DBS and the Islamic Bank of Asia conundrum…

Although my mind has been more on my business and the books that are in my head, I will succumb to the steady flow of emails asking me to update my thoughts on Singapore banks. I made a promise to myself this year to start on the two books that have been playing in my mind for the longest time, and they really need to get out there. Then there is also the pressure of rebuilding things on the business side after the impact of the crisis last year. So, I am under considerable strain on time and energy as I update this blog.

In any case, for those of you who wrote to ask about the latest on DBS, I want you to know that I only updated myself when I was hovering around the table of my colleague, Peter Hoflich, the managing editor of The Asian Banker, last Thursday and asked him, ”what’s up.” He told me that he had just returned from the DBS Bank’s 4Q annual results press conference, to which I replied that I would have wanted to be there.

It was Piyush Gupta’s first solo performance as CEO of the bank and attending the press conference would have given me a good sense of what to expect from his leadership. I am not in the loop of editorial opportunities such as this one because Peter leads the publication part of our business. But still, I would have liked to have been there.

Not that I expected there to be much drama. The upheavals that the bank went through in finding the right leadership are mostly over, for the moment. I don’t care for anyone as CEO or chairman, as long as they are logical choices selected from men and women who know what they are doing – and I do think Piyush falls well into that category.

We should measure them by their performance – but that in itself is not saying very much because it is really difficult to foul up as a banker in a cloistered environment like Singapore or for that matter, in most Asian countries. A banking licence in these countries is a restricted asset, and there are only three local banks in Singapore. Governments are willing to turn entire economies on their head just to ensure the continued survival of their banks. Every day that loans cost much more than deposits, you will have to be a really big bloody fool not to make money in the banking business.

And so it was, that during the past year, while business of every kind were struggling to make ends meet, the local banks ended their year coming out sterling from the crisis. All they had to do was keep their noses clean. Why, they even got government guarantees to lend more money risklessly to their favourite SME clients – how to fail?

In any case, I asked Peter how the press conference went, and one of the first things he told me was that Piyush in his comments effectively disparaged the leadership provided by Jackson Tai, and praised Koh Boon Hwee and Richard Stanley.

Let’s just say that if he was his own man, there was no reason for Piyush to play favourites on things that are past. Statements to the effect that the management was dysfunctional during Jackson Tai’s time and that Koh Boon Hwee and Richard Stanley did a wonderful job only serve to raise our eyebrows about the person making them. So we know from those statements that Piyush the man is not comfortable in his seat yet. He is still looking over his shoulders to make sure his sponsor is happy.

From the few speeches he has given, I do find this man given to a lot more posturing than is necessary. A lot of “I humbly” this and “I humbly” that. Many words. Not that it is a good or bad thing – it’s all just unnecessary if he is his own man. Also, the analysts and all the stakeholders – from staff to shareholders – are going to be holding his throat on fully purposeful, capitalistic measurements, no matter how “humbly” he would like to package his leadership. So it is just as well he gets on with the job.

On this point, we should give him time. Maybe he will form his own credibility as he sets out to repair the weak points of the bank. If the numbers hold steady after a few years, he will become part of the Singapore Inc furniture.

While it is not necessary for the CEO to draw favourites amongst his predecessors, it’s heartening when a new CEO is able to articulate clearly his own assessment of what went wrong and how he expects to salvage them. I think on this front, he did well in identifying, what I thought was correctly, that the DBS Hong Kong business suffered from its senior management team being distracted.

I was very pleased to hear that he said that. I do agree with him that it was what happened in DBS Hong Kong. The numbers coming from that franchise is dreadful and is affecting the bank’s overall performance a lot even as DBS Hong Kong slips drastically in its market share of the domestic business.

I did wish though that he was also as clear in articulating what he thought went wrong with DBS Cholamandalam in India and in Thailand. A sound assessment of these is a prerequisite for any regionalisation plan he may have to be credible. He said nothing on these. The lessons from DBS Cholamandalam are very important to articulate, because some of them were easily avoidable.

