to US$73 billion last year, helped by the Singapore lender’s acquisition of Societe Generale’s Asian private banking business.
“Other factors that contributed to (DBS’) success are a focus on digital banking, innovation, and the ability to retain customers as their individual wealth grows,” it added.
PBI had ranked DBS number nine in its previous ranking. Overall, PBI estimates that total AUM in Asia Pacific increased by 12 per cent to US$1.54 trillion last year.
(CNA sometime back)
As readers will know Ho Ching has big markers on StanChart and Chinese banks.
Once regarded as a proxy for the growth of Asian markets in commodity-rich nations like Indonesia, StanChart has today become a victim of the reversal of fortune suffered by many emerging markets and their heavily indebted corporate borrowers …
Much of the lending to Asia outside of China assumed the region would grow on the back of insatiable demand from China. Much of the lending to China itself was based on that same expectation. That faulty thinking was then compounded by assuming that the value of the Chinese property used to back the loans would also continue to rise. But local banks in China, such as Agricultural Bank of China, are beginning to report that their bad loans have doubled — although officially they remain under 3 per cent. (Excerpt from recent FT article)
Ho Ho HO.
But it’s our problem too now that Tharman is now using projected long term returns from Temasek to spend our money on ourselves. Cybernuts might want to note that their heloo, Ong Teng Cheong, wanted to lock-up all the returns from the reserves (more LKY and Dr Goh). It was Ah Loong that fought him. Ah loong is the real people’s hero. if Ong had his way, we’d be pressing our noses on the iron bars guarding our reserves: Money, money everywhere/ Not a cent to spend/ Give thanks to Ong Teng Cheong
But the pix’s not that great for our local banks either: what with DBS’s exposure to Greater China and Indonesia, OCBC’s exposure to Greater China, and UOB’s and OCBC’s exposure to M’sia. Btw, OCBC has FTs as its Chairman and CEO, while DBS and UOB have true blue S’porans (Yes, I’m counting Gupta as a local. He’s a real talent.)
And if property prices tank here …
DBS, UOB and MayBank are reported as interested in the intl side of Coutts Bank, while is for sale.
Hope they realise that the Queen of England banks with Coutts Bank, UK, which is not for sale.
DBS Bank yesterday said that it will buy the Asian private banking business of Societe Generale for US$220 million, accelerating its ambition of becoming a leading wealth manager in Asia.
The deal will also widen the gap with DBS’s closest rival, the Bank of Singapore, a unit of OCBC Bank.
The price represents about 1.75 per cent of assets under management (AUM), based on the AUM of Societe Generale Private Banking Asia (SGPB Asia) of US$12.6 billion as at last Dec 31. This is a steal: OCBC in 2oio paid US$1.46bn which represents 5.8% of the unit’s assets under management, after adjusting for surplus capital of US$550m*.
Last Tuesday’s BT went on: DBS’s AUM will go up by about 23 per cent to S$85 billion from the current S$69 billion with the purchase, seven months after it was reported the French lender wanted to divest the business to redeploy capital into its core markets.
Swiss bank UBS is the largest private bank in Asia-Pacific, followed by Citi Private Bank and Credit Suisse, in that order according to trade journal Private Banker International in a 2012 survey.
That survey ranked DBS and Bank of Singapore ninth and 10th, respectively.
DBS is onto a winner with this FT and his FT COO. Well DBS deserves it, given the FTs it has had where “T” stands for Trash. SGX needs that kind of luck where both its CEO and COO are FTs where “T” certainly doesn’t stand for Talent. They did Temasek no favours by saying everything was kosher about the share price movements of Olam (More on this next week).
Coming back to OCBC. Its CEO is a Hongkie FT with great credentials. But he hasn’t shown whether the “T” is for Talent or Trash. So far the mkt inclines to the latter. OCBC’s share price crashed (and have yet to recover) when OCBC annced purchase of Hong Kong’s Wing Hang Bank few months ago. Deal is still pending. Hopefully, it dies a natural death.
My fav bank is still UOB where the chairman and CEO are true blue S’poreans. But UOB has limited visions which suits my taste here. DBS is for those who want to own a bank can be the leading regional bank in place of CIMB. It always had the vision but the FTs leading it let it down. Gupta has the talent (and luck) to make it the leading regional bank despite DBS not having significant presences in Indonesia and M’sia. It’s expansion plans in Indonesia were thwarted. S’pore has to play ball with Indonesia (allowing Indonesian banks more privileges here) for DBS to be able to buy Temasek’s Bank Danamon stake.
Finally, yesterday’s BT had a story about the difficulties our three banks were facing. UOB’s finance director said “Funding pressures will serve as a growth constraint for mid-sized banks like us outside of Singapore, particularly amid a backdrop of tightened liquidity conditions in the region. UOB has always emphasised funding stability. We must also be selective in the customer segment we engage in and avoid large concentration risks.” Taz straight talk.
