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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.

Undeterred, the bank doubled down on its expansion effort. In 1998, DBS hired John Olds, a veteran of J.P. Morgan & Co. who headed that bank’s Asia-Pacific business in the 1980s, to become chief executive, making him the first foreigner to head one of the country’s banks. “Singapore banks needed an infusion of foreign talent and a different mindset,” Lee explained in his 2000 memoir, From Third World to First: The Singapore Story, 1965–2000. Olds helped recruit two dozen experienced foreign and local bankers to fill DBS’s senior ranks, including future chief executives Philippe Paillart and Jackson Tai. Olds also raised the standards of DBS’s operations and promoted investor relations, fostering the internationalization of the company’s shareholder base.

The new management team accelerated DBS’s regional growth drive, taking advantage of the hobbled condition of many banks in the region in the wake of the Asian financial crisis. Only months after Olds arrived, DBS completed the S$1.6 billion purchase of state-owned POSBank, Singapore’s former Post Office Savings Bank. At a stroke, the deal made DBS the largest retail bank in Singapore, with more than 3.3 million customers and an extensive mortgage business and ATM network.

Also in 1998, the bank purchased a majority stake in the Philippines’ Bank of Southeast Asia, which was later folded into Bank of the Philippine Islands. In July 1999, DBS acquired a controlling stake in Hong Kong’s Kwong On Bank, its first acquisition in the Greater China market. It would later buy out minority shareholders, raising its total purchase price to S$879 million.

The acquisition spree culminated in 2001 when DBS paid $5.4 billion to buy Dao Heng Bank Group, Hong Kong’s fourth-biggest lender. The deal gave DBS the infrastructure and personnel to participate in China’s lucrative trade finance business, but it came at a controversial price. DBS forked out 3.3 times book value for Dao Heng, more than double the price of other Hong Kong bank acquisitions at the time. Many shareholders criticized the deal because it forced the bank to sell S$2.2 billion in shares to replenish capital; it would eventually take S$2.25 billion in goodwill write-downs on the deal.

Shareholders were left exhausted by an unfocused acquisition strategy. “We didn’t know where true north was,” says Gupta. “If somebody came along with what seemed like a good idea and said, ‘Let’s do that,’ we would do that.” Although DBS doubled total income and net profits in the eight years following the Dao Heng buyout, the lender failed to integrate its operations and deliver promised synergies. Return on equity hovered in the single digits for all but three years over the past decade, while the bank’s cost-to-income ratios remained high and fee income as a percentage of revenue stayed flat. “The bank basically created an expectation in its acquisition of Dao Heng that it then was unable to deliver and spent many years justifying,” says institutional banking head Wong, who served as chief financial officer between 2003 and 2008.

DBS’s troubles peaked in 2008, when the bank responded to the global financial crisis by cutting 900 employees, or 6 percent of its workforce, its biggest retrenchment ever. Although DBS remained profitable throughout the crisis, it conducted a S$4 billion rights issue priced at a steep 45 percent discount, exacerbating a collapse of the stock’s trading price between September 2008 and March 2009. The nearly two-thirds decline in DBS’s share price exceeded those of the bank’s Singapore competitors OCBC (51 percent) and UOB (56 percent) over the same period.

The reputation of DBS became mired in the financial crisis’s worst excesses when $360 million worth of structured notes created by Lehman Brothers Holdings, which DBS had sold mostly to private investors in Hong Kong and Singapore, became worthless when the U.S. brokerage went bust. In July 2009, Singapore’s monetary authority temporarily banned DBS, along with nine other local financial institutions, from selling structured notes altogether. In Hong Kong, DBS agreed to pay HK$651 million ($83.6 million) to 2,160 local customers who lost money on the notes. For 2009, DBS raised its loan-loss allowances by 95 percent, to S$1.53 billion, as nonperforming loans doubled from a year earlier, to 2.9 percent of all loans. Exacerbating the bank’s woes, CEO Richard Stanley, another former Citibanker, died from leukemia in April 2009, less than a year after taking the top job.

The eldest of three children, Piyush Gupta was born in the sugarcane-growing town of Mawana, India, about 70 miles northeast of New Delhi. His father was a senior officer in the Indian Audit and Accounts Service, the government’s independent auditing agency. Gupta studied economics at St. Stephen’s College, part of the University of Delhi, before earning an MBA from the country’s premier business school, the Indian Institute of Management, Ahmedabad.

