Can DBS make it work?

• Global banks are pulling out from Asian markets as the “super regional bank” strategy loses steam
• Many acquisitions are often not strategically fitted to meet customers’ needs 
• Multi-faceted challenges in managing the “super regional bank” model

In the 1990s, it was mostly the American banks that were expanding overseas into retail markets. Banks like Citi and to a lesser extent, Bank of America and American Express set up and grew retail businesses in many Asian markets with largely successful results. Some European banks followed this approach a few years later and this led to a few acquisitions.

That trend continued all the way until the 2008 financial crisis. Just before Lehman Brothers went under, the sale of ABN Amro was one of the largest M&A deals ever at $71 billion.

The consortium – RBS, Fortis and Banco Santander – paid three times the book value for the Amsterdam-based bank, which at the time was already expensive for a bank based in a mature European market.

Global banks started pulling back after 2008

According to Bloomberg, the transformation of Citigroup, and similar changes at HSBC Holdings Plc. and other global banks, isn’t just about cutting expenses. It’s also about looking for greater returns by focusing on the richest customers - high-net-worth individuals, large corporations and institutional investors. As a result, they are pulling out of many retail markets. Based on the same Bloomberg report, some global banks have already sold or shut down their retail operations in more than half the countries in which they had a presence before 2008.

As the global banks started exiting, regional banks like ANZ moved in. ANZ's acquisition of RBS' Asian assets in 2009 was exactly that. Their guidance at the time indicated that they saw this as a significant opportunity to grow.

“The acquisition of these RBS businesses is a further stepping stone in our super regional strategy and creates a new platform for our retail and wealth businesses in Asia," said Mike Smith, chief executive officer of ANZ, when he announced the deal in 2009.

In 2016, it's quite clear that things have worked out differently. The circumstances and the leadership at ANZ have changed and they have now decided to sell these businesses and to write down $203 million. So, is there still a case for a super-regional strategy in the retail and wealth segment?

The bank clearly explained why the transaction was a really important strategic acquisition. But, did this really make sense from a customer perspective? Before the RBS acquisition, ANZ had a small retail and wealth presence in Asia. While the deal did give them the market presence, the businesses they acquired were quite small in many of these markets and had limited appeal for the Asian retail and wealth customer. This was always going to be a challenge and when you consider this from a customer perspective.

The proposition for a wealth customer is not always easy to deliver

The relationship manager is a critical part of the value proposition. For a wealth proposition, the products and services aren't unique because banks typically distribute products from third-party providers. The customer needs assessment and the relationship management services are usually the most important for a customer. For smaller players, this is not always easy to deliver.

As a customer, it is quite likely that you might get a relationship manager who is under significant pressure to meet sales quotas. Therefore, to meet their quotas, they are likely to recommend the most profitable products for the bank. Furthermore, the service levels are not always consistent. If your relationship manager is good at managing the relationship, it’s not always consistent because of the high turnover of relationship managers. This is because smaller banks (and often, bigger banks too), in highly competitive markets often find it difficult to attract and retain relationship managers. Smaller banks end up being stepping stones for sales people and this results in high turnover that creates a very poor customer experience.

The “super regional model” and its challenges

While the following issues do not directly impact customers, they can be potential problems in the running of a “super regional bank” model.

• To acquire customers, smaller banks have to use aggressive pricing and promotions to attract and keep customers. The more attractive these offers are, customers will keep some of their business at the bank. However, these are seldom main bank relationships and therefore, less “sticky”. This ends up reducing profitability for the bank. With limited size and lower margins, it’s only a matter of time before someone in the head office decides it’s time to exit these markets as the contribution is limited and the risk weighted returns (if positive) are often lower than what they generate in their home markets. 
• The mindset challenge - when the regional businesses are run by people who have largely worked in the home markets (where they are the dominant bank), it’s difficult for them to adapt to markets where the bank has a much smaller market share and has to operate very differently.
• When the head office is in a high cost market, the regional business could end up being loaded with significant costs.
• Governance, compliance rules and capital requirements are different in each country and if the head office has much more stringent requirements, they can make the business less competitive in overseas markets.
• Fintech companies bring interesting capabilities with enhanced digital knowledge and robo-advisory services. These have clearly benefited banks and customers. However, they are not substitutes for the personalised relationship model.
• The cross-border and regional proposition are a lot less important for this segment if it’s a trade- off with local capability and scale. In my opinion, local capability and scale is a lot more important for the retail and wealth customer.

Customer holds the key to success

DBS is significantly better placed to make this deal work. It does give DBS better scale and they have experience operating retail and wealth businesses in a variety of Asian markets. Their success (in my opinion) will be determined by their ability to make it work for the customer.

Note: The opinions expressed in this article, written by Sandeep M Deobhakta, head of retail banking at VP Bank, are the author's own.