So is [C]ompetition in US-dollar funding is likely to intensify, given the anticipated growth in trade financing, and the liquidity requirements of Basel III, says OCBC’s Mr Tan. Trade financing is still mostly greenback-denominated.
DBS’s Ms Chng says: “The so-called ‘balkani-sation’ of the financial landscape is an emerging risk, potentially resulting in captive capital and liquidity pools within each jurisdiction and impacting the pursuit of synergies across regional operations.”
But sadly they couldn’t resist sprouting PR rubbish
“From a capital perspective,” says Darren Tan, chief financial officer of OCBC Bank, which is negotiating to buy Hong Kong’s Wing Hang Bank, “we prefer to acquire majority stakes where possible. However, in instances where a majority stake is not immediately available, we will still give the opportunity due consideration if there is strategic value in the acquisition.”
United Overseas Bank’s approach to overseas growth is to expand the platform for customers to tap trade flows within the region, says its CFO, Lee Wai Fai.
DBS puts priority on pursuing organic growth, and adopts “a disciplined approach” to M&A, says Chng Sok Hui, its CFO … She adds that DBS is adopting a digital strategy to expand its footprint in growth markets.
What do they mean?
*My 2010 analysis: But maybe OCBC shld have waited. The purchase of ING’s Asian private banking business could come to haunt OCBC. A few days before this deal was annced, ING sold its European biz, at a fraction of the multiple that it got for Asia. Only time will tell if the growth in Asian wealth and OCBC’s ability to grow the private banking biz will justify the hefty premium that OCBC paid.
It paid US$1.46bn which represents 5.8% of the unit’s assets under management, after adjusting for surplus capital of US$550m. This compares with the 2.3% measure paid by Julius Baer for ING’s Swiss assets which is in line with another European purchase by an American private equity group of a smallish private banking outfit — RHJI’s purchase of Kleinworth Benson from Commerzbank.
Trumpets pls. BTW, I don’t blame the previous FT CEO of OCBC, Richard O’Connor. He was retiring. In such circumstances, usually the CEO would not take the lead in such a move: he’d go with the flow. Rightly, as he wouldn’t be the person running the show.. This is what happened here, I’m reliably informed. BTW too, he did a great job. Ngiam Tong Dow (remember him) called him an honorary S’porean, I think.
Lower economic growth prospects and tighter credit conditions could create a tougher operating environment for the banking sector here and in the region, said a report by Standard & Poor’s (S&P) late last week.
S&P expects S’pore’s GDP) growth to fall to 3.4 % this year, from 3.7% last year.
The report also notes that corporate and household indebtedness has been on the rise here. The situation could worsen this year, in anticipation of interest rates rising; higher borrowing costs amid rising. See DBS’s CEO’s tots below* and related post https://atans1.wordpress.com/2014/01/16/why-banks-tested-for-50-plunge-in-property-prices-and-other-wonderful-tales/
Related articles: The three local banks posted their reports last week too and for quick snap-shots (not the usual ST or BT fluff)
Charts on banks’ loans etc
Cheap way of owning UOB shares
Update at 6.ooam:
South-east Asia’s three biggest lenders, DBS, Oversea-Chinese Banking Corp and United Overseas Bank, have seen their share prices rise this week after posting solid results last Friday. Common trends in the fourth quarter were better margins, trade finance-driven loan growth, seasonally softer treasury earnings and no asset quality weakness, CIMB noted.
UOB, despite being the smallest of the trio, has been particularly impressive with its fee income and regional strategies, CMC Markets Analyst Desmond Chua told TODAY.
“In terms of fee income, it has performed relatively well while the market has been lacklustre, in part due to a higher interest outlook. Its diversification to grow in regional emerging markets has also helped it maintain loan growth despite weaker mortgage demand in Singapore,” he said.
“On the other hand, OCBC’s share price might have been affected by the prospect of its overpriced acquisition of Wing Hang Bank in Hong Kong while DBS hasn’t been able to impress with its fee-based revenue in recent times despite aggressively attacking this space,” he added.
UOB’s net interest margin, which is the highest among local banks at 1.72 per cent full-year, is another advantage for the lender, Voyage Research’s Deputy Research Head Ng Kian Teck added. “UOB has historically been good on this front, and it means the bank can churn the most value out of every dollar loaned — that’s what’s attracting the investors,” he said.
All three banks ended last year on a positive note, with their fourth-quarter net profit rising between 6 and 11 per cent on the back of strong growth in net interest income.
The banks have also continued to solidify their regional presence, drawing more revenue from overseas than before.
“Their return on equity is healthier vis-a-vis the other industries, which are facing greater margin pressure due to higher wages. But the banks have been able to control this issue better.”
CMC Markets’ Mr Chua is also bullish, saying: “I’m looking at the banking space being an outperformer this year even though interest rates are bound to rise. Their tactical diversification across this region allows them to tap into Indonesia’s emerging affluent segment, for example.
