Singapore Finance Inc.

That obsessive fellow picking up litter in the local branch could be DBS’s CEO: Philippe Paillart. Is this any way to become Asia’s best retail bank? Maybe.

That obsessive fellow picking up litter in the local branch could be DBS’s CEO: Philippe Paillart. Is this any way to become Asia’s best retail bank? Maybe.

By Kevin Hamlin
February 2002
Institutional Investor Magazine

Visit one of DBS Group Holdings, 301 bank branches across Asia and you just might run into the CEO, Philippe Paillart. He,ll be the fidgety Frenchman standing in the teller line, stopwatch in hand to time how long the wait is. Or maybe he,ll be scooping up scraps of paper in the lobby. Or chatting away to customers and staffers. “I talk to people. I go to branches. The most dangerous thing for somebody in my position is to live through the filters of the organization and be fed every day with good news,” says Paillart.

Perhaps the DBS CEO shouldn,t worry so much about being overstuffed with good news. He has had to absorb his share of the opposite kind lately from analysts, journalists and shareholders. DBS, basically a financial division of Singapore Inc., the country that thinks it’s a company (and vice versa), has been lambasted for overpaying for Hong Kong’s Dao Heng Bank Group, botching the takeover of Singapore’s Overseas Union Bank and letting the bank’s profit margins shrink while its expenses swell. Indeed, Paillart’s job may be in jeopardy. Since he took over in January 2001, DBS,s stock price has slid some 35 percent.

“Three strikes and you are out,” says a Hong Kong-based portfolio manager with a major European firm. “What appeared to be such a good story has been so disappointing. It’s going to take many years for DBS to rebuild their credibility. Investors won,t believe them until they see hard facts.”

But as in the parables of Confucius, the real story may lie behind the apparent one. Paillart insists that DBS has gone from being “a little Singaporean bank” to the “beginnings of an Asian one.” In fact, its 154 billion Singapore dollars ($84.6 billion) in assets make it the biggest bank not only in Singapore but also in Southeast Asia. DBS had the third-highest pretax profits of any regional bank in Asia in 2000: $890 million. (HSBC Holdings dwarfed all the region’s banks, with $4.96 billion in earnings; Citigroup came second, with a bit more than $1 billion; and Standard Chartered Bank fourth, with $844 million.)

“If you look at the bank one year ago and what it is today, it is a totally different bank. Suddenly, things are starting to come together,” contends Paillart, who boasts that DBS is on track to become Asia’s top financial institution in terms of customer service as well as shareholder return in three to five years.

The statement is as audacious as the title of DBS,s bright blue 2001 annual report: “Building the Best Bank in Asia.” But there may be something to it, and not just because the CEO occasionally scours DBS branches for litter. Amid all the bad reviews, the bank received a telling and timely vote of confidence this November when Brandes Investment Partners in San Diego and Capital Group International in Los Angeles together bought S$1.15 billion of newly issued DBS stock to help finance the Dao Heng takeover; each now holds more than 5 percent of the bank. Neither firm will comment on the purchase, but Merrill Lynch & Co.'s head of research in Singapore, Tan Sin Mui, notes that “to have two quality shareholders anchoring this transaction gives a lot of confidence to the market.”

In both its practicality and its presumption, DBS,s current strategy attests to the bank’s Singapore provenance. Set up by the government in 1968 as the Development Bank of Singapore, the bank expanded its brief as Singapore prospered and its call for development money waned. Having launched consumer banking operations as early as 1969, DBS went on to spearhead creation of the Asia dollar bond market, floating the first such issue in 1971. It soon moved into bond and equity underwriting and by 1976 had set up its first overseas office, in Tokyo. In 1983 DBS began running ads to reposition itself as a retail rather than a development bank. In this new guise, DBS flourished in its protected home market.

The government was eager to give DBS a rock-solid domestic foundation for venturing overseas. So in 1998 the bank bought Singapore’s post office savings bank, POSBank, for $1.6 billion, becoming the country,s largest retail bank. The new DBS had more than 4.4 million accounts, 112 branches and almost 990 automatic teller machines. That same year DBS made its first significant overseas acquisition: a 50.3 percent stake in Thailand’s Thai Danu Bank, purchased for $119 million.