His aim to reinitiate DBS’s regionalisation drive is for the moment flat, dead in the water for yet another reason. It is not a question of strategy or ideas, the bank simply lacks the management bench-strength. He simply does not have the people required to go out there and stitch a franchise together – all those who could were thrown out with the water when the bank got rid of 900 of its better people early last year.

In fact, the weakness of its management bench-strength today is a quantifiable lesson on the importance of continuity in any large business. Look at the performance numbers – they manage to wrangle the same $2billion in earnings in a difficult year as they have in the 2-3 years before that. It could have been higher if not for the provisions they are making on that Dubai loan.

So, what did the sacking of 900 people early last year achieve? A saving of $300million? So, what if the bank was able to announce a $1.7b earning in a bad year and keep it’s 900 staff? Or announce, say, $1.8b and sack 500 cheaper deadweights who will not contribute to the management bench-strength under any circumstances?

In a number of core businesses, including corporate lending, transaction banking, capital markets, DBS has lost so many key people as to be dysfunctional as a serious international institution.

A chairman or CEO who is with the bank for a longer time, and who understands the difficulty of building a business over a three, or five or seven years, could have made the decision to balance the trade-off between skills and performance numbers in a more sustainable manner. The bank needed its best people in that difficult year and it needs them now.

All that the sacking of 900 staff did last year was proof that Koh Boon Hwee is really an expert at this. He did just that at Singapore Airlines and we should not be surprised if he does that in his next posting as chairman of another Singapore Inc company. The problems created by sacking the wrong people and asking for lesser people to try and run the business, has created a huge problem for the current and next few CEOs.

DBS today is nowhere near a Capitaland, another Singapore government-linked company, where its chairman Liew Mun Leong can send out “my boys” to take on bold and huge new investments today because his bench-strength in terms of management skills is solid. The worst you could be would be a Singapore Telecoms, where the continuity in terms of management bench-strength is stable and they can make the hard decisions, building on the groundwork that Lee Hsien Yang laid for them.

For all the criticism that Piyush has of Jackson Tai, if he is his own man, he will be taking the same road as Jack did, and he is going to have zero tolerance for humouring any intrusive chairman hovering over his head. Still it will take him a good 3-5 years of trial and error to build his own team of “A” stars who can hang together and really expand the franchise.

The problems related to another Singapore Inc company, NOL, which announced an amazing $1b loss for 2009 is a stark reminder that things can go wrong if DBS doesn’t develop the management bench-strength it needs to steer the business.

Piyush’s assessment of how DBS is going to grow in China was also unconvincing. He said a little bit of this and a little bit of that, but it is quite clear that his the strategy on China is still a wet one, albeit understandably so.

In my view, the competition for foreign banks in China is now entering “Round 2”. “Round 1” of the “foreign bank’s competition to succeed in China” took place between 2006-2009, and is now properly over. The winners were the Chinese banks, the Chinese government, the Chinese employees of foreign banks. The losers in “Round 1” were the badly bruised foreign banks – particularly Standard Chartered and HSBC, which were the two most heavily invested foreign banks in China during this period.

The key people in these banks have learnt many valuable lessons now, and although some of them failed badly, I continue to have considerable respect for what they have gained from learning what works and what does not work for foreigners in China. I think the new foreign banks entering China should pick up the people who learnt from “Round 1” in order not the make the same mistakes again.

The local currency deposit business in China can be a poisoned chalice. If you succeed in attracting local currency deposits, you lose, because they can change the rules on what you can do with it anytime they like. If you fail to attract local currency deposits, you also lose. Both ways, the costs of the deposit business are stacked up against the foreign banks. The business that saved the day for foreign banks in the first stage was treasury and the banks that were burnt in Round 1 have adapted accordingly and have now redefined how they want to play the Chinese market. Hence Round 2.

