TMB Bank hopes recap will lead to recovery

Euromoney, March 2008

Just as Thailand has entered a period of rare political calm and optimism with a new prime minister, one of its most sickly banks has also been given a new lease of life with a landmark recapitalisation. But, just as the jury is out on whether Thailand’s government can build on its new foundation, it remains to be seen whether TMB Bank can turn the corner after years of underperformance.

TMB Bank was created in September 2004 from the merger of Thai Military Bank, DBS Thai Danu Bank and Industrial Finance Corporation. The merger created the (then) fifth largest bank in Thailand, and today has 471 branches and five million deposit accounts, but has struggled to generate performance to tally with its scale. It recorded a full year loss of Bt 43.7 billion in 2007, three and a half times worse than the previous year, and has non-performing loans equivalent to 15% of lending as of the start of the year, having set aside Bt31 billion in provisions last year for loan-loss reserve requirements and increasing bad debt.

In January, though, it completed a US$1.1 billion recapitalisation which gives it a chance to turn things around – this time thanks to the heady enthusiasm for Asian distribution platforms at ING, which took on 13.1 billion shares out of the 25 billion issued in the deal, taking it to a 30% stake (and 25% of the voting rights). The recap, advised on by Macquarie Securities, UBS and Phatra Securities, was something of an event in its own right: southeast Asia’s largest equity fund raising in the last 12 months and the second biggest since 2002, achieved in the teeth of the sub-prime crisis. And from TMB’s perspective, it considerably improves capital adequacy ratios and frees funds for investment.

TMB and its legacy businesses have long been stuck in the murk. Departing DBS chief executive Jackson Tai recently recounted to Euromoney the shocking state of Thai Danu when his predecessors at DBS agreed to take it over in 1999; it was so bad that it caused DBS to report a 13% NPL ratio at a group level – not just the Thai business – in 2000. Things haven’t greatly improved since and there is still debate about whether the 2004 merger made any sense anyway. (Among the dissenters is recently departed TMB chairman Somchainuk Engtrakul, who tells Euromoney: “I think it was not right. If you leave TMB alone in 2004, I think it would be in a much better condition [now].”) Somchainuk resigned after the recapitalisation, “because I have completed my role; it is time for me to hand the stock over to ING to carry on.” Chief executive Subhak Siwaraksa is expected to follow.

So what’s the appeal for ING of such an asset? Philippe Damas, CEO of ING Private Banking and of retail banking for Asia, puts it in the context of a broader strategy to build a distribution network in Asia.  From this perspective, TMB’s branch network looks appealing. “It’s a very nice imprint,” says Damas. “Obviously we also look at the current state, and we feel we have the experience to solve their problems.” Priorities at first will be governance, with wholesale changes at the board level and in management; improving the execution and systems for risk management; improving profitability, by driving revenues rather than cutting costs (“if you look at the net interest margin it’s pretty clear they’re at the bottom of comparable banks in Thailand”); and by increasing non-interest income, which fits in with ING’s broader expertise in insurance and asset management. ING will second between 15 and 25 people into the bank.

ING believes its experience in other Asian assets, notably ING Vysya Bank in India and Bank of Beijing in China, will set it in good stead. But rebuilding TMB will potentially be even more complicated than that.

For a start, there’s the fact that the Ministry of Finance, though slightly diluted in the rights issue, still holds 26% of the stock – less than ING, but more of the voting rights. Somchainuk says this level of ownership was never an issue under his watch. “The Ministry doesn’t involve itself in the day-to-day operation of the bank at all,” he says. “They have three representatives in the directors but they leave everything with the board and management. They are quite professional in this area.” But it still makes rebuilding the bank politically sensitive, particularly since the team now in the ministry under the new government is not the same as the one who handled negotiations for the deal. Damas thinks the ministry is so keen for success it will remain friendly; “they have been called to recapitalise this company a couple of times already, so this will be the last time they want to do so. As long as we can demonstrate we bring something and can manage the company, I think they will remain a very silent partner.”

Another issue to resolve is DBS, who held a 16% stake in TMB through their pre-merger stake in Thai Danu. DBS declined to participate in the rights issue in January, and so ended up diluted to around a 7% stake. As Tai explained in November: “We decided early on that we could not go ahead with the recapitalisation unless we saw that we could really take serious control over the future of the bank. We felt that 16% was never-never land in terms of equity accounting or consolidation.” When it became clear it couldn’t do that, Tai declined to take part in the deal, and instead launched a rival bid, including Deutsche Bank, which was not selected. Tai says DBS “will be good shareholders and see what comes ahead in the future”, but that will now be a matter for DBS’s new chief executive, Richard Stanley. ING would be a willing buyer but in the meantime the overhang is hurting the stock.

Much depends on the outlook for Thailand itself. An election on December 23 ended 15 months of limbo after a military coup deposed Thaksin Shinawatra in 2006; Samak Sundaravej, representing a new party that looks an awful lot like Thaksin’s old one, is the new prime minister. “The money has started circulating and the outlook for Thailand will be a lot better in the coming year,” says Somchainuk. “The economy will have a much better stance.” Logically, that means stronger businesses, and less pressure on NPLs; and perhaps a brighter future for a beleaguered bank.