Singapore Senior Minister and founding father Lee Kuan Yew realized that DBS needed a seasoned international banking executive to oversee its metamorphosis into a world-class regional institution. DBS is a central plank of Singapore’s strategy of building an “external wing” onto its economy: With the home market reaching the saturation point, the government believes growth can come only from expanding abroad, and it wants DBS’s reach to extend throughout Asia.

So in August 1998 Lee recruited former J.P. Morgan & Co. private banking chief John Olds, as CEO and agent of change. Lee had been impressed by Olds while sitting on J.P. Morgan’s international advisory board.

That rare breed, a low-key and modest New Yorker, Olds had had a 24-year career at J.P. Morgan, encompassing everything from corporate lending to investment banking to securities clearing. He,d spent several years abroad and served as the bank’s Singapore head in the 1970s. Between 1983 and 1985 he had overseen the entire Asia-Pacific region for J.P. Morgan out of New York. Olds had also served as head of Euroclear, the firm’s securities clearing and settlement offshoot, and was at one point considered a candidate to take over its investment banking operation. He,d retired from the bank in 1997. Given the breadth of his expertise and his Asian experience, Olds was deemed the ideal person to execute DBS,s expansion strategy.

His simple but clever plan for transforming DBS into Asia’s top banking franchise with all deliberate speed was to capitalize on the 1997,,98 financial crisis by snapping up banking assets, from retail to wholesale, on the cheap. Investors envisioned DBS thriving because so many of its competitors were debilitated by bad loans and unwilling to shake off outmoded practices or upgrade customer service. The backing of the Singapore government, which still held a roughly one-third stake in DBS, boosted investors, comfort level. The government has sold down much of its holding over the years, but isn,t about to relinquish control.

Investors bought into DBS’s bold banking experiment en masse. The bank’s stock price soared from a low of S$3.37 in 1998 to more than S$28 in January 2000. A year later, in a stunning turn of events, Olds quit for undisclosed personal reasons. He,d said from the start that he didn,t want to stick around more than three years, and he,d once allowed that he found running a business day-to-day boring, preferring the challenge of formulating a new strategy, putting key people in place to execute it and then moving on. Olds is now a special adviser to DBS chairman Suppiah Dhanabalan.

Olds’s unscheduled departure rattled investors. Although he hadn,t actually pulled off any major acquisitions in his two and a half years at the bank, the market feared a leadership vacuum. The worries didn,t abate when some eight months later the bank named Paillart CEO. Largely unknown in Singapore, he had joined DBS at Olds’s behest as head of consumer banking in July 2000 from, of all places, the Ford Motor Credit Co. in Detroit.

Frenchman Paillart made an improbable yet ultimately logical choice for CEO. His primary expertise was in consumer banking, and Olds and Dhanabalan had determined that the bank’s best chance for penetrating the pan-Asian market lay in catering to underserved retail customers.

Paillart earned undergraduate degrees in law and economics from the l,Université Paris as well as a business degree from the Ecole Supérieure de Commerce. After finishing school in 1975, he joined French automobile maker Renault as an economist, but soon moved over to strategic planning, where he reported directly to the chairman. He then got himself posted to America to head up product planning and development. “For a little French guy, going to New York was like a dream,” Paillart recalls. “The only thing I didn,t tell Renault was that I didn,t speak English.”

In 1983 Paillart moved on to Citibank in London as head of strategy and marketing for Diners Club in Europe, Africa and the Middle East. Diners Europe was in the red, but by acquiring franchises in Austria, Britain, France and Germany, Paillart had it turning a profit again.

In 1986 he moved to Dusseldorf, where he created Citi’s European personal banking service for upscale customers. “I am particularly proud of this,” he says. Paillart was promoted to general manager for Citi,s personal banking in Europe, Africa and the Middle East.

Paillart left Citi in 1993 to take charge of personal banking in Northeast Asia for Standard Chartered out of Hong Kong. His next move took him to Singapore as group general manager of personal banking for the bank’s operations in Asia, Africa and the Middle East. He was also appointed one of just four group executive directors. When Standard Chartered CEO Malcolm Williamson stepped down in September 1998, Paillart lost out to another ex-Citibanker, Rana Talwar, in the contest to become the bank’s CEO.