Upon graduating in 1982, Gupta joined Citigroup in India. He moved quickly through the ranks of the New York–based lender, holding various senior management jobs in the bank’s corporate, markets and consumer businesses in India, Singapore and Indonesia. He also gained deep planning and product experience working as chief of staff for Citi’s Asia-Pacific corporate bank, head of strategic planning for emerging markets and Asia-Pacific regional director for global transaction services.

In 2000, following a stint as regional head of acquisitions and Internet businesses for Citi’s corporate banking group, Gupta left the bank to head, an Indian news and investment advisory portal, which was bankrolled by Chase Capital Partners and the Hindustan Times. He rejoined Citigroup in late 2000 and advanced quickly to running the bank’s Malaysia business, ultimately rising to serve as chief executive for Southeast Asia-Pacific, with responsibility for the Association of Southeast Asian Nations countries of Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, as well as Australia, New Zealand and Guam.

Meanwhile, by 2009, DBS was looking for a banker just like Gupta. “DBS is a commercial bank with Asian ambitions, so we knew very clearly that we wanted a CEO who cut his teeth as a commercial banker and knows the ins and outs of doing business in Asia,” says DBS chairman Peter Seah in an e-mail response to questions. “Piyush was a perfect fit.”

Gupta almost didn’t take the job. Citi’s chief executive, Vikram Pandit, was pressing him to remain at the bank, offering him various executive positions in New York and a global job based in Singapore. Gupta also wondered about the Singapore Inc. question: DBS is controlled by Temasek Holdings, the Singaporean sovereign wealth fund that holds a 28 percent stake, and Gupta was concerned about possible political interference. But discussions with Seah and other board members — particularly Kwa Chong Seng, deputy chairman of Temasek — convinced Gupta that the group operated on strictly commercial grounds and that he would be given a free hand to run the bank. The “professional promise” of building a franchise in Asia sealed the deal, says Gupta. Besides Seah, who is a former chief executive of Overseas Union Bank, now part of Singapore’s UOB, the DBS board includes Bart Broadman, a former JPMorgan banker and co-founder of hedge fund Alphadyne Asset Management, and Danny Teoh, former managing partner of KPMG in Singapore.

Within weeks of taking the helm at DBS in November 2009, Gupta started drawing up a plan to identify and tackle the most fundamental problems facing the bank. “The biggest issue was lack of strategic clarity for what we wanted to be,” he recalls. “Businesses weren’t strategically driven.” In January 2010 he assembled his management team on Singapore’s resort island of Sentosa for three days to discuss the bank’s outlook. A meeting in Shanghai followed, along with a presentation to the DBS board of directors in New Delhi later in the year. Along the way, the bank held more than 20 workshops in each business and market to incorporate bottom-up views.

The process produced a nine-point strategic blueprint aimed at broadening DBS’s revenue by geography and business line. The plan hopes to generate 30 percent of group revenues in Greater China (including Hong Kong and Taiwan) within five years, another 30 percent in South and Southeast Asia, and the remaining 40 percent in Singapore. Those targets, if achieved, will represent a substantial diversification for DBS. In 2010, Singapore accounted for 63 percent of the bank’s revenue and 64 percent of profits, while Hong Kong provided 21 and 22 percent, respectively. “DBS’s basic weakness is that it’s still dependent on two markets,” says Anand Swaminathan, Singapore-based banking analyst at Credit Suisse.

The planning process did more than come up with a strategy, says Gupta; it unified management around a common goal. “We got strategic alignment,” he says. “When we go around the company today, people talk the same language.”

Singapore remains the core of DBS’s business. DBS is the largest bank in the city-state, with S$338.6 billion in assets, more than one third of the country’s banking assets. It boasts Singapore’s largest branch and ATM network, and is a leading player in mortgages, auto loans and debit and credit cards. The bank holds the largest trading book for the Singapore dollar globally and controls about half of all Singapore-dollar currency trading in the domestic market. The bank’s leading position in foreign exchange is matched by its local investment banking franchise. DBS remains the leading book runner for syndicated loans and bonds denominated in the Singapore dollar, according to data provider Dealogic. In September the bank was joint book runner, along with JPMorgan, on a S$500 million bond for Cheung Kong (Holdings), the flagship company of Hong Kong billionaire Li Ka-shing, and in May it was one of four book runners on a $3.54 billion syndicated loan for commodities trading giant Glencore International.

