The new face of DBS

DBS has embarked on an ambitious journey since its new chief executive, Piyush Gupta, took the reins last November. He inherited a bank that was dominant in Singapore, but which had struggled to define a strategy for international growth. Put simply, the Singapore market was too small and the global market too big, so Gupta decided on a third way: to become Asia’s bank.

It is still early to say if his plan will work, but Gupta, who is now chief executive of both DBS Group and DBS Bank, certainly has the right credentials to get the job done. A veteran Citi banker before joining the Singapore lender, he has worked throughout the region and was most recently head of Southeast Asia, Australia and New Zealand. He has also been country head of Citi’s operations in Indonesia, Malaysia and Singapore, as well as head of the bank’s Asean institutional clients group. In total, he has spent more than two-thirds of his 27-year career in the region, including eight years in Singapore.

His vision is predicated on spotting a niche that he says DBS, Southeast Asia’s biggest bank by asset size, is well-placed to fill.

“In the region, there is a viable role for an Asian bank as distinct from one-country banks or international Western banks,” he told FinanceAsia in an interview in September. “DBS is in a position to take on that role and compete effectively.”

Recent events have bolstered Gupta’s faith. “Anecdotal evidence supports our confidence. Money flowed into DBS during the global financial crisis, indicating that customers were more comfortable with an Asian bank than Western banks. Corporate clients gave the same message, for instance, by insisting on the participation of at least one Asian bank in its loan syndications.”

Gupta argues that many Western banks withdrew during the bad times, whereas Asian banks stayed to service their clients throughout the cycle.

“This reflects the more give-and-take relationship we have with our customers, in contrast to Western banks, which tend to be more product-centric and constantly appraising the bottom line. The bulge-bracket investment banks invariably seek high returns from their deals. That outlook means that DBS has a positioning advantage.”

It is a bold course for a bank with such a solid domestic franchise. DBS’s loan books in Singapore are still growing bigger, with lending to consumer and business clients on the rise this year. In both segments, DBS won more than a fifth of the market.

Its internet banking platform is also growing, with 20,000 new users joining each month, and the bank continues to exploit its POSB franchise and network to generate new unsecured loans -- POSB is the former Post Office Savings Bank set up in the 1960s that DBS acquired in 1998. Finally, it’s worth noting that DBS is one of the best-capitalised lenders in Asia, with a capital adequacy ratio of 16.5%.

But, Singapore, with a population of around 5 million, is a small market -- and Gupta is determined to make a difference. “In the past, DBS burnt its fingers moving into markets in countries and regions where it lacked sufficient expertise and knowledge. Now, our geographical expansion is tightly focused, determined by identifying the best opportunities and by where we can play to our strengths,” he said.

“Clearly, Asia offers us the best opportunities: youthful demographics and tremendous economic growth are a compelling incentive for us to broaden our reach. Further afield, we are likely to go beyond our core competencies,” he added.

Gupta identifies two main areas for regional growth: capturing the wealth management market and servicing small and medium-sized enterprises (SMEs). He concedes that wealth management is highly competitive, but argues that Singapore is well-positioned to be the “Switzerland of Asia” and that DBS enjoys a “halo effect” thanks to its reputation for safety and solidity.

In the SME market, Gupta notes that corporate activity in Asia is increasingly a “spaghetti mix rather than a hub and spoke model”. Businesses are serving end-users in the region rather than just acting as links on an export chain. Investment banking business outside Singapore, where it is already preeminent, is not a priority. “It is a glory business dominated by specialists such as Goldman Sachs and Morgan Stanley,” he said. “We can’t really compete with them on the international stage. But, in Singapore, we have a powerful franchise and can leverage that to win capital markets mandates elsewhere in the region.”

Instead, DBS will focus on its core capabilities: building a regional SME business anchored to trade finance, which means aligning customer portfolios in the mid-cap and SME segments in Hong Kong, China, India and Indonesia, in addition to growing its wealth management services.

Switching to a 4-3-3

Gupta’s task is to translate this vision into revenue. Today, the bank makes most of its money in Singapore and Hong Kong -- just 11% comes from South and Southeast Asia, compared to 62% from its home market and 27% from Greater China. But by 2015, if all goes according to plan, the bank will earn just 40% of its revenues in Singapore, while 30% each will come from Greater China and the combined territory of India and Southeast Asia.

Sanjay Jain, head of Asia regional banks research at Credit Suisse supports Gupta’s strategy of greater regional diversification, especially in South and Southeast Asia. A 30% revenue target within five years, starting from a low base, “can be achieved organically, but growth would need to exceed 40% per annum, which is not impossible”.

Rating agencies are sceptical. DBS might face “severe challenges in attaining such scale and diversity, and achieving a competitive position in its targeted foreign markets, while offsetting the increased risk from such markets through higher profitability and capitalisation,” wrote Standard & Poor’s Terry Sham in July.

How DBS might attain that diversification is also problematic. Gupta said that local regulations will determine how DBS grows. He describes the businesses in Singapore and Hong Kong as “near universal banks”, the networks in Taiwan and Indonesia are growing (currently 40 branches in each), but branch numbers are severely restricted in China and India.

Therefore, organic growth, particularly in China and India, is limited -- as indeed is expansion through acquisitions, where foreign ownership of domestic banks in China and India is restricted to 20% and 5% respectively.

“We are prepared to make acquisitions, as long as we have management control,” said Gupta. Realistically, that means in Indonesia -- and he added that DBS is “open to opportunities in Southeast Asia”.