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Thai fusion

To rescue and then revamp Kasikorn, his family bank, Banthoon Lamsam introduced Western financial practices to a traditional Thai institution.

Kasikornbank, Thailand's third-largest commercial bank, was on the brink of ruin. Asia's 1997­'98 financial crisis had devastated the institution's balance sheet by pushing its nonperforming loans to an overwhelming 30 percent of assets. Its CEO, Banthoon Lamsam, a member of the family that had owned the bank for generations, concluded that Kasikorn -- and the rest of Thailand's family-dominated banking industry -- was in for wrenching and irreversible change. In full crisis mode, Banthoon slapped a moratorium on lending and in April 1998 jetted abroad, hat in hand, to raise fresh capital to salvage the then-53-year-old enterprise.

He succeeded against all odds. That same month, in Asia's first big private equity issue since the onset of the crisis in July 1997, Kasikorn collected $857 million from international investors. The capital infusion gave the bank new life -- at great cost. It diluted the Lamsam family's holding from more than 30 percent to less than 5 percent.

Just four months later, however, Kasikorn's shares collapsed from 88 baht ($2.12) to 15 baht. Investors had become alarmed that the worsening local crisis triggered by Indonesia's August 1997 devaluation of the rupiah would spread financial contagion throughout the region.

"Investors were mad, but as a group they misread Asia," says Banthoon. "They thought it would be a V-shaped recovery. It was not. It has been a long U."

Most of Thailand's other family-held banks haven't been as fortunate as Kasikorn, whose shares had substantially recovered to nearly 54 baht as of mid-July. When depositors began a run on Thai finance companies and banks soon after the baht crisis erupted in the summer of '97, Sino-Thai banking families looked on helplessly as the government nationalized their suddenly insolvent banks and put them into state-run rescue facilities.

"In hindsight, we got away with a very small window," recalls Banthoon in a recent interview with Institutional Investor. "If we hadn't recapitalized precisely when we did, we wouldn't have survived. We were lucky."

Kasikorn, once known overseas as Thai Farmer's Bank, depends these days more on calculation than on luck. Unlike most Thai commercial banks, Kasikorn had the foresight to outsource the recovery of bad loans to external experts like Goldman, Sachs & Co. and General Electric Capital Corp. That freed up its managers to focus on restructuring the bank rather than chasing down bad debts.

Bangkok-based analysts generally give Banthoon high marks for revamping Kasikorn. Every facet of the bank's operations, from risk management to information technology to human resources, has been thoroughly modernized.

"Kasikorn's cost efficiency and asset quality are now considered the best in the sector," says Vincent Milton, managing director at Fitch Ratings (Thailand). Fitch has upgraded Kasikorn twice this year, bumping up its long-term foreign currency debt rating from BBB- to BBB+. "These steps are yielding results and helping the bank return to profitability," says Milton.

The rosier outlook reflects not only Kasikorn's recovery but also the much improved performance of the Thai economy. Gross domestic product grew a robust 6.1 percent in 2004, cooling only slightly from 2003's 6.9 percent clip. But higher oil prices are likely to dampen growth across Asia this year, and Thailand, one of the region's biggest net importers, is feeling squeezed. GDP growth fell from 5.1 percent in last year's fourth quarter to 3.3 percent in 2005's first quarter, reflecting a slowdown in both manufacturing and consumption.

The government is hoping to fill the growth gap by ramping up 1.7 trillion baht of infrastructure spending, which should get under way in earnest in early 2006. Yet some economists caution that the more import-intensive projects' commercial viability is questionable as long as oil prices hover at $60 a barrel.

Kasikorn, with its 13 percent share of Thailand's deposits and loans, has profited nicely from the economic upturn to date. Strong loan growth coupled with a falling cost of funds helped net a 15.3 billion baht (or $368 million) profit in 2004, up 12 percent year-over-year. Kasikorn issued dividends this year for the first time since 1996. According to Fitch, the bank's net interest margins are the highest of all Thai banks: 3.45 percent.

The performance is all the more impressive considering the wide range of financial services that the bank promotes through its 496 branches. Kasikorn does everything from retail banking to investment banking to trade financing. It also runs Thailand's biggest private investment fund: Kasikorn Asset Management Co., which oversees more than $4 billion.

Meanwhile, the bank is slowly extending its global reach with branches in Hong Kong, Shenzhen, Los Angeles and the Cayman Islands, as well as representative offices in London and three locations in China: Beijing, Shanghai and Kunming. To reflect the bank's expanded mandate at home and abroad, Banthoon in April 2003 dropped its old foreign name, "Thai Farmer's Bank," which is a crude translation of Kasikorn. "I was tired of explaining why this was not a farmers' bank," he says.

