Euromoney: Piyush Gupta’s plans for DBS

Euromoney, September 2010

DBS has long been the most outspoken southeast Asian bank about the goal of being a regional player. For more than a decade, different CEOs have outlined their vision for a regional banking champion. Jackson Tai used to talk of a pan-Asian bank, headquartered in Asia, run by Asians for Asians; under Piyush Gupta, appointed in September 2009, the mantra has become “the Asian bank of choice for the new Asia.” Much still has to be done before one could truly consider DBS the pan-Asian power it aspires to be. But the logic underpinning the idea looks better than ever.

“It’s quite clear to me that trade patterns within the region are on the verge of some profound changes,” says Gupta, speaking on the 44^th floor of the bank’s Singapore headquarters; out the window the city’s vast container port, a visible barometer of the health of Asian trade, flits and buzzes in the background.

Through the 80s and 90s, he says, the growth of Asia was built on the supply chain of manufacturing and exports, with Asean countries sending materials into China to be assembled and shipped out to the west; intra-regional trade in the strict sense of the term, but ultimately still reliant on a final export to Europe or the US. “What’s beginning to happen is consumption in Asia is changing. Increasingly it’s Asian companies supplying Asian consumption demand.”

DBS recently published research showing Asian incremental domestic demand growth relative to the US, a comparison that starts out in 1980 when for every dollar of US incremental consumption, Asia would generate 44 cents of consumption. This year, Asia will deliver $1.02: outstripping US consumption for the first time. “This is Asia’s year,” wrote economist David Carbon. “What we are talking about is the biggest structural change underway in the global economy today: the shift in who generates the new demand every year. This year, Asia will generate more of it than the US. In so doing, Asia will become the world’s biggest driver of economic growth. Chances are it will remain so for the next 50 years, if not for longer.”

And for a bank like DBS, this trend is potentially transformative. “If you’re part of Dell’s total supply chain, there’s very little bank intermediation you do when they export from Dell Penang to Dell China, though it goes into the trade flow numbers,” Gupta says. “But when it’s from an Asian company to another Asian company, it’s a completely different role you can play as a bank. The change is quite profound.”

And hence the business model of a pan-Asian bank. Gupta shares the vision of his predecessors, but with a slightly different method of achieving it. “This whole notion of the Pacific century, the shift of the centre of economic gravity to the east, is even more relevant today than it has been in the last decade,” he says. “In that context, for us to try and mark our fortunes and grow in this part of the world is a logical thing to do. It makes a lot more sense than trying to seek out opportunities in Europe and the US.”

Where Gupta differs in his vision from some of his predecessors is in his sense of what DBS, at heart, really is. “We have a lot more clarity today about what DBS is good at and what this Asian footprint should really look like,” he says. “There is a recognition that we are really a good commercial bank, a good universal bank.” That, he says, does not eschew the investment banking arms of the business, “but there is a recognition that this will not be our forte, to go out against the bulge bracket banks in high end capital market transactions. It’s not our principal area of strength. So my vision of being an Asian bank is now a very clear focus on wanting to be an Asian commercial bank.”

Gupta hopes to achieve that with two clearly defined strategic objectives, one geographical, the other based on regional business lines. Not long after arriving at DBS he announced a quite specific directional statement calling for a 40:30:30 split of earnings within five years, with the 40 coming from Singapore, and 30 apiece from Greater China, and south and southeast Asia (principally India). On the business side, Gupta wants to build a high-quality regional platform in two key areas: SMEs and wealth.

SME business is a classic play on growing regional trade. “We are a top end corporate bank in Singapore but what we are even better at is the SME space,” he explains. It is already significant in that business in Hong Kong through the old Dao Heng business, it has built a presence in China and Taiwan, and “we have a product suite that is very complementary to the needs of the SME: we are big in trade finance, warehousing financing, factoring, receiver financing – most of what SMEs in Asia really need.”

Wealth management seems a logical fit too. Partly this is a function of Asia being the area where the greatest individual wealth is being created – benchmark surveys such as CapGemini consistently rank it foremost in numbers of new millionaires or multimillionaires – and partly because Singapore has so effectively made itself the region’s hub for private banking. “Within Singapore there is nobody else who is more gold standard than DBS, and our ownership and pedigree has helped us to create this image of safety. Through the whole crisis, one of the few banks that benefited from the crisis was us: we had large inflows of deposits through the entire period.” Already, based on this Singaporean strength, DBS has a strong regional mass affluent customer base and certainly ranks in the top 10 private banks in the region. “But to take that platform and build on it regionally we think is a distinct possibility.”

