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Business: One Step, Two Step, Three...
A three-way relationship may suit DBS

October 2, 2000
Web posted at 7.30 p.m. Hong Kong time, 7.30 a.m. EDT

Last week I tried my hand at a bit of corporate matchmaking -- between Singapore's DBS Bank and Standard Chartered Bank. Not too much luck there, I'm afraid. But now there is news that DBS may be thinking of trying a ménage à trois.

The story of DBS merging with a large multinational bank has been making the rounds for some time now. Indeed, DBS' CEO John Olds has in recent months said repeatedly that he has talked to and has had approaches from several banks with operations in the region. With its ultra-strong balance sheet, a fine pedigree (Singapore government interests own 40% of its stock) and its already formidable presence in Asia, DBS is really a partner of choice. As the biggest bank in Southeast Asia by far, it is flushed with several billions in excess cash. But DBS' stated policy of making big acquisitions seems to be going nowhere fast.

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It has made only one minor acquisition in Hong Kong (the purchase of smallish Kwong On Bank), which has given it just a 1% share of the Hong Kong gigantic banking market. Still, DBS shares have traded at a 20% to 30% premium to the rest of banking sector in Singapore for the past year because of the perception that it would soon grow bigger.

The problem is that the market is starting to get a bit impatient. Even the analysts who normally sing DBS's praises are making snide remarks about its acquisition strategy. It needs to do a deal and do it fairly quickly before investor sentiment turns sour. The longer DBS takes to make an acquisition, the more pressure mounts for it to do something, anything. The more pressure mounts, the more likely it would get into a marriage of convenience with a partner it might not get along with for too long. Of the four acquisitions DBS has made in the past three years, three have gone bad. Olds admitted to me in a recent interview that DBS regrets having acquired Philippines' Bank of Southeast Asia, Thailand's Thai Danu and Indonesia's Bank Buana.

It now emerges that DBS has been talking to Australia's No. 3 bank, Westpac, for several months now. Westpac was Australia's leading bank and its most aggressive in the 1980s, and almost went under during the 1990-91 recession because of its over-exposure to buccaneering Aussie tycoons. It had a decent presence in Asia in the late 1980s and early 1990s, but closed down almost all its Asian operations as it hunkered down to rebuild at home. In just five years, American banker Bob Joss, who stepped down last year, turned Westpac around, making it one of the best-managed among the Big Four Australian banks -- with one of the best ROE, or return on equity, for any financial institution Down Under.

Westpac's problem now is that it lacks a decent presence outside Australia and desperately needs one if it is to serve Australian companies doing business in Asia or Asian companies expanding into Australia. Two-thirds of Australia's trade is with Asia. Though DBS is more keen on Hong Kong and Malaysia, it hasn't had much luck there. Just a month ago, it lost the battle to buy up the consumer banking operation of Chase Manhattan in Hong Kong. Other Singapore banks -- especially OCBC and OUB -- have small but fairly profitable operations in Australia. If DBS can't grow elsewhere in Asia, it might as well grow in Australia.

Analysts say DBS has talked to several Australian banks, including ANZ Bank, which used to be the Australian bank with the largest portion of assets in Asia. ANZ earlier this year sold its Grindlays Bank subsidiary to Stanchart. Again, DBS had been one of the potential buyers of Grindlays, but lost the bidding. Having let go of Grindlays and pulling back from Asia, ANZ isn't keen on an Asian connection just now. Another bank up for sale is Perth-based Bank of Western Australia or BankWest, as it is known, which is currently owned by the U.K.'s Bank Of Scotland. But BankWest is a smallish outfit that does not have major operations outside Western Australia. Why buy a small bank in Perth that isn't going to add value to your regional franchise?

Which brings us back to DBS' hammered stock price -- down nearly 20% from its peak. Analysts are now saying that unless they hear of big purchases from DBS in the next six months, the price could move even further southward. CEO Olds, who has just seen his former bank, J. P. Morgan, gobbled up by Chase Manhattan, must be wondering whether a similar fate awaits DBS.

What to do? A truly global bank might not be created by the merger of Westpac and DBS or DBS and Stanchart. But I'd wager that a three-way merger between Westpac, Stanchart and DBS might just do it. It would create a global force that would make even Citibank and HSBC envious.

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