Update at 5.15pm:Can Singapore safely deflate its property market? http://www.cnbc.com/id/101409247
*DBS Bank chief executive Piyush Gupta expects home prices to fall by 10-15 per cent this year – more than the 10 per cent forecast by property consultants – but says that this decline would not make a material impact on the bank’s loan book. Speaking at DBS’s Q4 results briefing, he said it is likely that the prices of high-end homes will slide 15 per cent, and that for lower-end ones, by 10 per cent.
As for the higher interest rates expected with the shrinking of monetary stimulus policy by the US, he said he was not expecting it to have any effect on DBS. “The Singapore portfolio is really driven on income considerations . . . As I’ve said before, the pressure will likely start coming when unemployment rises – more than when property prices change.” Singapore’s unemployment rate is now at a low 1.8 per cent.
Mr Gupta said: “All our stress tests in the past have shown that we can easily withstand a 20 per cent reduction in Singapore property prices without material impact on our portfolio. We stress-test (for a) 20 (per cent fall in property prices), but don’t expect it to happen; our stress tests are always calibrated to go off the charts. My own sense is that there will be a correction of 10-15 per cent.”
He noted that the market was already stabilising and that the froth was running off, but that if this continued, the government would roll back some of the macro prudential measures. Sales of new mortgages have plunged 30-35 per cent at DBS, and by 40-50 per cent at OCBC Bank as a result of the stricter loan rules.
Mr Gupta likened the Singapore property market to that of New York and London, where prices held up even during the financial crisis between 2008 and 2012. While prices in the rest of the US fell by about a third, prices in New York slipped by only 10 per cent. It was a similar situation in London, another city where the demand is not dependent on the state of the domestic economy.
Mr Gupta said he expects regional money buying properties here to also put a floor under prices. With the slower sales, DBS’s $49.1 billion mortgage book is likely to grow by $2 billion to $2.5 billion this year, down from $3.5 billion last year and $5 billion the year before that, said Mr Gupta.
OCBC Bank chief operating officer Ching Wei Hong said of the new mortgage sales having declined across the board: “That’s expected, given all the cooling measures that have been imposed. We’ve built up a healthy inventory level. The inventory drives the growth of (the loan) book, going into 2014 and 2015. Beyond 2015 H2 and 2016, if conditions remain the same, we’ll see a bit of tapering in that period.”
(BT article last Saturday)
First HSBC’s results and now StanChart’s result show that regional economies are slowing down
Example Singapore, where first half income fell 3% and profits dropped 12% (not reported by our constructive, nation-building media).
Other Asean round-up news
And here’s the third confirmation. Indonesia’s exports are dropping, GDP growth is slowing and inflation is rising.
Forget about India, China, Thai or Indon markets
Think frontier markets: like Vietnam, Cambodia. Laos and Burma are coming too
And here’s a plug for M’sia
Another Lion Air air crash since May (then into sea) this year: now into into a cow
And UOB recently set up a unit offering loans to Chinese companies looking to move into the region, including in renminbi
Growing faster than Greater China
South East Asia is expected to drive growth in the luxury market in Asia this year. Analysts at Bain and Co predict that luxury goods sales will grow by 20% in 2013: Greater China only 6% http://www.bbc.co.uk/news/business-22564297
How Myanmar will connect up Asia
Great graphics: explains how the opening up of Burma will allow ships to by-pass the Malacca Straits.
DBS Group Holdings is hoping it will have to settle for the minority stake (40%) it has been offered in Indonesia’s Bank Danamon. It hopes that talks between the central banks of Indonesia and Singapore will clear the way for a majority takeover. Pending these, it may ask for an extension from seller Temasek Holdings.
Note that because UOB and OCBC have a bigger regional presence (thks to legacy branches in M’sia), they trade at a 25% to DBS in terms of book value.
Finally DBS has a FT CEO where the “T” stands for “Talent” not “Trash”. He had a bad start when its consumer banking IT systems failed at the beginning of tenure, for which he can’t be blamed. An earlier FT CEO where the “T” stood for “Trash” outsourced its IT systems, only for the process to be reversed by another FT(rash).
(Gupta, who oversaw a 29% jump in DBS shares last year, was awarded a S$3.5 million cash bonus and company stock valued at S$4.6 million as part of total compensation, according to the annual report. His base salary totalled S$1.2 million.)
In the early noughties, OCBC was the bank that never failed to screw-up. It had an FT (Still has one as CEO). Fortunately his replacement was a Talent (can’t call him Foreign, as he has been in and out of S’pore for decades). DBS became the “go to” bank for mess-ups. Now Gupta has got DBS into a “stable” state: gd for him and Temasek must be grateful.
And UOB’s true blue hereditary banker got a 30% pay rise last yr. Well those of us who hold UOB shares (indirectly in my case via Haw Par) can’t complain. UOB has avoided the “Trash” risk by keeping things local. And avoided problems.