So, in a what car buffs would call a spin turn, Paillart immediately headed off to Michigan to become chairman, president and CEO of Ford Credit as well as president of Ford Financial Services Group. Former Ford Motor Co. chairman Alex Trotman had beguiled Paillart with his vision of Ford’s own brand of General Electric Capital Corp. that would peddle credit cards, insurance and mortgages to the millions of customers in the automaker’s database. But barely three months after Paillart joined Ford, Trotman left and the company pulled back from what had been dubbed “Ford Bank.”

Around this time, Paillart received a call from John Olds. “I love Asia,” Paillart says, “and John sold me on the concept of turning DBS from a big bank in a small country into a pan-Asia bank with a regionwide franchise. It was a huge challenge that appealed to me.”

The veteran retail money man sees DBS taking on such institutions as HSBC, Citicorp and Standard Chartered for Asian preeminence primarily as a consumer bank catering to the region’s burgeoning middle class. This market segment’s allure is hard to overlook: It has some of banking’s thickest profit margins, weakest competition and greatest growth potential. Consumer banking already contributes more than 44 percent of DBS’s pretax profits. (Corporate loans and investment banking account for 41 percent and treasury and markets the rest.)

“Where we differentiate ourselves from the competition is that many of our competitors are product pushers,” Paillart contends. “We start with the customer relationship, and that makes us very different. We know that understanding and knowing the customer is the only thing we should focus on.”

In a telling example of this customer-comes-first ethos, Paillart acted swiftly last year to end delays at POSBank. In absorbing the bank, DBS had closed too many of its branches too fast. Some customers were having to wait in line for as long as an hour to see a teller. So Paillart ordered 400 old ATMs replaced, installed 130 cash-acceptance machines for deposits and hired more than 300 “queue combers” to speed transactions. The average waiting time was slashed to three minutes. One appreciative customer is Paillart, who often does his own banking in branches on Saturdays.

Along with blue-ribbon service, Paillart aims to have DBS provide nothing less than the best consumer products in Asia , whether mutual funds, insurance or mortgages , and when the bank can,t deliver top-drawer merchandise itself, it will turn to third parties that can.

For instance, says Paillart, “if we don,t have a good insurance product, we go with best in class.” DBS judged that to be Britain’s CGNU, with which it formed a ten-year pact July to sell bancassurance products. And if DBS “cannot deliver fast online trading or we know it’s going to take us two years and probably we won,t be the best,” adds Paillart, the bank goes with “the recognized leader , TD Waterhouse Investor Services.” DBS’s 50-50 joint venture with the Canadian brokerage firm plans to roll out online trading for DBS customers this quarter.

To build his consumer colossus, Paillart started off boldly , but controversially , last April by paying a steep HK$45.3 billion ($5.8 billion) for Dao Heng Bank. Regarded as one of Hong Kong’s better second-tier retail banks, with 70 local branches, 700,000 credit card customers and HK$141 billion in assets, Dao Heng has a reputation for innovation. It’s a market leader in call centers and customer relationship management and a factor in trade finance. “The purchase was transformational for DBS,” asserts Paillart. “It was a perfect target.”

The purchase immediately made DBS the fourth-biggest bank by assets in the lucrative and desirable Hong Kong market (behind HSBC Holdings, Bank of China [Hong Kong] and Standard Chartered) and gave it a springboard for expansion into China and Taiwan. Before Dao Heng, DBS had had only a modest footprint in Asia outside Singapore, domicile of 80 percent of its assets. Afterward, Singapore accounted for 57.4 percent of its assets and Hong Kong 35.2 percent. (The remaining 7.4 percent were spread around Asia.) Paillart believes that DBS now offers investors something no other bank can match: leadership positions in Asia’s two most vibrant banking markets.

Nevertheless, many investors were appalled at what Paillart paid for Dao Heng: 3.2 times book value. Other, smaller Hong Kong banks, like First Pacific Bank, had sold for multiples of between 1.1 and 1.5. The purchase impelled Hugh Young, Asia chief for Aberdeen Asset Management, to dump the firm’s DBS stock. “The Dao Heng acquisition tipped the scales on the valuation front and was massively dilutive,” he says. “DBS ought to be building up a strong regional presence, and it should be going into Thailand, Indonesia, the Philippines, Hong Kong and China. But it should be doing the right deals at the right price.”