The average Thai bank could do with more than a name change. The banks' bad loans -- 10.7 percent of their assets, on average -- remain a concern among foreign investors, particularly those who got burned because of Thailand's 1997 implosion. For big U.S. and European banks, nonperforming loans of 1 to 2 percent are the norm. Although Kasikorn's NPLs represented 11.6 percent of its assets at the end of the first quarter of this year -- slightly worse than the industry average -- the figure represents a notable improvement over the 15.6 percent of first-quarter 2004.

One investor who takes a dim view of Thai banks in general is Lance Depew, portfolio manager of Quest Capital Co., a Thailand-focused hedge fund. "There are still plenty of skeletons in the banking sector's closet," he contends. "There is a perception among many investors that regulators have allowed Thai banks to gloss over some of their biggest problems." He asserts that many of the loan restructurings brokered between indebted companies and banks in an environment of record-low interest rates are now at risk of reverting to nonperforming status as global and Thai interest rates trend upward. Depew, who manages $250 million, is in fact shorting Thai bank shares.

Still, he believes that Kasikorn has distinguished itself among its peers by its restructuring efforts. In particular, he lauds the bank's introduction of information technology for improving efficiency and profitability.

Other analysts are quite optimistic about Thai banks. Andrew Stotz, head of research at Macquarie Securities in Bangkok, projects that a surge in public and private investments will drive the banks' loan growth to 8 percent this year and to more than 11 percent in 2006. He predicts that the spread between what the banks pay on deposits and what they earn on assets will climb to 2.9 percent this year from 2.6 percent in 2004 and will hit their precrisis peak of 3.4 percent by 2007.

"We see a firm recovery on the horizon for Thai banks," says Stotz. "We expect to see good core performance for the foreseeable future -- for at least the next two to three years." He singles out Kasikorn for separating the marketing and the risk management sides of its business. "It might mean slower loan growth than in the past," he says, "but moving to a more risk-adjusted return on capital is a big deal in this market."

ESTABLISHED IN 1945 WITH REGISTERED CAPITAL of 5 million baht ($250,000 at the time), Kasikornbank was one of Thailand's first Thai-owned commercial banks. Banthoon's thrifty grandfather, Chote Lamsam, parlayed the profits from his modest rice-milling, logging and variety store businesses into a founding stake in the bank, whose focus was trade finance and working capital facilities. In the early 1960s the Lamsams bought out the other shareholders and assumed majority control. The family listed the bank on the Thai stock exchange in 1976.

Kasikorn profited hugely from the country's industrialization in the 1980s, and its closely held client book remains a who's who of Thailand's most accomplished industrial and service sector entrepreneurs. Charoen Pokphand Foods, Thailand's largest agribusiness; Thai Airways, the national carrier; and Siam Cement, the country's biggest construction materials producer, are all among Kasikorn's preferred clients.

The debonair Banthoon was groomed from an early age to take over the bank. He received his undergraduate degree in chemical engineering from Princeton University in 1975 and his MBA from Harvard Business School in 1977. After a two-year stint with the Thai Defense Ministry's directorate of joint intelligence, Banthoon began a 13-year climb up the company ladder.

He acquired seasoning as a banker mostly in Kasikorn's domestic department, which focused predominantly on corporate lending. The personal relationships he cultivated in those early years contributed to the bank's crucial decision to outsource its debt collecting after the crisis hit, Banthoon says.

In 1992 he succeeded his father as Kasikorn's president and CEO and quickly earned a reputation as an aggressive boss. Banthoon's take-no-prisoners style is legendary. One famous episode: As head of the secular oversight committee of the Maha Makutrajavithayalai Foundation, a charity run by Buddhist monks to educate and help the poor, Banthoon, himself a devout Buddhist, came into conflict with the most-senior monks over his efforts to introduce greater transparency into the foundation's asset management. The row was resolved only after the highly revered Thai royal household intervened in Banthoon's favor.

The Asian financial crisis changed Kasikorn and, to some extent, changed Banthoon as a manager as well. The bank has become more institutionalized in its structure: State Street Bank and Trust Co. and HSBC (Singapore) Nominees PTE are among Kasikorn's top ten shareholders, and Western executives now sit on its board of directors.

The shift from a family-dominated to an institutionalized shareholder structure has fundamentally changed the way Kasikorn is managed -- and for the better, according to Banthoon. "When I took over the job 13 years ago, board discussions were never very intense because everything was going well," he says, laughing. "We reached all the targets; loan growth was high. There was never any discussion of issues like risk management or governance. They were totally foreign concepts. Now the board is more hands-on. They scrutinize what's going on at the bank, and we have to respond."