Coming back to OCBC, pls send yr COO to PR class. OCBC’s COO said its differentiation strategy has been to re-orientate the consumer finance business from being product-centric to one centred on the customer. BT’s headline rightly screamed “OCBC shifts strategy to focus on the customer”, but this sadly sells OCBC short: it never was into product pushing like DBS where FD customers were targeted for HN5 Notes and were then left to swing in the wind, when Hongkies were compensated for similar notes.
As my mum still has her OCBC fixed deposits, I’m grateful. If she had been a DBS customer, she’d have been targeted by Team HN5, and lost her money.
In fact sounds harder than flogging life insurance. ING’s attempts is case in point.
ING may break up its Asian life insurance operations and is holding talks with buyers interested in the business in different countries.
The company is currently in discussions with Manulife Financial and AIA Group Ltd or the Southeast Asian operations, and with both firms as well as KB Financial Group Inc for those in South Korea.
ING is also in talks with a consortium led by Mark Wilson, the former head of AIA. Backed by Blackstone and Swiss Re. Wilson bid for the entire Asia business. m Richard Li, son of Hong Kong’s richest man, bid for ING’s operations in Southeast Asia and Japan.
Two private equity funds have bid for the Japanese operations.
Meanwhile UOB, among many others, are interested in ING’s fund mgt unit.
(Or “Another reason why perps are so popular among coporates”)
As the sovereign debt crisis drags on, international lending by global banks in the fourth quarter last year fell by the largest amount since the Lehman Brothers crisis in 2008.
Gd news for our three local banks. They can expand their US$ lending activities (US$ is preferred currency of borrowers).
Expect them to raise more perps. They will be exploring the possibility of selling US$ perps to our local retailer investors to avoid having to swap the proceeds into US$. But retail investors don’t like foreign currency issues: juz look at Hutch Ports.
DBS is the 6th largest foreign bank in China proper. It has a strategy of expansion into China. So have UOB and OCBC.
Well, its a tough biz to be in. Non-Chinese banks have only 2% market share. Even HSBC, StanChart and Citi have problems http://www.bloomberg.com/news/2012-06-04/china-wall-hit-by-global-banks-with-2-market-share.html
DBS, OCBC and UOB shld juz not bother abt China.
(or “The next, next disaster for retail investors & DBS”)
While reading this , I saw Calvin Yeo’s reply to a question on why corporates were issuing perps
… one reason is to diversify the sources of funding. Another reason is that the market cannot withdraw the financing facility like the bank can in a credit crunch. Investors also have generally less bargaining power than the banks, so it is harder for them to take action against the issuer or place restrictive covenants. As you see, the terms of the bond are drawn up by the issuer rather than the lender. For most loans, banks tend to be the ones giving the terms of the loan.
Another main reason is that banks don’t normally issue perpetual loans, you would have to issue perpetual bonds or preferred stocks for that.
On the issue of diversification, most European banks have been cutting back their lending outside their home markets because they are shrinking their balance sheets to meet the new capital rules. No-one wants to invest in them (on terms acceptable to the banks) because of the Euro crisis.
In Asia, the French banks (like Soc Gen, BNP and Credit Agricole) were once very big USD lenders, the currency of choice, to corporates. They have now withdrawn*. So corporates that used them, now have to find other lenders. Seems to have found a new source
of suckers in the retail mkt here.
See related post on central bank’s concerns.
Asian banks (including our DBS, OCBC and UOB) are increasing their USD lending to these corporates as the European withdrawal have improved USD lending margins (the Frogs were very, very aggressive) .
Let’s hope DBS doesn’t get too aggressive in USD lending. Not concerned by OCBC’s and UOB’s increased lending (I own Haw Par shares as partly as a play into UOB). They have conservative controlling shareholders and mgt (I’m assuming the newish CEO of OCBC is as conservative as O’Connor**). Can’t say the same abt the cowboys at DBS and Temasek, though DBS’s chairman and CEO have reputations as conservative bank executives. The Bank Danamon deal shows otherwise in my view.
*But European banks still have lots of exposure to S’pore or rather the other way round. See chart in http://www.zerohedge.com/news/why-stability-stalwart-singapore-should-be-scared-if-feta-truly-accompli. Nothing to worry abt as most of this exposure is not to locals because it’s offshored in turn. Do remember that S’pore is a major global financial market.
**Anyway someone in OCBC is a tough taskmaster. O’Connor earlier this yr said that working in OCBC for 10 yrs felt like 40 yrs. No wonder Tony Tan and Yong Pang How (remember him?) preferred to be cabinet minister and chief justice respectively. And remember O’Connor was from Citibank, not known for its relaxed style.
OCBC Bank was recently named as the world’s strongest bank for the second straight year by Bloomberg Markets Magazine. (The ranking featured 78 global banks with at least US$100 billion in total assets.They were assessed based on factors such as their Tier 1 capital ratio, loan-to-deposit ratio, ratio of non-performing assets to total assets and their efficiency ratio, which compares costs with revenues.)