Skeptics speculated that DBS’s real motive in buying Dao Heng was to accommodate the long-term strategic interests not of shareholders but of the Singapore government, which is bent on building that external wing onto the economy. “People feel that it is Singapore Inc., 1; investors, 0,” observes one analyst.

DBS and the government strenuously dispute this interpretation. “They didn,t do the Dao Heng deal because we told them to do anything,” says Deputy Prime Minister Lee Hsien Loong. “They felt they paid a fair price; the market felt they paid more than they should have. Time will tell whether management was right. But we put the board there, and the board worked through management, and we have to depend on their judgment.”

DBS senior executives scoff at the contention that 3.2 times book value was an outrageous price to pay, citing the quality of Dao Heng’s consumer franchise and its significant size. Trying to accomplish the same objective by buying a bunch of smaller banks and integrating them into DBS would have much been more problematic, not to mention a drain on management time, they suggest. Paillart notes that Standard Chartered paid 4.5 times book for Chase Manhattan Corp.'s credit card business in Hong Kong in late 2000.

Rajiv Ghatalia, the Goldman, Sachs & Co. (Asia) investment banker who advised DBS on Dao Heng, dismisses most of the criticism as myopic. Fund managers, brief time horizons induce them to sell when companies make “transformational acquisitions,” he points out. The banker draws an analogy to HSBC,s purchases of the U.S.'s Marine Midland Bank in 1980 and the U.K.'s Midland Bank roughly a decade later. “People scratched their heads and said, ,HSBC, what are you doing? There’s no way you are going to return money at those prices,,” Ghatalia recalls. “But here’s the beauty of those acquisitions: 1997,1998, 1999, 2000 and today we,ve been through tough times in Asia and HSBC has never produced a return on equity of under 15 percent. Why? Because of earnings diversity. And HSBC,s stock during the past 15 years? Compound annual growth of 23 percent.”

As if the Dao Heng acquisition weren,t enough to incite shareholders, wrath, Paillart simultaneously mounted a S$9.4 billion hostile bid for Singapore,s Overseas Union Bank that went disastrously awry. The basic strategy was sound: Overseas Union fit into DBS,s consumer-banking designs, and a takeover would have generated enormous operating efficiencies. But DBS was outmaneuvered by Singapore’s United Overseas Bank, which snatched OUB from DBS’s grasp by allying with it in a friendly merger. United Overseas wound up paying S$10 billion, or just 6.4 percent more than DBS offered.

DBS’s campaign for OUB was marked by startling tactical blunders. One seemingly glaring miscalculation was sending DBS director Fock Siew Wah to try to persuade OUB founder and principal shareholder Lien Ying Chow to accept DBS’s offer. Fock, as it happened, was a former president and CEO of OUB who, according to bankers and analysts, had left the bank after disagreements with Lien over strategy. “That was like the hired help going to the employer and saying, ,You,re going to be working for me from now on,,” says one senior banking executive. “In an Asian context that’s an absolute insult.”

Indeed, banking sources confide that this was what ultimately forced Lien into the arms of his old foe, United Overseas chairman Wee Cho Yaw, head of a rival Singaporean Chinese clan. The two had barely been speaking before DBS’s hostile bid gave Wee the pretext to propose a friendly combination of their banks. (A senior DBS executive disputes this version of events, saying Fock left OUB on good terms with Lien and thus was a good choice for deal broker.)

DBS’s advertising blitz in support of its bid also backfired. The advertisements depicted DBS as a grown man holding the hand of a young boy , OUB. The ads received strong criticism in the press, and OUB management felt they were demeaning. In contrast, a slick advertising campaign by United Overseas talked about the two banks “joining hands” and used the tag line “United by a Common Vision.”

DBS also found itself having to make a humiliating public apology to both OUB and Overseas United for remarks in a document that its adviser, Goldman Sachs (Asia), had prepared and distributed to shareholders in Europe. The firm had indelicately suggested that the board of a merged UOB,Overseas United would consist of “family and friends” whose mission would be to protect the interests of the controlling families “without regard for shareholder value.” DBS paid S$1 million each to UOB and Overseas United in a private settlement. Goldman Sachs Group chairman Henry Paulson Jr. flew to Singapore to smooth ruffled feathers.

