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Eager to build a national banking champion to cement Singapore’s status as a rising financial power, the city-state’s authorities endorsed a bold expansion strategy at Development Bank of Singapore in the late 1990s. The lender went on an acquisition spree between 1997 and 2001, spending more than 12 billion Singapore dollars ($9.3 billion) to acquire local banks in Hong Kong, Indonesia, the Philippines and Thailand. The pieces never added up to a greater whole, though. Profits rose, but costs escalated at an even faster pace, and margins shrank. When the global financial crisis struck in 2008, the renamed DBS Group Holdings saw its stock price plunge by nearly two thirds and was forced to raise expensive capital with a big rights issue.

Today, Singapore’s flagship bank has recovered with its ambition intact. This time, however, DBS is pursuing its regional goals on a sounder basis under CEO Piyush Gupta. A veteran of Citigroup’s Asian operations, Gupta has injected new life into DBS’s platform since taking over as chief executive two years ago. He has bolstered the group’s management ranks with senior executives recruited from the likes of Standard Chartered and Morgan Stanley. He is knitting the bank’s far-flung operations — more than 250 branches in 12 Asian markets — into a coherent whole by offering a common platform of global transaction services, trade finance and wealth management to small and medium-size enterprises and their owners across the region. And Gupta is rapidly expanding the bank’s modest branch network in China and India, seeing those two massive markets as the motor of Asian prosperity.

His aim is bold yet simple: Make DBS a powerful pan-Asian bank with the spread and sophistication to outcompete local lenders while avoiding direct competition with global giants such as Citi, HSBC Holdings and Standard Chartered.

“It’s quite clear there’s an opportunity to carve a playing field on which we can win as an Asian bank distinct from a domestic bank or a Western global bank with a strong Asian footprint,” Gupta tells Institutional Investor in an interview on the 46th floor of DBS’s headquarters overlooking Singapore’s bustling port. “Asia in the next ten or 20 years is going to be a lot different than the Asia of the last 20. We are moving to a consuming Asia from a producing Asia.” That means greater connectivity among the region’s different manufacturing and consumer markets, with Asian companies creating more of their goods and services for local buyers rather than Western countries.

Those efforts are starting to pay off. DBS recently reported its best-ever nine-month results, with net profits before goodwill charges rising 17 percent in the first three quarters of 2011, to S$2.3 billion, and revenue increasing 7 percent, to S$5.7 billion. The bank’s return on equity rose to 11.3 percent in the latest period from 10.2 percent a year earlier.

DBS’s CEO expects his bank to generate double-digit growth in both revenue and profits over the next three to five years.

“Gupta is doing a great job,” says Harsh Wardhan Modi, a banking analyst at JPMorgan Chase & Co. in Singapore. “The change he’s brought in is giving this organization a structure and clear direction of where they have to go.” Modi isn’t the only industry forecaster taking note of the bank’s improved outlook. Of 27 analysts covering the company, 19 hold a buy or outperform recommendation on DBS stock and only one has a sell recommendation, according to information compiled by Reuters. DBS is even winning back investors who abandoned the stock a decade ago, including Hugh Young, the Singapore-based head of Aberdeen Asset Management’s Asian business, which manages more than $90 billion in assets. “He seems to have his feet on the ground,” says Young. “He seems pragmatic.”

Gupta is underpinning his strategy by beefing up DBS’s corporate transaction, treasury and wealth management businesses. Such services used to be overshadowed by corporate lending, but they offer extra appeal today because they demand less capital, generate steady fee income and deepen the bank’s relationship with Asian companies and their prosperous owners.

The CEO recruited Tan Su Shan, Morgan Stanley’s former private banking chief for Southeast Asia, to oversee wealth management and Tom McCabe, who helped build Standard Chartered’s global transaction services business, to do the same at DBS. “Cross-sell” is their mantra. Small and midsize companies often require collaboration among assorted teams of product specialists. “Our marching orders are to make sure we don’t do just lending but extend our business to transaction banking, treasury and capital markets,” says Jeanette Wong, head of the institutional banking group. The efforts seem to be working. Net fee and commission income rose 15 percent in the first nine months of 2011, to S$1.2 billion.