Gupta is candid about shortfalls in DBS’s regional presence. “If you want to be a regional bank, you have to do a lot more work in terms of defining standards around our policies,” he says. “DBS sort of stumbled into being a regional bank: we were a Singaporean bank, bought a Hong Kong presence, started going into some more countries but have by and large been a Singaporean bank managing externally. We did not have the opportunity to step back and put in place regional management frameworks.” That has created a disjointed structure. “Frankly if you go around the countries we do things differently in every place. We don’t even have consistent technology platforms across different countries. That is a singular priority for us. The whole regional or pan-Asian approach is going to be built in the way the HSBCs and Citis of the world built their global approaches 100 years ago: get the manuals, the how-to books in place.”

It is no surprise to hear these institutions mentioned so early in the interview. Gupta clearly admires HSBC and refers to it a number of times, but Citi is the bank that is in his blood: most of his working life was spent there, starting in 1982, and he was Citi’s CEO for southeast Asia Pacific when approached by DBS. He has run individual country offices in Indonesia, Malaysia and Singapore, has been regional director for global transaction services, has had a strategic planning role for emerging markets and been chief of staff of the corporate bank in Asia. One sees every one of these roles informing his thinking at DBS.

What did he take from his time at Citi? “Thinking about how to put in place a standardised framework to manage, while at the same time recognising the need for customisation and the individuality of different countries – Citi historically has done a great job of that which is why they have been able to build a fantastic emerging markets franchise,” he says. “That notion of getting the balance in a matrix management process, where you recognise the power and relevance of a country management construct, putting deep roots in the country, but at the same time the leverage you get from being a multinational player through technology, products, risk management policies – it is something I bring with me.”

He also says that Citi taught him the banking business is “fundamentally about two things: HR and IT.” He speaks of wanting to build a “consistency of culture” at DBS, through moving people around, through training, and focus on a consistent set of values – something else that could certainly have come straight from an HSBC mission statement. And the infrastructure will clearly be a priority for development under Gupta.

Getting DBS to the 40/30/30 split he wants is going to take time and effort. Many fund managers and analysts feel that DBS is not yet a regional bank in the sense that it aspires to, rather than a bank with twin hubs in Hong Kong and Singapore that runs successful but small businesses in other countries off the back of them.

There are already some noticeable differences in how Gupta wants to expand. One of the great regrets of predecessor Jackson Tai’s tenure was his failure to complete a purchase of Korea Exchange Bank; he had been a great believer in the trade synergies that would come with that bank. One senses Gupta would never have pitched for it in the first place: he doesn’t mention Korea once in the interview and his priorities are clearly towards less developed markets. The corollary of that is that Tai rarely mentioned India in interviews, yet for Gupta it appears more of a priority. It’s somewhat surprising that India already contributes nearly 9% of group revenue; he says business has been growing by 50 to 60% annually for the last five years. “While we are not huge by Indian standards, we are relevant,” Gupta says. “If you think about most banks with pan-Asian ambitions, nobody else has the India presence we do.” Indeed, it is hard to think of any Asian bank that has successfully built a presence in Asia, unless one considers Stanchart or HSBC Asian banks.

Oddly, though, Gupta has started his India drive by selling something: its 37.5% stake in Cholamandalam DBS Finance to its joint venture partner. That business targeted the unsecured consumer finance space. Why? “While I think in some ways that is a long-term opportunity, in the short term it is riddled with risks,” he says. “Chief of which, the credit infrastructure in India for being a part of the mass market is not very developed. A lot of people wound up extending credit to untested names and the absence of a credit bureau can make it very risky to do that.” Instead, in India, Gupta wants to do what he can within the regulatory environment, which is be a corporate and investment bank serving SMEs and only the highest end of the consumer banking space. “Can that change? Yes, if regulations change.” Nevertheless DBS reckons it can do a lot through its 10 branches in India, soon to be 12, and it would be no surprise if DBS’s next acquisition took place here if presented with a better fit than the consumer finance business.

The Greater China business is anchored out of Hong Kong, from the Dao Heng business purchased a decade ago in by far DBS’s most transformative ever transaction. Today, that business shows both a positive and a negative tilt.

On the negative side, DBS seems destined to be forever haunted by the 3.3 times book value it paid for Dao Heng back in 2000, because it came back to bite them yet again this month when Gupta concluded it was significantly overvalued in the books despite a significant writedown once before, in 2005. The books reflected it at 2.5 to 2.6 times book value; 2.2 would be more appropriate, the bank concluded, and the shift meant hitting the bank with a S$1.02 billion goodwill impairment charge, wiping out an otherwise healthy 30% rise in second-quarter earnings to S$718 million. An impairment charge doesn’t affect operating performance, regulatory capital, cashflow, dividends or even expansion of the business, but it certainly ruined the headlines and raises deep questions about the Hong Kong business’s prospects generally.