At an extraordinary general meeting in August to seek shareholder approval for DBS’s formal bid for OUB, shareholder Vincent Chen summed up the thoughts of many attendees when he complained: “Everything went wrong from the start. From the advertisements to the Goldman Sachs fiasco . . . DBS is becoming a bank everybody loves to hate.”

Paillart now insists that OUB wasn,t worth any more than DBS’s S$9.4 billion bid and that forfeiting the Singapore bank to a local rival doesn,t constitute a major strategic loss. “There’s much less value in OUB than in creating the second pillar of our expansion in northeast Asia, especially when you see how fast northeast Asia is growing,” he says.

Paillart has faced the toughest economic environment of any DBS boss in recent history. Singapore’s GDP shriveled 2.2 percent last year, the sharpest contraction in several years. Hong Kong’s economy slipped 0.3 percent.

So shareholders were braced for bad news last July, when DBS reported that its first-half profits had fallen 10.7 percent, to S$629 million. But neither shareholders nor analysts had reckoned with the bank,s operating expenses ballooning 26 percent, to S$749 million. Staff costs alone had surged 39 percent, to S$389 million, chiefly because Olds had gone on a hiring spree, bringing in 90 executives at the vice president or managing director level. Criticism was swift and swingeing. Analysts asked how DBS expected to manage a complicated expansion drive if it couldn,t even contain costs during a downturn.

Paillart moved quickly to rein in runaway costs. He promised shareholders that DBS’s overall costs will rise no more in 2001 than they did in 2000 , that is, 17 percent , despite continuing expansion. Operating expenses were set to increase by no more than a single digit. In July Paillart announced that he and four other top executives would take 20 percent pay cuts and that 70 managing directors would have their salaries reduced 10 percent. And since this January 550 vice presidents have seen their salaries shaved 5 percent.

Yet Paillart also vigorously defends stepped-up spending in certain areas as essential to carrying out DBS’s strategy. “When you start having a customercentric approach,” the DBS CEO says, “you need to build a customer-relationship management system; you need to build databases; you need to create online banking; you need to create the best call centers in Asia; you need to create a new IT platform, you need to attract people who have never been attracted to this bank before.” He argues that “when your ambition is to be No. 1 in Asia, you need a very different engine” than when you operate only in a protected market like Singapore,s. “When you look at the investments that have been made by our major competitors in Asia over the years, they are huge,” Paillart points out. “And it took them 15, 20 years. We have compressed that into a few years.” The bank is now slowing its expansion outlays, he says. And he brags that DBS’s cost-income ratio of roughly 47 percent is still 10 percentage points lower than that of other regional banks.

Paillart, of course, is determined to grow DBS, not shrink it. Although Olds didn,t pull off any big deals like Dao Heng, he did begin a concerted push for a pan-Asian DBS. In March 1999 he paid S$879 million for 87.3 percent of Hong Kong’s Kwong On Bank, a 32-branch retail bank with HK$32.5 billion in assets. Six months later he bought 60 percent of Bank of Southeast Asia in the Philippines for $44 million, and six months after that he spent S$1.2 billion for a 19.7 percent stake in Bank of the Philippine Islands. Olds also held merger discussions with WestPac Banking Corp. that failed because, he said at the time, the Australian bank got cold feet.

Paillart’s expansion program has likewise pursued regional targets little and large, mostly in keeping with DBS’s consumer thrust. For instance, in February 2001 he bought a 59.5 percent stake in a regional stock brokerage, Vickers Ballas Holdings, for S$444 million to give DBS customers access to regional markets.

Despite the emphasis on the consumer, Olds and now Paillart have sought to enhance DBS’s humdrum corporate banking franchise. Former National Westminster Bank Asia Pacific chief Frank Wong, who joined DBS as managing director of treasury and markets in March 1999, has increased his staff from 90 to 230. Turnover from treasury activities surged 139 percent, to S$299 million, in the first nine months of 2001. Last November Wong announced that DBS would invest $100 million to build a 30,000-square-foot treasury center. Time was when the best DBS could offer its corporate clients was relatively low-margin loans. Now six out of every ten corporate customers buy additional products or services. “In the past this business would have gone to other banks,” says Wong.

