Much has been made of the growth of Asia’s small and medium-size enterprises (SMEs), but how significant is this segment to banks like DBS?
In my view, companies with between $50 million to $5 billion in annual turnover are not being served by global transaction banks in Asia, as these banks have clearly stated their preference for the largest 5,000 to 7,000 global firms. But for DBS, our fastest growing market is large SMEs with $100 million to $1 billion in sales, which are growing at 30% a year, and which are rapidly expanding into Asia and increasingly into Europe and the US. And they are emerging fast: in 2010, 147 Asian companies were on the Fortune 500 global list.
However, these large Asian firms with about $100 million to $1 billion in turnover are not significant to global banks, even though these firms still need pan-Asian transaction banking services. With our network across the region, we are trying to capture both ends of the trade flow so that we can handle payroll, cash management, operating accounts, liquidity, risk management and the whole working capital cycle.
So the market is there, but how is DBS capitalising on growth in SMEs and emerging market companies?
As I see it, there is room in the market for 600,000 sales calls a year to corporate clients from transaction banks, but the market only has capacity to make about 450,000 sales calls. So there is a huge gap in the market which needs to be filled to advise clients on regulatory, liquidity and tax issues and the full working capital cycle. We have strengthened our team by bringing on Ken Stratton as our new global head of sales, and Lum Yin Fong who has focused her team on specific areas like regional liquidity management, commodity finance and supply chain finance. This has given us deeper relationships with customers and helped us win more mandates. Finally, our Asian network means we are ideally positioned to tap into the massive Asian trade flows which have grown so much during the past ten years or so.
How are the SMEs and large local corporate segments contributing to the bottom line of DBS and its GTS business?
Our portfolio revenue mix is changing dramatically, but right now 46% of our GTS business revenue is derived from SMEs and large emerging Asian corporates, the rest from multinational corporations (MNCs) and financial institutions. Since we started the investment programme and launched our strategy review in January 2010, we have registered record 30% year-on-year growth in our GTS business in the last 14 to 16 months. The bank’s first quarter profits also hit a record S$807 million ($653 million), which is the highest quarterly profit ever generated by a Singaporean bank (excluding one-off gains).
In addition, our chief executive, Piyush Gupta, identified the GTS business as a key priority over a year ago and the investments are really starting to pay off in shareholder returns. GTS is also adding liabilities at twice the rate of the industry average and we now have S$24 billion in assets, up 71% year-on-year, and SGD69 billion in deposits, which is up 31%.
Is this kind of growth sustainable?
Yes, I think very much so. The growth of many of these large local firms runs at three, four or even five times that of MNCs. Although sometimes this is from a low base, these firms are in the middle of Asia and its trade flows, and in many instances are moving into markets more quickly than MNCs.
Additionally, between 85% and 88% of my business is annuity business. Assuming normal GDP growth, I can expect 6% to 8% growth embedded in my business just from GDP alone. If I have a portfolio of $800 or $900 million, you are talking of $80 or $90 million of growth every year -- rising to 15% or 16% if we can secure both ends of the trade. So the dynamics of this business revolve around annuity earnings -- which are highly valued by shareholders -- and return on equity, which should be between 25% and 30% for a well-run business.
Ultimately, GTS should have more of a positive effect on the bottom line than many other banking services. So all in all, we are very bullish about DBS’s prospects, especially from a GTS perspective.