What was telling about DBS China’s strategy was not what Piyush said at the results press conference but what the indomitable Rajan Raju was quoted as saying in The Edge, a Singaporean publication that the bank brought on a junket to the opening ceremony of the new DBS building in Shanghai (we were not invited nor told about the opening ceremony although we have an office in China).

Unless he was misquoted, Rajan Raju told The Edge journalist in Shanghai that because interest rates are regulated in China, therefore competition in China’s banking industry is “a level playing field.” Those who know China could not have suggested those words “level playing field” by any stretch of the imagination.

The Islamic Bank of Asia conundrum

The thing that troubled me the most about the Piyush Gupta’s first press conference though was a question that has never been asked and a matter that has not been really discussed by anyone in Singapore in the past. Even the journalists and the analysts present at that meeting apparently did not pick up on it. DBS should be really telling us more about what is happening with the Islamic Bank of Asia (IBA).

The IBA question was triggered in my head when I heard that Piyush revealed that the non-performing loans (NPL) of DBS bank rose from 1.5% to 2.9% yoy. Provision increased from S$888 million in 2008 to $1552 million in 2009, up by a hefty 75%. When Peter told me that Piyush attributed the single, largest item to Dubai World, I immediately asked Peter repeatedly, “You mean nobody asked if the loans were originated by or sits in the books of the Islamic Bank of Asia?”

Peter answered no (repeatedly). “The Islamic Bank of Asia was the elephant in the room, Peter!” I emphasized in my usual excited way. “You mean it struck no one to ask?” He said no. “Our friends from Reuters, Bloomberg, Wall Street, Financial Times?” No. “How much of the sour loan was attributable to DBS Bank and how much was originated by the Islamic Bank of Singapore?” Nobody asked.

Well, to be clear, it is not DBS job to tell us where or how the Dubai loans were originated or recognised in their books. As long as it is recognised in their books. It is our job to ask and now that the souring Dubai World loan has surfaced, we should all be educating ourselves on the changes that the IBA has brought to this Singapore bank.

This whole episode throws up so many questions about how DBS does business in the Middle East and the role of the IBA. It’s the elephant walking around in the room, and oblivious to everyone.

Here are some of the strange characteristics of this elephant that are at odds with the rest of the Singapore Inc scene.

Firstly, the IBA was instituted almost as soon as the MAS painstakingly put in place Chapter 19 of The Banking Act – all the rules of ownership of financial institutions that were meant to make the industry institutionalised and not have banks that are accidentally owned by some rogue family from anywhere. There is no specific provision in Singapore law for an “Islamic bank” and so all incorporations should be within the existing legislation.

Section 19 of the Act stipulates S$1.5 billion minimum capitalisation, no individual owners without telling the MAS, institutional owners only, the percentage rule on foreign ownership, etcetera. Then within one short year, pops up the IBA, the literature describing which could not be in sharper contrast to The Banking Act.

We are told that the IBA is capitalised to only US$500million (S$800million). It is 51% owned by DBS Bank, the other 50% is from “34 Middle Eastern investors from prominent families and industrial groups from Gulf Cooperation Council (GCC) countries.” This phrase “prominent families” is so uncharacteristic of Singapore.

The owners of UOB or OCBC do not call themselves “prominent families”, and neither do the Islamic banks in Malaysia describe themselves as belonging to prominent families. But it’s there on the IBA website for anyone who is bothered enough to ask, who are these “prominent families”?

To add to the conundrum, in August last year, the MAS imposed a single minimum paid-up capital requirement of S$100 million for a locally incorporated wholesale bank regardless of whether the bank has branches or subsidiaries overseas. Which now begs the question – should the IBA fall under the definition of a wholesale bank or a full commercial bank under these new legislation?

In my own stupid way, whenever I see an ownership structure like this in a bank in any run-down third world country, the first question I always ask is – “are the shareholders also the borrowers?” – because they almost always are and it is my job to ask that stupid questions to ensure they are not.