Wong and other division chiefs enjoy considerable autonomy under Paillart. In contrast to the owner-autocrats of traditional Chinese banking, he prefers a team approach and delegates substantial responsibility. Paillart contends that DBS cannot succeed if it operates on the basis that “somebody up there is calling the shots on every move.”

This philosophy extends to his dealings with ordinary employees. Paillart likes to break down the customary barriers that seal off the CEO: Hence his forays into the branches. “I believe I can take decisions if I know what the reality of the operations is.” Each week he sends a chatty e-mail to staffers to bring them up to date on developments at the bank. “It’s being in sync , it’s not being in the ivory tower and giving orders and directions. It’s being part of the team, part of change,” he says. Paillart ends each e-mail with the mantra he introduced at DBS: Professionalism, Performance, People, Passion. “If you don,t have passion about doing something,” he says, “you waste your life.”

Some investors, however, are troubled by Paillart,s readiness to share authority, especially with president and chief operating officer Jackson Tai. As Tai deals almost exclusively with the institutional investor community and was the driving force behind the Dao Heng acquisition, he often seems to have a higher public profile than Paillart himself. This gives “a feeling of too many chefs,"says one Singapore-based banking analyst.

Paillart insists that DBS has but one chef. “Because we have a team approach doesn,t mean I don,t call the shots,” he says emphatically. “During OUB and all other acquisitions, all the top executives meet if not every day, then every second day. It’s a team approach, but there is only one decision.” And that is evidently the CEO,s.

For their part, DBS executives describe Paillart as a detail-fixated but inspirational leader. His boss, DBS chairman Dhanabalan, calls him “exuberant in the way he deals with people” and “very passionate about wanting to achieve results.” The chairman, a longtime Singapore cabinet minister, brushes aside worries about the bank’s share price plunge, arguing that the real problem is that investors, irrational exuberance caused DBS’s stock to soar too high, too fast. Now the bank is suffering from a backlash, Dhanabalan says.

Singapore-based J.P. Morgan banking analyst Craig Turton concurs with the DBS chairman. “Investors got way, way ahead of any management’s ability to deliver,” he says. “The share price had to pull back even if management had delivered beyond belief.”

As Dhanabalan sees it, what the bank must do now is avoid yielding to pressure from investors, stock analysts and journalists. “DBS’s biggest challenge in the next two years is to not get distracted or diverted by what I see as short-term economic problems,” he says. “The important thing in a situation like this is not to lose your nerve but to continue to invest in technology, in processes and in people. In the short term it may not look good in the financials, but we are building the foundations for growth.”

The DBS chairman has not always sounded so supportive of Paillart and his strategy. At the bank,s extraordinary general meeting last August, amid the opéra bouffe of the OUB bid, angry shareholders protested that the bank’s management had lost control. Dhanabalan strongly refuted the charge but acknowledged that “this is a low point for DBS. . . . We can do things better, no doubt about that.” (Compounding Paillart’s travails was a revelation in the Asian Wall Street Journal that he did not have a postgraduate degree from Harvard Business School, as the bank had indicated, but had merely completed a Program for Management Development there.)

In early October Dhanabalan was doing damage control again, this time denying reports that Paillart would be replaced as CEO. The reports were apparently based on a leaked DBS reorganization chart that failed to show Paillart as CEO. It was all said to be a big mistake. Nevertheless, the rumor that Paillart was about to be dismissed boosted the bank’s stock price 4 percent. Still, in a public statement Dhanabalan gave his ostensible backing to his CEO: “Paillart enjoys the full and individual support of the DBS board and staff of the bank.”

Such language has been likened to the murmur of an executioner’s blade, and Paillart is clearly under immense pressure, both internally and externally. “The only way to silence the critics,” suggests Daiwa Institute of Research (Singapore) banking analyst David Lum, is for DBS to deliver superior results. That won,t be easy, given the region’s continued economic weakness.

“We,re trying to keep our heads down, stay out of the limelight and just execute,” says president and COO Tai. Paillart, characteristically ebullient in spite of everything, declares, “Every day I am more convinced that we can be the best bank in Asia.” But can he convince impatient shareholders , including Singapore Inc. , of that?

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