Given DBS’s dominance at home and the relatively small size of the Lion City, growth by definition means international expansion. “It’s quite clear to us that when you think about the future of the world, the biggest opportunities and growth prospects are right in our backyard,” says Gupta. “It is the China story, the India story, the Southeast Asia story.”

The CEO’s expectations are underpinned by continued expansion in the region’s wider economy, even with the global slowdown led by Europe and the U.S. Asia’s economies are expected to increase 6.3 percent in 2011, led by 9.5 percent growth in China and a 7.9 percent rise in India, according to October estimates by the International Monetary Fund. In Singapore the government expects gross domestic product to increase between 5 and 6 percent in 2011, down from a record 14.5 percent in 2010.

China and India hold the key to Gupta’s growth strategy. The bank expanded its revenues from those markets by 47 percent and 34 percent, respectively, in the first nine months of 2011.

In India, DBS opened its 12th branch in February and applied to the central bank to expand its license with four additional offices. Over the past five years, the bank has expanded its Indian payroll to 700 employees from 55 and increased its mostly corporate clientele to about 12,000 customers from fewer than 100. South and Southeast Asia, which includes Indonesia and Malaysia as well as India, had net profits of S$225 million, or roughly 10 percent of group earnings, in the first nine months of 2011.

In China, where strict regulations and capital requirements constrain the ability of foreign banks to grow, DBS employs more than 1,500 staff and operates nine branches and 14 subbranches. In 2011 the bank opened seven new outlets in Beijing, Guangzhou, Hangzhou, Shanghai and Shenzhen, and it planned to open a new branch in Chongqing and another outlet in Guangzhou by the end of the year. The bank aims to have a total of 50 branches and subbranches by 2013.

Roughly half of the bank’s S$16.8 billion loan book in China is tied to trade. DBS has strengthened its ability to help Chinese transnational companies conduct cross-border trade and to provide them with treasury products by launching Singapore and Taiwan desks at its Shanghai headquarters, which was opened in 2010. Corporate customers include Li Ning Co., the country’s biggest sportswear maker, and Want Want China Holdings, which was expected to sell more than $2.5 billion worth of rice cakes, flavored milk and candy in 2011. DBS is also getting an influx of business thanks to an agreement announced in December 2010 to take over the mainland China business of Royal Bank of Scotland Group, which is retrenching after getting a multibillion-­pound bailout from the U.K. government. The deal, which cost DBS nothing, allows more than 25,000 RBS customers in Beijing, Shanghai and Shenzhen to switch their accounts to DBS; more than 6,000 have already done so. Net profits for DBS’s China operations jumped 160 percent in the first six months of 2011, to 300 million yuan ($47 million). Gupta expects China to generate as much as 15 percent of the bank’s profits within a decade.

DBS is building its China business off the strong base it enjoys in Hong Kong, where it was one of the first banks to offer renminbi-denominated offshore deposits. The bank had some 50 billion yuan in deposits at the end of September. Although that represents only a fraction of the Chinese currency deposits at Standard Chartered and HSBC, the funds have allowed DBS to expand its China trade finance and local currency lending. DBS added 1,500 corporate customers at its Hong Kong arm in the first six months of 2011, including many Chinese companies. The bank also controls an estimated 15 to 20 percent of interbank foreign exchange trading in renminbi in Hong Kong.

Gupta is counting on the bank’s global transaction services and wealth management arms to tie the budding Chinese and Indian franchises to the rest of DBS’s pan-Asian business and generate the synergies that the bank failed to deliver in the past.

McCabe, an ebullient commercial banker who helped build global transaction services into a key moneymaker at Standard Chartered, is looking to pull off an encore at DBS. His unit offers services ranging from traditional cash management to trade finance, commodity finance and fund servicing. He sees DBS’s sweet spot as providing top-notch products and services to often-neglected small and medium-size businesses. “There’s a gap in the banking industry right now for addressing the pan-Asian needs of fast-growing SME customers,” he says. “DBS is filling that need.”

The market for global transaction services in Asia generated some $91 billion in revenue in 2009, according to consulting firm Oliver Wyman, and that market is expected to grow at an average annual rate of 7 percent thanks to rising regional trade flows. “Talk about an underappreciated business,” says McCabe. “It was very much a utility business that was being responsive to customers.”