If you look at the annual Asian Banker 500 ranking on The Asian Banker website, you will find some of the most profitable banks in the region coming from really third world countries like Sri Lanka and Bangladesh, where the government or some prominent owner effectively capitalises the bank, and then borrows back at high interest rates and making them hugely profitable in that way.

I am not suggesting for one second that this is the case with IBA. There are loads of rules against interested parties lending in Singapore. But the lack of information sets up all these misconceptions to be answered. DBS has to help us through the facts because the lack of clarity is not characteristic of Singapore Inc at all.

The only significant references to the annual performance of IBA are at best cryptic. DBS has been a mention in its 164-page 2008 annual report under an “other non-interest income” section: an “others” income of $61 million (up from $41 million in 2007).

DBS says “other income rose with increased contributions from The Islamic Bank of Asia.” Why under “Other Income” when it is a majority owned subsidiary?

There is a mention in June 2008 that suggests it probably has a US$500m book (against a US$500m capital? that’s really under-leveraged) comprising an “average size of $25m loans spread across 20 borrowers.” This kind of description of the loan book is creepy and throws up more questions than the information it provides.

There is a sketchy reference to “treasury products”, and participating in syndicated lending – which is where the possible connection with Dubai World is. The last mention of its assets is that it raised S$200million.

Another question that was not asked was whether the Dubai World loan was constituted as a commercial loan or an Islamic sukuk (bond) or one of a series of Islamic loans – Mudharabah (profit sharing), musharakah (a joint venture), murabahah (like a straight loan on a cost plus basis), Ijarah (a lease).

The big deal about Islamic lending is that the risk is shared with the lender in one way or another. If it was, then it becomes clearer why DBS has had to classify the loan as non-performing although it is technically current.

To top it all up, there is this mystery of Vince Cook, the former CEO of IBS, who came across as a very congenial but careful man, who left the bank quietly last year without even saying goodbye to me. It is currently operating as a nobody’s child.

Let me stress that the lack of symmetry in information is not the bank’s fault. It is just that nobody in Singapore has been interested enough in this Islamic bank since its inception – even now when it is the elephant in the room. I would argue that even if this IBA becomes a controversy in its own right, it will be a good thing, because it will make corporate Singapore think a bit more about things we can do with this bank.

The fact that the first Singaporean sukuk was issued only nearly two years after its launch was palpable – the Integrated Resorts moved at lightning speed compared to Islamic finance in Singapore. We were in a hurry to set up the IBA, but not in a hurry to grow and make it significant? I think the fact that no one outside the Singapore government was interested in Islamic finance played a very important role in the slow development of the IBA.

Herein there are several lessons for us to ponder on about how government can avoid getting ahead of the industry by taking the low road instead of the high road – but that is a whole other conversation.

The circumstances around the conception of the IBA are easy to understand. Singapore was slow off the mark in setting up an Islamic bank in the first place. Malaysia for example, got the commitments of the blue chip institutional players, including the Al Rajhis of Saudi Arabia and the Kuwait Finance House long before Singapore did. Malaysia also got the Islamic banking players to do what Singapore got the casino owners to do – put up their own capital and build the business from ground up commercially.

So someone in the Singapore system thought that jump-starting an Islamic bank would be a good way to keep Singapore in the game. Which is fully understandable given the fact that nobody else in Singapore was interested to take the first step – not the other local banks, not the property developers needing to raise capital, not anyone.

Then there is the problem with doing business with the Arab world. It sucks the non-Arabs into their tribal trivialities. If you do business with the Emiratis, the Qataris won’t play with you. You get the Bahrainis, the Kuwaitis won’t play with you. All of them want to play with the British, however, because of historical links and the pinkerton syndrome. But the Asians have to work out their Islamic banking strategy more prosaically and play wherever they can.