“Clearly,” Gupta says, “there are some shifts in the structural situation in terms of funding.” Hong Kong is the place in Asia where the global financial crisis and its impact on liquidity architecture has been most keenly felt. Those who were once happy to fund themselves entirely in the wholesale market will no longer do so. “There is a competitive war for retail deposits now, some of it driven by the Chinese banks who fund in the Hong Kong market, so in the short term it has created funding stresses that are likely to stay for at least the next year or two.” Comparing the Hong Kong business to the value it held in the books “there was obviously an imbalance,” he says, and as a new CEO it made sense to clear the slate early in his tenure.

Nevertheless, it’s a solid business; “if we can retain share – we have roughly 5% of the market – and continue to grow that business it will produce decent returns and allow us to be part of a deep and rich market,” he says. But that’s not really the point, and never has been: where Dao Heng has paid off for DBS is in the way it has helped it build a Greater China franchise.

“The bigger and more interesting raison d’etre for the Hong Kong business is really the anchor to the Greater China market,” Gupta says. “If we were to be in mainland China by ourselves today we would be the 60^th or 70^th largest bank. Given the regulatory environment, it would be a slow, long, hard slog to build a business of any substance. Hong Kong changes that for us.” As he says, every one of his customers in Hong Kong has a China angle of some description, be it SMEs serving the Pearl Delta or even individuals. Half the customers DBS has in China are from Hong Kong, and about half of the remainder are Taiwanese; likewise, Chinese companies moving out of the mainland tend to go to Hong Kong first, so that the biggest growth in DBS’s Hong Kong business today comes from the red chips. “We are participating in the flow, this two-way traffic, at all levels.”

China business, he says, is mainly driven by corporate and investment banking, and is growing at 40 to 50% per year. The franchise is increasingly being supplemented by a growth in affluent consumer business to help build a funding book, which then supports expansion of other areas. Gupta hopes to be in 15 to 20 Chinese cities, “and in those cities we hope to go deep through a sub-branch network.”

What about a minority stake in a mainland bank? “The issue with a minority stake is what is the strategic intent and what is the go-to plan.” A pure minority stake with limited long-term prospects would probably not be interesting as anything other than a private equity play, he says, though he would consider a stake in a bank with a willingness to build a pathway to full control when regulations allow.

Elsewhere, though, acquisition appears inevitable. “Organic growth is important and will shift the needle, but it will only get us so far. At the right time we will have to look at inorganic opportunities. My view in the medium term is the opportunities will arise.” Again he is quick to refer to India, where 2010 WTO commitments are likely to drive an opening of the market. Asked if the good valuations from the global financial crisis have passed, he suggests: “Asian valuations never really came off.”

Development in Asean is somewhat in its infancy: a stake in Thai Danu Bank, subsequently rolled into Thai Military Bank, ceased to be of much interest when it became clear DBS could not get the control it wanted, and Thailand is not a priority. There is little in the Philippines, a Vietnam licence was only recently awarded and the bank doesn’t even have one for banking in Malaysia, though it has a strong asset management business there. Outside the home base of Singapore, the only place one would call DBS significant in Asean is Indonesia, and even there one would think it could do more: the only other southeast Asian bank that has really spelt out a regional strategy is Malaysia’s CIMB, which has devoted most of its expansionist energy to the huge opportunity it sees in Indonesia. “We have a lot more work to do in that market [Asean],” Gupta admits. Indeed, 10 years after Dao Heng, it’s stil hard to argue there is true depth in any Asian emerging market.

But underpinning DBS’s vision are regional trends: the changing nature of Asian trade Gupta outlined at the start; the somewhat retro trend of primary goods and commodities coming back into fashion, making Singapore an increasingly important trading hub for numerous commodities; the growing importance of Africa-Asia trade.

One of the biggest themes concerns the way wealth behaves in Asia, which is central to DBS’s regional wealth management plan. “The Asian wealthy individual has always been more prone to taking market risk,” he says. “This is still a wealth creation rather than a wealth preservation game.” This is a consequence of European wealth tending to be several generations older, and Asian wealth more recent, but it has created a particular approach to private banking in Asia geared much more towards wealth growth than protection or transfer. But it may be that the financial crisis changed that. “We believe it has, and that there will be increasingly a need at the high net worth end for services on wealth preservation. This is going to change the type of provider you want and the type of product you want.”

The financial crisis, he says, “made it quite clear that there is a role for Asian providers, a meaningfully differentiated role.” Being non-American or European clearly helped with flows through the crisis. But is it enough? “What we need to do is this. We are seen as a safe play. We need to add to that and be seen as a smart play.”