McCabe’s global transaction services unit generated S$315 million in revenue in the quarter ended September 30, up 76 percent from the start of 2010. The business has been adding customers at a rate of 800 to 900 a month, mostly companies with annual sales of less than S$150 million. At the same time, McCabe isn’t ignoring the bank’s 2,400 larger corporate customers, most of which borrow from DBS but haven’t traditionally used it for services such as cash management or foreign exchange.

Global banks like HSBC and Citi have also been emphasizing their transaction services, but McCabe doesn’t worry about the competition. “The big boys are fighting over the top 3,000 or 4,000 names in the world, but the next level of clients is growing the fastest,” he says. “They need the advice because they are grossly underserved.”

Wealth management is another key growth driver. In 2010, Gupta appointed Tan, a former Morgan Stanley banker, to build out DBS’s modest wealth operations. A tireless manager, Tan is famously remembered for continuing to monitor the forex market even as she went into labor at a Singapore hospital to deliver her first child a dozen years ago. “What was I going to do?” she recalls. “The dollar-yen exchange rate was fluctuating widely, and there was nobody else to look after my clients.”

Tan has brought in a number of top professionals, hiring former Citigroup banker Olivier Crespin as chief operating officer and luring Lim Say Boon, a former chief strategist for private banking and wealth management at Standard Chartered, to serve as chief investment officer. In recent months DBS has been ramping up offerings to high-net-worth individuals — private clients with S$5 million or more in assets. The bank has also launched a new unit, DBS Treasures Private Client, to cater to mass-affluent customers with S$1.5 million or more in assets. The division offers offshore RMB products and Asia-centric investment funds to clients. The effort aims to grow the wealth unit’s assets under management from S$35 billion currently to more than S$50 billion within three years.

“It was very clear from the absolute top people, from the CEO to the chairman, that they want to build a good Asian private bank that would build a name in the marketplace,” Tan explains. “They want to build a good Asian wealth management proposition that would give DBS’s already deep distribution to clients a good, sticky product — a product that will make them money.”

The potential for growth is substantial. The wealth management market in Asia-Pacific ex-Japan increased at a 17.1 percent clip in 2010, making it the fastest-growing region in the world, according to a May 2011 study by Boston Consulting Group. China is likely to join the ten wealthiest economies by 2015, and the country’s millionaire households are expected to expand their combined assets to $8.24 trillion in 2020 from an estimated $1.67 trillion in 2011, according to a report by the Deloitte Center for Financial Services. India’s affluent will increase their wealth to $2.95 trillion from $580 billion over the same period, the report says.

DBS’s Asian expertise gives it a competitive advantage against big Western banks such as Citi, Credit Suisse and UBS, Tan contends. “Our model portfolio positions are made for Asians,” she says. “You get Hutchison Whampoa or the Cheung Kong group or HSBC.” Among the funds DBS is exclusively promoting is the DBS Asia Asset Allocator Fund, a multi-asset-class fund. “I won’t kid myself and say that we’re experts in the U.S. or Europe, but we’re definitely experts in Asia,” Tan says. 

Wealth management fee income rose 58 percent in the first nine months of 2011, to S$145 million. Tan’s business received a boost in September when the bank announced it would invest S$250 million in its private banking division over the next five years to increase its head count in China and set up desks covering the Middle East and other emerging markets.

Can DBS keep on a growth track at a time of increasing challenges, or does Gupta risk repeating the bank’s past missteps?

The CEO acknowledges the gathering economic headwinds but vows to pursue growth in a disciplined way. “If any of the European banks, as a consequence of the crisis, winds up shedding interesting Asian assets, that is something that we might look at,” he said at the bank’s third-quarter results press conference. But don’t expect DBS to pull out a big checkbook. “We’re trying to drive a large chunk of this organically, because that’s the school I come from,” he tells II.

The threat of a regional slowdown may demand even more prudence in the near term. Gupta signaled as much in September when he completed an agreement to sell DBS Asset Management, which has S$7.9 billion in assets, to Nikko Asset Management Co. for S$137 million, which DBS converted into a 7.25 percent stake in the Japanese company. He also promises to sharpen the bank’s efforts to contain costs as DBS completes its heavy investment in technology and staff. “Over the next couple of years, my problem is to improve the return I give my shareholders,” he says.

That message is a welcome one for the Singapore government and private investors. Delivery will be sweeter still.    

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