Strangely enough, in my view the Islamic capital market business is likely to grow faster in Hong Kong, because the European institutions – from HSBC to UBS – the truly active global players in this business, are more domiciled in Hong Kong than in Singapore.

The IBA kept its nose clean by being involved in treasury type businesses and as for lending, by participating in syndicated loans instead of being more aggressive in pursuing loans themselves. The loans to Dubai World would have been generated through participation in a syndication, but the basis of lending is important for us to know so that we can understand why the need for DBS to reclassify the loan while it is still current.

One final point, I am happy that the wheels are already in motion for a strengthening of the board at DBS. I have a lot of sympathy for Peter Seah or whoever else brought in from Temasek to strengthen the DBS board. Temasek is itself having a hard time on several fronts – the grief that Bridgette Lai is giving them in Malaysia’s Alliance Bank, the fact that colourful Sebastian Paradez is leaving Danamon in Indonesia and so on. So all of these factors come into play when thinking about the boards of DBS and the other banks in its stable. But those developments are par for the course and don’t deserve any additional comment.


  1. interested observer

    ED, what do you think are the learnings from the DBS Cholamandalam story – do you think it was really a problem , or just the relationship fell through

  2. The setting up of IBA was a national service for DBS. It was more for “show”.. perhaps for MAS' KPI.. I gather that the honchos in DBS don't really pay much attention to the subsidiary.

    At the analyst meeting, the CEO hinted at an acquisition in Indonesia likely Danamon to meet his 40:30:30 geographical target mix.. He also talked about improving the SGD L/D ratio of 55%, expanding its market share in mortgages and SME etc, which could mean increased competition and some margin compression in the medium term.

  3. This is a very interesting article and I agree with you about the “elephant in the room” that no-one wanted to ask about at the recent full year DBS press conference as well. It is amazing that there has been absolutely no press coverage of IBA's $77m loss. Apparently there was an article in Berita Harian in Malay but nothing in English anywhere!

    My understanding of the Dubai losses is that they were about half born by IBA and the other half by DBS itself. IBA was involved in many Islamic Finance transactions in Dubai and the region that took a huge hit in 2009 but so was DBS involved in conventional loan facilities through its Dubai branch. So both suffered big losses last year.

    It was amazing that Piyush and his CFO did not even mention the line in their presentation about loan loss provisions in Dubai. They obviously hoped that by not mentioning them no one would notice. And apparently the strategy worked perfectly with almost everyone but you.

    The point you made about the ME shareholders is interesting but it was the only way that DBS and Singapore Inc were going to get an Islamic Bank established in Singapore – there is no way that MAS would have allowed “the Al Rajhis of Saudi Arabia and the Kuwait Finance House” to run their own show the way Bank Negara allowed them to KL. So IBA brought in the royal families of all the emirates and gulf states as shareholders with DBS. But those guys do not borrow much – they are already so filthy rich they do not know what to do with all the oil billions.

    But the huge difference between Malaysia and Singapore is in the number of Muslims in each domestic market. Singapore's 400,000 is too small for the big guys to be interested in the retail market here whereas 14 million or so and dedicated Halal government pension funds in KL are much more interesting as the bedrock for the IF industry in KL.

    I agree with you about Vince's sudden departure but as the architect of IBA's business strategy he has to carry the can for their losses. They still have not found a suitable replacement.

  4. Omar Kim Abdullah

    Good write up on this. You were right on the dot on the cultural aspects of the corporate game, inferiorly spirited shareholders taking the easy way out in setting up the bank with hardly any strategic inkling what it is going to be (except for the elephant you mentioned, now at the risk of turning white!) The success of an Islamic banking and finance institution is not easy if you are operating within the conventional banking and finance framework without major changes to the legislative and tax environment. The Malaysian experience is a testimony of continuous changes through macro policies in rendering the business environment conducive to its growth. The process started 27 years ago in 1983; and thus it's very very naive to think that Singapore can do all this without giving incentives for the players and formulate policies supporting the business.

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