OCBC said the bank’s strength is partly built on its “disciplined credit management practices and robust risk management capabilities”.
If I were the controlling shareholder of OCBC, I’d be very upset at this ranking because what it means is that OCBC is not making its assets work: it has too much capital. I’d tell the board that the most impt KPI should be that OCBC drops out of the top 10 on the list.
It can be done. UOB was at seventh place, down from sixth last year, while DBS fell three spots to eighth this year.
UOB and DBS are doing the right thing. Their core market (like that of OCBC) is S’pore and it’s a safe, boring, stable market where margins are only so-so. So not much capital is needed, if one sticks to the basics of banking, and not try to be a hedgie.
As to the right amount of capital, look at StanChart at no.12. It operates in a wide range of emerging markets, some in unstable parts of the world like West Africa and so needs to have capital lying around. If S’porean banks have abt the same level of capital, they should still be safe.
Bank results down 4%, CEO’s salary down 18%.
Own shares in Haw Par which has stake in UOB.
So investors sold DBS on news of its Bank Danamon purchase. It closed 0.39 lower (2.75%) to 13.79. About a quarter of the sellers seemed to have bot UOB which closed up o.36 (1.97%) to 18.64.
As to OCBC, it closed down 0.03 (o.33%) to 8.96. Unlike DBS and UOB, a large chunk of its profits comes from life insurance. Hence, it was of no interest to those who wanted out of DBS but wanted exposure to S’pore banks. And there is the uncertainity of what the new CEO will want to do. The retiring CEO did a good job: he stuck to the basics of banking and life insurance.
No, not profits from lending to gamblers and loan sharks but from raising money for Sands.
Las Vegas Sands, controlled by Sheldon Anderson, hired DBS Bank, OCBC Bank and UOB to coordinate a S$4.6bn loan for Marina Bay Sands, Bloomberg News reports. The loan may be split into a S$4.1 billion term facility and a S$500 million revolving credit facility.
Our three local banks are targeting private banking because Asians are getting richer and richer, it’s a steady, cash generating business providing a great annuity revenue, and it allows them to take advantage of their large capital base (they are among the safest banks in the world) which is a drag on earnings. One report has DBS as the “strongest bank” in the world, while another has OCBC. Me, I say OCBC because less FTs there, even its ang moh CEO is more-or-less localised. And it has the Lee family as a contrilling shareholder. They are super conservative.
But Investec, a South African investment bank is a lesson for our local banks. In November 2011, it posted a 2% decline in first half earnings after recording a loss at its private banking business and a sharp drop in deal flow.
It had been reducing dependence on lending and deals, and asset and wealth management now account for 40% of operating income, compared with 29% a year ago.
But the private banking division lost £4.9m, hurt by real estate woes in Ireland and Australia. Operating profit before exceptional items totalled £223.63m in the six months to end September, compared to £228.16m in the same period last year.
So losing money in private banking is a possibility
Worse our banks have to spend a lot juz to be in the game. OCBC despite acquiring ING’s Asian private banking biz*, is still a midget even in regional terms when compared to Citi, HSBC, UBS and Credit Suisse. The Bank of Singapore (OCBC’s private bank) expanded its assets under management by 11% in the first nine months of 2011 to US$29 billion. Peanuts by int’l standards.
*It paid, in 2010, US$1.46bn which represents 5.8% of the unit’s assets under management, after adjusting for surplus capital of US$550m. This compares with the 2.3% measure paid by Julius Baer for ING’s Swiss assets which is in line with another European purchase by an American private equity group of a smallish private banking outfit — RHJI’s purchase of Kleinworth Benson from Commerzbank. To be fair to OCBC, it was rumoured that HSBC was willing to pay the same price, but lost out when it was unwilling to give promises that staff would not dismissed. OCBC was willing to give this promise.
This excessive capital requirement is the reason why OCBC paid such a high price for the Asian private banking business of ING and why DBS and UOB are trying harder to build up decent private banking businesses, despite repeatedly failing to do so in the past.
While private banking itself does not use up much capital, clients and prospects want to put their money in banks that have plenty of capital. A very high capital base is a great comfort blanket. As is the conservative nature of a bank. OCBC and UOB have both and while DBS’s FTs are more cowboyish, they have been kept in check, so far.
OCBC’S private bank claims that it is attracting assets from the Singapore branches of French banks as the euro region’s debt crisis frightens their local clients. Defections from French banks helped generate net new money of about US$4 billion for Bank of Singapore this year, the CEO said recently.
Private banking looks like a good use of the local banks’ capital, given that their conservatism and regulatory requirements require them to hold excessive amounts of capital.
But they are late in the game where economies of scale matter. Example: OCBC’s private bank (the biggest by far of the three local banks) had US$29.6 billion of assets under management at the end of June, less than 9% of the total at BNP Paribas’s wealth management unit. And this French bank is not a serious player in the either the Asian or international private banking industry.