Banthoon half jests that the only reminder of the Lamsam family's six decades of stewardship of Kasikorn is his presence and the family portraits that hang outside his office, which is on the top floor of the bank's gleaming, diamond-shaped headquarters in Bangkok's gritty Raburana suburb, across the Chao Phraya River from the central business district. (In fact, Banthoon's uncle Banyong Lamsam is chairman of Kasikorn's board.)

Postcrisis, Banthoon remained Kasikorn's CEO. His experience and reputation for integrity, not his family ties, were what won him the board's nod. The decision proved to be a good one. In 1999, Banthoon and his managers devised an eight-pronged strategy to overhaul the bank and enhance its functions. Fundamental to this effort were improved risk management systems, including institutional checks on related-party lending -- a practice that had left gaping holes in Kasikorn's balance sheet during the crisis.

The bank's loan officers had once acted as one-stop money lenders, asserting influence over every aspect of the lending process, from origination to underwriting. Too-cozy relations with clients often clouded bank managers' credit decisions, postcrisis investigations showed. But according to Banthoon, that old regime has been utterly overthrown.

Recently, Kasikorn abandoned its "no land, no loan" policy for extending new loans. That formula had been based almost solely on a borrower's having property to put up as collateral. In its place are mathematically applied credit scoring and risk-adjusted pricing models similar to those used by big international banks. Kasikorn has transformed its loan procedures as well: Loans are no longer underwritten where they originate but rather at a central back office.

Banthoon says the new order has made for a "constructive tension" between the bank's business development and internal control divisions. "Basically, the system is set up so that the loan people will complain that the rules are too strict to do business," he explains. "Then we find ways to achieve common ground. That's a healthier way."

Next on the reform agenda was a sweeping, albeit gradual, downsizing. Kasikorn has nudged more than 5,000 employees into early retirement, reducing the bank's payroll from a precrisis peak of more than 15,000 to fewer than 10,000.

This has cleared the way for promoting a new generation of predominantly Western-educated middle managers. Kasikorn now has the lowest average-age profile among all Thai banks. The typical manager is in his or her late 30s or early 40s.

"They've shown a willingness to promote young blood that you haven't seen at most other Thai banks," says Therapong Vachirapong, a strategist at Phatra Securities in Bangkok. "Where they haven't been able to recruit outside talent, they've worked hard to develop it internally. It's a commitment to human resource development you just didn't see in the past." A pay-for-performance scheme that links compensation to revenue generation and cost savings replaces the old fixed-bonus system.

Kasikorn has poached top talent from both the public and private sectors. Last year Banthoon recruited Prasarn Trairatvorakul, Thailand's former Securities and Exchange Commission chief, to serve as the bank's president, relinquishing that title himself. Prasarn, who is in his early 50s, oversees day-to-day operations, freeing Banthoon to focus on more-strategic matters, such as partnerships and acquisitions. Prasarn's calm counterbalances Banthoon's self-confessed fieriness.

Their yin and yang provide equilibrium for the bank, in a manner akin to the Western "good cop, bad cop routine," but with an Asian twist. In Buddhist Thailand conflict-avoidance is the golden rule. That has made it hard to initiate corporate reform at many Thai businesses and banks. Breaking with that social convention, Banthoon is quite outspoken in identifying problems and, as he candidly puts it, "deadwood" employees. Prasarn helps to allay employee resistance to Banthoon's sometimes tough reforms.

Banthoon courted well-respected technocrat Piyasvasti Amranand, former head of the government's National Energy Policy Office, to serve as chairman of Kasikorn's asset management operation. Piyasvasti's no-holds-barred plan for privatizing Thailand's electricity monopoly, the Electricity Generating Authority of Thailand, had brought him into conflict with Prime Minister Thaksin Shinawatra, who favors a more gradual method. (EGAT remains wholly state-owned.) Banthoon wants Piyasvasti to integrate Kasikorn's historically aloof asset arm into the bank's mainstream retail operations. This is in line with the Bank of Thailand's "one footprint" directive, which calls for banks to consolidate their subsidiaries under one roof. Piyasvasti sees a huge opportunity to lure Kasikorn's customers out of low-yielding deposits and into higher-yielding financial products, such as mutual funds.

"The total amount of assets under management by the fund industry at the moment is only about 1 trillion baht, whereas the amount of bank deposits is 5.5 trillion baht, including more than 15,000 accounts with at least 10 million baht deposited," says Piyasvasti. "That shows that people are still accumulating a lot of wealth in bank deposits earning a very small amount of interest. And it also shows the extraordinary potential for growth in the mutual fund industry."