In tandem with developing DBS’s product offerings, Gupta has ramped up the bank’s expansion across the region, especially in the vast Chinese and Indian markets. DBS said it would open nine new outlets in China in 2011, making it the sixth-largest foreign bank there behind HSBC, Standard Chartered, Citi, Bank of East Asia and Hang Seng Bank. In India the bank has grown its revenues at a compound annual rate of about 50 percent over the past five years.

DBS is far from alone in seeking to expand in Asia. Multinational banks, including Citi, Deutsche Bank, HSBC and JPMorgan Chase, are bolstering their Asian operations in search of growth. Local rivals have ambitions of their own. Malaysia’s CIMB Group Holdings is expanding in Indonesia and Thailand. DBS’s Singapore rivals, Oversea-Chinese Banking Corp. and United Overseas Bank, are seeking to expand in China; each bank grew its Greater China loan book by more than 65 percent in the first nine months of 2011. It all adds up to a daunting competitive landscape.

Gupta’s expansion bid doesn’t come cheaply, moreover. Expenses rose 13 percent in the first three quarters of 2011, to S$2.42 billion, and the bank’s cost-to-income ratio rose to 42 percent from 40 percent a year earlier.

The CEO’s growth strategy also entails greater risk. DBS is ramping up its exposure to key Asian markets at a time when some analysts see increased risks to growth stemming from the sluggishness of Western markets and Europe’s deepening debt crisis. In the 12 months ended in September, the bank increased its total lending by 25 percent, to S$188.5 billion, with credit to China, India and Southeast Asian markets climbing by 67 percent.

“This has been a great opportunity to push our strategic agenda faster than we would normally do,” Gupta told investors and the media in September. “European banks are pulling out, China has loan quotas in place, and people have uncertainty.”

So far, DBS has kept nonperforming loans in check. NPLs on the bank’s Chinese loan book stood at just 0.5 percent at the end of September; the bank’s overall NPL rate dropped to 1.3 percent from 1.5 percent in June. Gupta insists that DBS is going about its expansion prudently, but gathering clouds on the economic horizon argue for caution, some analysts say. “A macro slowdown certainly will test risk management at DBS,” says JPMorgan’s Modi. “They’ve been much more disciplined in this cycle, but you’ve got to go through a cycle to know what can go wrong.”

DBS remains very well capitalized by international standards, boasting a core tier-1 capital ratio of 10.7 percent. In April, Fitch Ratings reaffirmed DBS’s long-term rating of AA–, citing the bank’s strong balance sheet and capital base. DBS also has an Aa1 rating from Moody’s Investors Service and an AA– counterparty credit rating from Standard & Poor’s.

The bank’s strength has helped it attract more wealth management clients since the onset of the global financial crisis, executives say. “A lot of money came out of European and U.S. banks and walked into the door of DBS after Lehman collapsed,” says wealth management chief Tan. “The pull of a safe bank is strong.”

DBS has been synonymous with Singapore since it was established by the government in 1965 with the mission of financing the development of the city-state’s manufacturing economy. It did so with panache, helping to turn Singapore into a modern, export-oriented powerhouse in the space of a generation.

In the late 1990s then–prime minister Lee Kuan Yew tapped DBS to spearhead a new drive to make Singapore a global financial center by becoming a universal bank with regional ambitions. DBS made its first significant offshore foray when it bought 70 percent of Bangkok-based Thai Danu Bank in 1997. The experience was costly. Losses skyrocketed as fully 53 percent of the Thai bank’s loans became nonperforming, forcing DBS to double its loan-loss provisions, to S$996 million, in 1998 and sell its stakes in DBS Land and Singapore Petroleum Co. to raise capital.

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