So another investor and blogger discovered last yr that Haw Par is undervalued and blogged abt it recently. Welcome to the Haw Par Tan Kuku club brudder.
If you read the latest annual report, you will know that Cundill and Eagle Investments are substantial shareholders. Both are value investors. Cundill has held the shares for over 10 yrs. Yes, the valuation gap has existed for at least that long.
I bot the shares more than 10 yrs ago and the gap has has narrowed, widened, going round and round. Some brokers recommend buying it when the gap is historically wide and selling it when the gap narrows.
But I don’t mind holding onto the shares. I looked at it, and still do, as buying into a listed investment trust that invests in the Wees’ financial empire (UOB, UOL and UIC). The operating businesses I get for almost free, and the dividends are decent. True there is a big gap between the share price and valuation but so what? No such thing as a free lunch.
And who knows? If the Wees’ empire is broken up, the valuation gap closes.
Another way for the gap to narrow, is if one or more of the operating businesses hits a winner, and the market recognises the value of the business or businesses. Actually 20 over yrs ago, people bot Haw Par because of its operating businesses.
First, Banking 101. The more capital a bank is required to hold, the less it can lend. It will make smaller profits, compared to a bank that needs to hold less capital.
Next some definitions. DBS Group, United Overseas Bank (UOB), OCBC Bank are required to hold a minimum Tier 1 capital adequacy ratio (CAR) of 6% and a total CAR of 10%.
International rules will require banks to hold a minimum common equity Tier 1 (CET1) CAR of 4.5%. MAS has decided that locally incorporated banks meet this rule from Jan 1, 2013 – two years ahead of the international 2015 timeline.
MAS will raise the minimum CET1 CAR to 6.5% from Jan 1, 2015. It will also bring the minimum Tier 1 CAR to 8%. The total CAR will remain at 10%.
MAS will also introduce a capital conservation buffer of 2.5% above the CET1 CAR. This will be phased in from 2016 to 2019.
So by 2019 locally incorporated banks will have to maintain a CET1 CAR of at least 9%, Tier 1 CAR of 8%. and CAR at 10%.
But one OCBC estimates that its CET1 CAR would be around 10.8% cent based on the bank’s financial position as at March 31, 2o11. Its Tier 1 and total CAR are estimated at 14.1% and 16.9% respectively.
It’s only 2011 but OCBC’s CET1CAR is 20% above 2019’s required levels, while Tier 1 and total CAR are 76% and 69% more than required.
This is a lot higher than needed for a bank whose main markets (S’pore, Malaysia and Hong Kong) are safe, mature and well regulated markets. True OCBC is also into “cowboy” countries like China and Indonesia but these countries contribute little to revenue.
Too much capital relative to assets and liabilities is unfair to shareholders, while not benefiiting depositors and other creditors. It only makes life easy for regulators.
So OCBC should return excess capital in the form of dividends (I’m not in favour of buy-backs, something I’ll explain one of these days). Of course OCBC could decide to increase its balance sheet, but that usually leads to tears for shareholders.
Yesterday the three local banks did well with investors demanding their shares.
In a Bloomberg survey on the world’s strongest banks, S’pore banks occupied three of the top 10 positions. OCBC was number one, DBS was 5th and UOB was 6th.
If I were a shareholder in one of these three banks, I’d be upset that the banks were such inefficient users of capital because the stronger the bank is, the less its earnings potential.
Standard Chartered was ranked 15th. It needs to have plenty of capital around because it does business in some really difficult markets like places like the Ivory Coast where its operations were closed for several months.
It also does some risky business like lending for M&A transactions in India.
Our three local banks operate in safe markets. OCBC and UOB are heavily dependent on S’pore and M’sia while DBS is dependent on S’pore and HK. Yes they also do business in riskier places like Indonesia (all three), mainland China (again all three) and India (DBS). But these places contribute “peanuts” to earnings and assets.
They are also conservative in the businesses that they do.
So they don’t need to be such inefficient users of capital. They can easy operate safely with capital ratios similar to that of Standard Chartered. Thois would increase earnings.
Could DBS be a takeover target for StanChart? The latter has just launched a 3.2bn sterling rights issue which would make it one of the top 20 banks by market cap. Temasek would surely be glad that one of its best performing investments relieves it of a dog of an investment. StanChart is itself the subject of talk that JPMorgan wants it.https://atans1.wordpress.com/2010/09/22/stanchart-a-takeover-target/
The only advantage for StanChart to own DBS is that it will finally have a market where it is the dominant player. It has never had a market where it dominated, unlike HSBC which parlayed its dominance in HK into being a global player.
As to DBS’s other biz, they are dross compared to similar biz owned by StanChart.
BTW, DBS is late to another party.
In June DBS Group annced that it was looking looking to expand its Global Transaction Services (GTS) biz by doubling its current annual revenue of S$800 million in less than three years.
The newly appointed, Thomas J McCabe, managing director of Global Transaction Services, said the expansion will be carried out in a two-pronged approach.
