Developments in the banking industry
9 July 2001
Last week, Keppel Capital announced interim results for this financial year which showed a rise in net profits of 29.3 percent. However, the rise in profits was attributed mainly to a one-off $41 million gain from the sale of investments. More significantly, net interest income rose by 2.9 percent year-on-year, a very modest increase.
Keppel Capital's management had been advising shareholders to wait for the interim results to be announced before making any decision on Oversea-Chinese Banking Corporation's take-over bid. Some commentators had suggested that they had hoped that the results would convince shareholders as well as OCBC to value Keppel Capital higher than the former's bid price. Well, the results have been announced but with the small improvement seen in the core banking operation, they might not have as much impact on the bank's valuation as the management had hoped for.
In fact, in an article on 9 July, kelive.com, Kim Eng Securities' research website, thinks that Keppel Capital's results confirm that the operating environment in the banking industry is much worse than the market currently expects. It suggests that most banks will post disappointing interim results this year, and advises investors to stay neutral on banks.
Of course, to a large extent, the poor banking environment is simply the product of the economic slowdown. So, to stay away from stocks in the banking industry would mean to stay away from stocks in most other industries as well. Perhaps the only thing that can be said with some confidence is that the two banks that are the targets of take-over bids, Keppel Capital and Overseas Union Bank, which have seen their stock prices run up quite a bit over the last month or so, are probably already close to their fair value, or at least closer than most other stocks.
For the other three banks, their prospects depend on the net result of their acquisitions and the ongoing banking liberalisation. The latter will introduce greater foreign competition in the Singapore market. The greater size and strength of the local banks from the current round of acquisitions should put them in a better position to face this competition.
Some commentators, however, seem to prefer conspiracy theories to what should be a simple matter of economics. In an article dated 8 July entitled For Singapore's Banks, Statism by Another Name, Bloomberg columnist Patrick Smith suggests that the current round of acquisitions is the result of manipulation by the Singapore government. "What's going on among Singapore's banks has less to do with truly open markets than with the 'activist and interventionist approach'...advocated all through Singapore's formative years", he wrote.
"Look at this as a choreographed round of merger proposals, and OCBC's offer for Keppel Capital turns out to be a safe, logical opening act," he suggests. "Keppel is 45 percent government owned; it has yet to accept OCBC's offer, but we're down to ritual negotiations on this one." If the negotiations are purely ritual, Keppel management -- which has so far reacted coolly to the take-over offer -- must be putting on quite a good act to complement the government's choreography.
Smith seems to interpret things only in the way he wishes to interpret them. Where Monetary Authority of Singapore chairman Lee Hsien Loong said that the MAS was "strictly neutral" on the offers being made, Smith asserted that "the notion that the government has been standing by watching the consolidation process with disinterest is something of a stretch". More balanced observers would have noted that being neutral on the offers could simply mean that the MAS is not making any assessment on the merits of the individual offers; it does not necessarily amount to MAS being disinterested in the overall consolidation process.
Smith also nit-picks over the cause of the mergers. He writes: "Bigger may be better in the global era, and open markets more efficient than those kept protected. But if this is globalization at work, I'd better get back to my dictionary." Mergers are the result of globalization because size is important in the global economy. Whether the mergers are driven purely by the market or by a government fearful of foreign competition does not change the ultimate driver, which is globalization. His dictionary will not help him here.
Smith also has suspicions on the Singapore government's attitude towards foreigners. "Since the crisis of the mid-1990s, Singapore seems to have paid ever-greater attention to the strategy Japan has perfected over more than a century: Let the foreigners in so as to keep them out." Catchy phrase, but misleading in this case. "Foreign competition is coming, but it is highly attenuated," he writes. "Singapore is nowhere close to an open market when it comes to retail service such as automated teller machines." But when he writes this, Smith is actually referring to the past and present. With the ongoing banking liberalisation, things may change in the future. And since mergers would be a necessary precursor to such an eventuality if local banks are to compete effectively against foreign banks, the current round of mergers could be seen as a preparation for such a change, among others.
While there are elements of truth throughout Smith's article, the overall tone tends to cast Singapore and the Singapore government in a rather sinister light. It seems to suggest that the Singapore government is non-transparent and xenophobic in instigating mergers among the banks. It conveniently ignores the fact that the ongoing banking liberalisation and low market valuations of banks could by themselves explain the spate of mergers taking place.
In reality, the only obvious sign of the government hand is in the liberalisation of banking regulation itself, and that is both transparent and conducive to foreign competition.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.