Another recruiting catch for Banthoon was seasoned banker David Hendrix, who spent 20-plus years in Asia with Citibank. Hendrix, who heads Kasikorn's crucial retail business group, introduced a credit scoring system for business loans of less than 10 million baht -- an underbanked, high-yielding segment of the market.

The bank's assessment of the creditworthiness of a small or medium-size enterprise, or SME, is decided on the basis of 23 criteria, ranging from sales growth to debt levels to industry trends. "We're simply making better-calculated credit decisions than we used to," says Hendrix.

Credit scoring has cut Kasikorn's cost for serving SME customers from $900 per loan to less than $600. Hendrix predicts that once the bank's credit analysts become more comfortable with the advanced algorithms that drive the scoring, the bank's processing costs will fall below $450.

Kasikorn has nearly 50 percent of Thailand's SME loan market, more than twice the 23 percent share of its chief competitor, Bangkok Bank. Big international players, such as GE Capital and Standard Chartered Bank, are scrambling to get a piece of the action, using their own credit-scoring schemes.

Ironically, being more prudent about risk management has not always endeared the bank to Prime Minister Thaksin's government. In 2002 the premier's economic advisers lambasted the country's top three private banks -- Bangkok Bank, Kasikorn and Siam Commercial Bank -- for allegedly holding back the recovery by hoarding capital rather than lending it. Private banks fired back that they were required by law to set aside capital as bad-loan provisions.

Thaksin ordered state-owned banks to fill the gap by lending more. Such government-directed lending accounted for nearly 70 percent of all new loans in the financial system in 2002 and 2003. Analysts questioned the quality of the state banks' loans and raised concerns about whether the banks were undermining the sounder credit culture that sophisticated private banks like Kasikorn had been striving to achieve.

Then in August 2004 the Bank of Thailand announced that the state-run Krung Thai Bank had racked up $1.1 billion in new nonperforming loans. Anxious foreign investors dumped Thai bank shares.

Until the bad-debt revelations, Krung Thai's lending spree had put pressure on Kasikorn to boost its own lending. "It's always tricky," says Banthoon. "Regardless of all the talk about risk management, if your loan growth lags behind that of your competitors, nobody understands -- particularly in an up-up-uptrend market. If you underperform too much, your stock price doesn't go up."

Nevertheless, Kasikorn avoided getting caught up in the lending frenzy. After years of nursing NPLs, the bank only recently resumed lending, recording 9 percent year-on-year loan growth in 2004.

"Yes, [Krung Thai] grew their loan books, but some of their clients were the higher-risk segment," says Banthoon "That's not our target. We're disciplined about the conditions of our lending. There is only so far you can follow them in terms of pricing, in relaxation of lending conditions." Several senior Krung Thai managers now face criminal charges for their role in extending the allegedly fraudulent loans.

What worries Banthoon more than lending competition from state banks, which has abated since the Krung Thai fiasco, is the prospect of greater foreign competition in the domestic market. Bangkok is negotiating a free-trade agreement with the U.S. that would likely eliminate protectionist barriers that have kept foreign banks from establishing Thai branch networks.

"The financial crisis was one kind of problem," says Banthoon. "Competition in the new financial world is even more frightening." He explains: "The crisis was one-dimensional: We were just too greedy. International competition is a more complex, multidimensional issue." Analysts note that Thai banks are vulnerable in part because they have badly lagged their Western counterparts in developing such complex financial products as derivatives.

Foreign banks are circling. As early as 1999, in the immediate wake of the financial crisis, Citigroup expressed interest in acquiring the distressed assets and branch network of the nationalized Bangkok Metropolitan Bank, but ultimately decided against it.

Recent market chatter suggests that Kasikorn would be the most likely target if Citi were to seek to enter Thailand's banking market in a major way following a free-trade deal. What would happen if Citi bid for Kasikorn?

"No deal," says Banthoon defiantly. "Thailand should have Thai banks."

In any event, foreign banks have found the Thai bank market tough to crack. Banthoon notes that ABN Amro's strategic tie-up with Bangkok's debt-ridden Bank of Asia ended with the Dutch bank's withdrawal from Thailand's commercial banking market in 2004. Singaporean-led joint ventures, including Thai linkups with the Development Bank of Singapore and United Overseas Bank, have failed to seize market share from Thai institutions, including Kasikorn, nearly five years after buying into the market.

Kasikorn's CEO contends that the best way to ward off external threats is through internal strength. He spends a large chunk of his time working to improve the bank's "corporate texture," as he puts it. Says Banthoon: "It's always a challenge to keep a talented team together, motivated and democratic. There is always competition out there to take away good people. My challenge is to make our staff believe that they're working not for the family or even shareholders but for something higher: their own job satisfaction." Clearly, that is the case for Banthoon Lamsam.