Banks have been buying stakes and businesses from each other. In Singapore, talks of million-dollar acquisitions happen every four years or less.
By Joelyn Chan, Edited by Alex Lew
The next focus to strengthen Singapore’s reputation as global finance hub involves helping local banks to grow via acquisition. The banking industry’s frequency of such acquisition is low, as it requires high capital outlay and strategic considerations. From 2006 to 2016, the Singapore’s banking industry had only four completed acquisitions of business units. The acquirers were DBS bank and Oversea-Chinese Banking Corporation Limited (OCBC).
Singapore’s largest bank leads the way with expansion
DBS, the largest bank in both Southeast Asia and Singapore, could be using the acquisition of foreign banks as a shortcut to accelerate growth. In 2013, DBS cancelled its plan to buy Indonesia’s Bank Danamon. One year later, it acquired French multinational bank Societe Generale’s Private Banking unit. In 2016, it successfully acquired Australia and New Zealand Banking Group (ANZ)’s Wealth Management and Retail Business in five markets.
Before its relatively larger scale acquisition of ANZ, it had won an auction and acquired India-based loan portfolio business of Royal Bank of Scotland Group Plc for US$149 million. DBS completed the deal last year, and the utilisation of capital did not stop DBS from continuing its expansion in the same year.
DBS’ 2016 annual report stated “We seek to intermediate trade and capital flows as well as support wealth creation in Asia. Our established and growing presence in Greater China, South Asia and Southeast Asia makes us a compelling Asian bank of choice”. DBS’s recent acquisitions are in alignment with its strategy. However, with a dip in profits in FY2016, it may be better to delay its next acquisition. It could focus on strengthening its current customer relations. After all, it would be a waste if the acquired customers chose to cancel their transferred policies and accounts.
DBS’ latest acquisition of ANZ
According to DBS’ newsroom, “The portfolio of businesses being acquired is in Singapore, Hong Kong, China, Taiwan and Indonesia, representing total deposits of SGD 17 billion, loans of SGD 11 billion, investment AUM of SGD 6.5 billion and total revenue of SGD 825 million for FY2016. They serve about 1.3 million customers, of which over 100,000 are affluent or private wealth customers and 1.2 million are retail customers.”
This addition of 1.3 million customers boosted DBS’ client base by nearly 20% to 7 million globally. However, the influx of new customers also brings greater fluctuations in performance. According to UOB Kay Hian, “DBS executed well operationally but earnings would be hurt by higher specific provisions.”
DBS’ Allowances for Credit and Other Losses has increased by 93% to S$1,434 million in FY2016 (US$1,050 million). This line item on the income statement is one reason for the fall in profits.
While the starting point for making provisions and allowances is to comply with regulatory requirements, the inclusion of provisions does help to convey realistic financial numbers. For instance, DBS and ANZ have different lending criteria. DBS’ loan value has a cap of 60% of the borrower’s gross monthly income. Comparatively, ANZ is willing to lend up to 90% of property value, subject to applicant’s real savings of at least 5% of property value. ANZ’s relatively loose lending criteria could increase DBS’ risk of bad debts. DBS’ non-performing loan rate has already risen by 0.5% to 1.4% in 2016. Making reasonable provisions will better assure investors on the financial profitability of DBS. Investors may be more likely to perceive its frequent acquisitions as part of a sustainable growth strategy.
Should regulators step in to protect consumers’ interests?
When foreign banks are acquired, their existing customers will be affected. Depending on the policy arrangements and transition plans, affected customers may find changes in repayment schedule or interest rates. Should unhappiness arise, they could attempt to consult Monetary Authority of Singapore (MAS), the Consumers’ Association of Singapore (CASE), the Association of Banks (ABS) or the Financial Industry Dispute Resolution Centre (FIDReC). Banks adhere to the Banking Act, which is reviewed by MAS. MAS also issues an occasional public consultation paper to gather mass sentiments.
Essentially, banks have regulatory requirements to comply with, top credit ratings to maintain, and competitors to outshine. It is only logical for a bank to put its interest before its customers. Nonetheless, as banks go on an acquisition spree, proactive customer management will help them mitigate any potential unhappiness. Otherwise, there may be increasing calls for MAS or any association to step in and ensure that customers do not suffer during bank acquisitions. All in all, the bank that manages to acquire strategically, and maximise the value in every acquisition, will be able to win the race in the banking industry.