This involves both building on its current Internet banking platform for its corporate clients and grooming GTS staff to meet their clients’ growing needs.
The bank is investing S$9 million on a new technology platform, including smartphone applications, to make its Internet banking service more functional.
The problem is that this biz which covers such services as corporate cash management, foreign exchange, trade finance, global custody and hedge-fund administration, is the new in-thing for much bigger and experienced banks because it provides steady income and is not too capital-intensive,. Some banks have moved investment bankers into this dull biz.
Looks like DBS has not changed, moving late into a fashionable biz where it has no special expertise. BTW Merrill Lynch and Citi had a reputation of moving late into biz where they had no special skills. Subprime is a classic example. Here’s an article on Citi’s latest possible folly: spending on new biz. Remember many of DBS’s FTs are ex- Citibankers, as is OCBC’s CEO. Only UOB is run by a true-blue S’porean.
Morgan Stanley is very bullish on OCBC and neutral on UOB. It ignores DBS.
Why Overweight OCBC: Our analysis shows that OCBC is more geared to upside from improved global sentiment than UOB is. In particular, it is likely to benefit sooner from improved capital markets revenues, given its greater exposure (23% of total revenues, compared with 13% for UOB) and its reliance on wholesale and private banking rather than mass affluent wealth management. In addition, as a more geared bank, it would benefit more from falling risk premia for banks.
In addition, OCBC’s greater overseas contribution and stronger growth track record give us more comfort in our higher growth forecasts for this stock.
Catalysts aplenty: We see many possible triggers for a rerating. These include an improving global economic outlook(more in line with Morgan Stanley estimates) or a lift in rates. Also, the 3Q results, due on October 29 for UOB and on November1 for OCBC, could act as a catalyst if the rate of margin compression seen in Q210 eases, or if the weak 2Q trading profit trends are reversed.
The main risk to our relative call would be rising leverage premia for banks, putting more pressure on levered OCBC, or a share buyback from UOB, which we estimate has the potential to raise its valuation by 15%. However, with UOB’s management keen to hold on to capital, the latter looks unlikely, and we believe OCBC’s higher growth offers better probability of returns.
I never realised that OCBC had the weaker capital base. But then by global standards it is overcapitalised. MAS never bot into into the view that banks don’t need capital if they are well managed.
According to Global Finance, DBS is the world’s 23rd safest bank. In Asia, HSBC is the safest bank (19th). But in Asia Pacific region, Oz banks are even safer with National Australia Bank, Westpac, and Commonwealth Bank (at 11, 12, and 13 respectively)
French, Dutch and German banks occupy most of the top positions in the Global Finance survey, which uses long-term credit ratings from agencies Moody’s, Standard & Poor’s and Fitch, and analysis of total assets owned by the 500 largest banks in the world to do the survey.
The safest bank is Germany’s KfW , followed by Frances’s CDC and Bank Nederlandse Gemeenten (BNG) of the Netherlands.
US banks are dogs (and taz insulting dogs), with BNY Mellon at position 30, JP Morgan Chase (40), Wells Fargo (42) and US Bancorp (47).
Recently I blogged on why investors hated cos that do big M&A deals: they usually flop.https://atans1.wordpress.com/2010/08/16/why-investors-dont-like-acquirers/
Based on the success of the BHP merger with with Billton to create the largext mining group in the world, and the takeover of OUB by UOB to create the largest and most well run bank in Singapore, here are some “rules”, that investors and mgrs could use to evaluate (OK better guess) whether a deal could add value rather than destroy value:
Overlapping businesses that allow costs to be slashed,
a modest price premium justified by the synergies,
clear governance and control, and
investors getting a decent share of the gains.
I’m putting DBS on my “Value?” watch”list. I’ve never ever owned DBS preferring HSBC and UOB (this via Haw Par).
I never regretted not owning DBS esp since 1998 when the CEO post became an FT only post and FTs dominated senior mgt.
Fat gd it did DBS’s shareholders including Temasek. According to the Boston Consulting Group, DBS has had a total shareholder return between 2005 and 2009 at negative 4.6%. OCBC had 2.4% relative total shareholder return and UOB 0.4%. OCBC has an FT CEO, but the rest of senior mgt is largely “home-grown”. UOB is on its third CEO from the Wee family (where banking is in the blood?), but the rest of top mgt is also largely home-grown.
But first, let’s add to the FT balls-up list. I’m not the only one amazed to read in BT that only now is DBS is rethinking the way it does wholesale banking in the Middle East, Europe and the United States, and is planning to focus more on supporting the overseas ventures of Asian businesses and rich clients, instead of broad corporate lending.
The bank will still lend to local firms in those markets, but will seek out those looking to invest in Asia or set up operations here.
Hell’s bells, I’m surprised that DBS is only thinking about this juz now. OCBC and UOB have been doing this from the day they set up overseas branches in faraway places. They never did corporate banking but focused on trade financing. So did OUB.
