Life after Permata: What's next for Singapore banks in their M&A strategy?

Singapore

SINGAPORE'S Big Three banks are likely to persist in their quest for growth in the coming year through potential mergers and acquisitions (M&A), even as OCBC and DBS recently bowed out of the race for Indonesian lender Permata after much fanfare.

Analysts tell The Business Times that the M&A priority for the local banks will be on current lines of business in regions where they already have a foothold, instead of venturing into new areas amid a weaker macro backdrop and slowing growth.

It is precisely due to the subdued economic outlook and falling interest rates that banks are being pushed towards looking for other means of growth apart from their conventional lending business, added the analysts.

Andrea Choong, equity research analyst at CGS-CIMB Securities, said: "Looking back over the past few years, Singapore banks have been acquiring wealth management businesses to beef up their non-interest income franchises."

This is a move that will serve them well in offsetting part of the growth slowdown next year, she noted.

With banks still bent on expansion, the pursuit of value-accretive M&A is expected to continue.

"We believe that the acquisition should be complementary and provide visible scale to the banks' existing exposures," she added.

Jefferies Singapore's equity analyst Krishna Guha concurred that the focus for banks is likely to be on existing business lines of banking, wealth or insurance in their core markets of Asean, Greater China and South Asia.

"Deal size is more difficult to call as previously banks have done large transformative deals as well as (a) few bolt-ons," said Mr Guha.

In a media briefing for its third-quarter results in November, DBS chief Piyush Gupta said that the bank will focus on bolt-on acquisitions, or deals valued at about 5 per cent of its market cap.

It must "make strategic sense", in a market and lines of business that DBS has an interest to grow in, and accretive in a "reasonable period of time".

Finally, the acquisition must not distract the bank from its key digital agenda, he had said.

One prime example that Mr Gupta often refers to is the S$110 million acquisition of most of ANZ's wealth and retail business in Asia announced in 2016.

"One of our learnings from that is if you get a customer business and overlay it with digital, you can drive value very quickly, principally because you do not pay for the cost of customer acquisition," he pointed out.

Aside from DBS, OCBC is another bank said to be actively pursuing M&A. Analysts have often questioned its M&A intentions, given that its capital equity one ratio stands at 14.4 per cent - the highest among the three local banks.

Earlier this year, Singapore's second-largest lender had said that it is keen to boost its presence in the Greater Bay Area and the Pearl River Delta region.

There was talk that OCBC could raise its 20 per cent stake in the Bank of Ningbo if given the green light from regulators.

But with the situation in Hong Kong now in flux due to civil protests, there is an added layer of uncertainty for what lies ahead for the bank's plans in Greater China.

In the last few months, however, this was overshadowed by the developments surrounding the sale of Indonesia's Bank Permata.

Both DBS and OCBC were reportedly in the running for the bank, but backed out of a bid after conducting due diligence.

In the end, it was Bangkok Bank which nabbed Permata, buying out the combined 89.12 per cent stake of both Standard Chartered and PT Astra International Tbk.

In a client note, Citi analyst Robert Kong wrote that an Indonesia M&A would face significant challenges, as it would mean a "multi-year rationalisation process" to manage network duplication and to squeeze out cost savings. Brick-and-mortar M&As would also conflict with Singapore lenders' strategy of building digital banks to capture opportunities in Asean, he had said.

Permata has over 300 branches in more than 60 cities in Indonesia.

But other analysts believe that while the digital component will be an additional area that bank management will have to consider for future M&As, acquiring physical branches is not necessarily a clash of interests.

"While a pure-play digital strategy provides certain efficiencies such as cost savings and lower customer acquisition expenses, we believe that the addition of a brick-and-mortar franchise is valuable in building up a bank's branding and franchise especially in developing economies," said Ms Choong.

Regulations are another tricky issue to navigate when it comes to M&A. Back in 2013, DBS dropped the purchase of Bank Danamon, after Indonesia changed regulations and restricted single ownership in domestic banks.

Whether OCBC makes a move to up its stake in Bank of Ningbo is also dependent on details from Chinese regulators' behind the relaxation of foreign ownership in local banks.

In 2018, China eased restrictions on foreign holdings in domestic banks, removing the previous 20-per-cent cap on foreign stakes in a single institution in a Chinese lender.

With the banks' CET-1 ratios comfortably above 13 per cent, there is certainly room for local lenders to pursue M&A for scale, said analysts. The question is if it makes sense for the banks to do so.

As it stands, there are many challenged banks in emerging markets like India and Indonesia, said Joydeep Sengupta, senior partner at McKinsey.

The Indonesian banking sector, in particular, is due for consolidation, with more than one hundred lenders in South-east Asia's most populous country.

But even so, local banks have consistently maintained that they are in no hurry to make acquisitions for the sake of it - their strategy of focusing on their core markets where they can reap synergies is likely to carry through to the new year.

"As a result of the late cycle, attractive acquisitions and partnerships are currently available for most banks," noted Mr Sengupta.

"However, potential deals should account for the risks in credit quality and must be pursued under two conditions - where there is a unique strategic fit and when the price is attractive."

Morgan Stanley's head of Asean bank research Nick Lord pointed out that banks ultimately need to make a judgment call on whether the best way to increase profitability or to increase market share is through organic or inorganic means.

"Given the opportunities you've got out there from new technologies and new business models, I think there are plenty of organic opportunities to expand," he said.

"For you to take part in M&A, there would have to be a particularly compelling offer, either in terms of market scope expansion or price."