A major test of execution is what happens to the head of Consumer Banking, “Wealth Terminator” Rajan. He signed-off on the HN5 Notes and targeting their sale to fixed deposit customers.
But the appointment of the last CEO of POSBank is a gd sign, as is the chairman’s desire that the next CEO be “home -grown”.
Hopefully DBS will no longer be a place where “FTs rule OK”, but a meritocracy,that gives the same opportunities to home-grown staff as to FTs.
Anthony Soh is suing OCBC Bank. He claims in court that said serious breaches on the part of OCBC Bank were behind his failed takeover bid for Singapore-listed Jade Technologies in April 2008 because the bank failed in its duty to advise him.
He says OCBC did not advise that a financial resources confirmation letter he had provided was insufficient for the purpose, and also did not verify the authenticity of the letter until it was too late.
The bank also did not review the terms of a share lending agreement that he had signed with an Oz broker. Millions of Jade shares lent to the brokerage were seized by its creditors when it failed and Dr Soh was forced to withdraw the offer because of his diminished holdings.
If he can prove his allegations, it would be interesting to see OCBC’s defence. What he claims OCBC failed to do would be par for the course stuff for M&A experts, or so I’ve been told.
The failed and clownish bid resulted in the Securities Industry Council, which later investigated the issue, censured Dr Soh and OCBC for breaches of the takeover code.
Dr Soh was banned from making any takeover offers in Singapore or sitting on the board of any Singapore-listed company for five years, while OCBC and an Allen & Gledhill lawyer voluntarily abstained from takeover work for six months.
DBS for all my rants abt its FT policy trumping S’pore’s meritocratic policy shows that the FTs didn’t ruin the investment bank. Unlike OCBC’s and UOB’s investment banks, DBS’s investment bank has not caused any problems for DBS. UOB’s investment bank was caught out when it tried avoid an undersubcription of an IPO. Prosecutions and convictions followed.
Our local banks were thrashed by Malaysian, Thai and Indonesian banks when measured by relative total shareholder return (RTSR) of mid-cap banks over the last five years according to a Boston Consulting Group (BCG) report.
OCBC was 11th, with a 2.4 per cent RTSR while UOB with 0.4 per cent RTSR was 18th. In the previous five year period 2004-2008, OCBC and UOB were placed 24th and 23rd respectively. They have improved.
DBS has a negative RTSR. It was ranked 35 over the five-year 2005-2009 period with an RTSR of minus 4.6 per cent. Previously, DBS ranked 49 out of 50 in the mid-cap bank category. Still bottom of the class but our national champ. Or shld it be our national chump?
“The rankings were for the biggest 100 banks as measured by capitalisation for which a five-year RTSR could be calculated; they were then split into two categories – large-cap and mid-cap. RTSR measures total shareholder return based on the change in share price and that includes gains from reinvesting dividends adjusted to the performance of the local stock market,” BT reported.
The following table is taken from BT.
The three banks (Credit Suisse, HSBC and JPMorgan Cazenove) supporting Prudential’s $35.5bn bid for AIA said on Thursday that the soveriegn wealth funds of Qatar (Qatar Holding LLC) and S’pore (GIC) have agreed to underwrite a significant portion of the US$20bn rights issue.
Bit surprised that given its record of big (and successful) bets on Asian banks (unlike on Western banks), Temasek isn’t an underwriter. Or maybe, it had its wings clipped? Or lost its nerve? Only time will tell us why.
Reminder: The Pru needs to raise the cash from its shareholders to fund most of of the deal. The group will also issue to AIG US$5.5bn of stock, US$3bn of convertible notes and US$2bn of preferred shares.
BTW, among the 30 -odd bank underwriters, Standard Chartered and United Overseas Bank are co-lead managers, while DBS is a mere co-manager.
Haw Par historically trades at a big discount to its assets and businesses. The discount has got even bigger. Its 4% stake in UOB is now worth more than Haw Par’s market capitalisation — by about 4%.
UOB closed yesterday at S$19.84. This works out to S$6.05 a Haw Par share. Haw Par closed at S$5.83.
And Haw Par has a rat-bag of businesses and assets ranging from healthcare products (‘Tiger Balm’), oceanriums, an aquarium (there seems to be some legal trouble here), properties, and 5.2% of UOL (an SGX-listed property company where the UOB Wees have a controlling interest (29.13); like in Haw Par (30.6%). OK rat-bag is unfail, its businesses are usually profitable, and the assets have value.
So at the these prices of Haw Par and UOB, one gets UOB shares at a 4% discount if one buys Haw Par shares. And the other businesses and assets are thrown in for “free”.
And who knows, one day the value of Haw Par’s UOB shares; and its other assets, and businesses may be unlocked. Two long-term value investors have been around for years: MacKenzie Cundill Investment Management has 11.67% and Arnhold and S.Bleichroeder has 14.74%.
Meantime, we long-term investors get decent dividends: present yield is 4%.