Southeast Asia’s biggest lenders including DBS Group Holdings Ltd. have performed the worst among the region’s bank stocks in the past five years on concern overseas expansion plans will fail to boost earnings.
Singapore’s DBS and Malaysia’s Malayan Banking Bhd., which get at least 30 percent of revenue outside their home markets, have given annualized returns including dividends of no more than 15 percent in the five years to Sept. 6, data on 15 banks compiled by Bloomberg show. Krung Thai Bank Pcl, which gets all its revenue in Thailand, returned the most with 28 percent.
The weaker returns underscore investors’ concern that banks in the region -- which have spent $5.3 billion on overseas acquisitions since September 2008 -- may be overly ambitious in stepping outside their domestic markets. Building their own operations abroad or buying local banks, as DBS sought to do with the $6.5 billion bid for PT Bank Danamon Indonesia that failed six weeks ago, hasn’t immediately yielded results.
“If you can’t make money at home, why do you think you can make money in another market where you don’t have the brand name, you don’t have the local knowledge,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd., said by phone on Sept. 10. “Why does Krung Thai Bank get such a great return? They’re totally local.”
Within Southeast Asia, Singapore banks have the lowest average net interest margin, a measure of lending profitability, at 1.8 percent, while Malaysia has the second lowest at 2.22 percent, according to data compiled by Bloomberg from the companies’ latest exchange filings. Indonesian banks have the highest average NIM in the region, at 6 percent, which has helped attract regional banks.
Banks with regional aspirations don’t earn enough income to justify their spending on acquisitions or franchise building in the initial years of their expansion, Jens Lottner, a Singapore-based senior partner and managing director at Boston Consulting Group, said by phone on Sept. 4. These lenders find it tough to compete with the top four or five local banks that are dominant in each market, he said.
DBS had a five-year annualized total return of 8.6 percent, the second-worst performance in the group of 15 Southeast Asian lenders.
“Stock markets have been volatile over the past five years, and share price performance was affected by factors other than business fundamentals,” Edna Koh, a spokeswoman, wrote in a Sept. 11 e-mail. DBS’s strategy had increased the bank’s access to “higher-growth markets,” she wrote.
In February 2010, DBS announced it’s seeking to reduce dependence on Singapore from about two-thirds of revenue to 40 percent in five years. The bank wants to increase Greater China revenue to 30 percent, with South and Southeast Asia excluding Singapore accounting for the remainder.
DBS derived 38 percent of its profit from outside Singapore in 2012, compared with 35 percent in 2008, according to the bank’s annual reports.
“A regional strategy is far from easy, plus when one does acquire, it can be pricey,” Hugh Young, Singapore-based managing director of Aberdeen Asset Management Asia Ltd., wrote in an e-mail, citing as examples DBS’s attempted purchase of Danamon and its 2001 acquisition of Hong Kong’s Dao Heng Bank Group Ltd. for $5.4 billion -- considered expensive by some analysts at that time.
His firm, which manages $318 billion globally, holds shares of DBS, Malaysia’s CIMB Group Holdings Bhd. and Thailand’s Kasikornbank Pcl, data compiled by Bloomberg show.
Investors in United Overseas Bank Ltd. had a five-year annualized return of 8.2 percent, the least in the group of regional lenders. The Singaporean company has been setting up units in the past year in countries from Indonesia to China to advise firms investing in Southeast Asia.
The bank’s expansion strategy “offers investors diversified exposure across various markets compared with the concentration risk inherent in businesses operating in one market,” Jimmy Koh, UOB’s head of investor relations, wrote in a Sept. 10 e-mailed response to questions.
Oversea-Chinese Banking Corp., third-worst in the group with a 12 percent return, got 38 percent of its 2012 pre-tax profit from overseas, compared with 31 percent in 2008. The Singaporean bank announced the purchase of ING Groep NV’s Asian private-banking assets for $1.4 billion in October 2009.
OCBC’s share price has outperformed the benchmark Straits Times Index in the past five years, helping the bank achieve total shareholder returns that are “favorable in relation to comparable peers,” Collins Chin, the firm’s head of investor relations, wrote in a Sept. 10 e-mail. The company had a dividend payout ratio of between 40 percent to 50 percent of core earnings in the period, he wrote.
OCBC’s share price gained 11 percent each year on average in 2008-2012, more than double the Straits Times Index’s 5.6 percent, data compiled by Bloomberg show. DBS posted an average gain of 6.5 percent, while UOB had 4.7 percent.
OCBC shares dropped 0.1 percent as of 9:34 a.m. in Singapore, while DBS added 0.9 percent and UOB gained 1.2 percent.
Maybank, as Malaysia’s largest lender by assets is known, returned an annualized 15 percent including dividends in the past five years. Former CEO Abdul Wahid Omar said in an August 2011 interview the bank was aiming to earn 40 percent of operating profit outside Malaysia by 2015. Overseas earnings represented 30 percent of group profit in 2012, according to the bank’s annual report.
The lender is “committed” to its regional strategy to sustain “long-term shareholder return,” Chief Financial Officer Rafique Merican wrote yesterday in an e-mail. The lender cited as an example its 2008 purchase of PT Bank Internasional Indonesia, a unit that is now “gaining strength” in terms of profit generation. BII reported a 15 percent increase in first-half net income on July 29.
Shares of Maybank trade for 13.9 times reported profit, a 17 percent premium to the 11.9 average multiple of the 15 Southeast Asian banks, data compiled by Bloomberg show. OCBC is valued at 9.3 times, DBS at 10.2 times and UOB at 11.5.
Mizuho’s Antos cites Malaysia’s CIMB, which acquired control of Indonesia’s PT Bank Niaga in 2002, as the sole Southeast Asian lender with a “modestly successful regional strategy.” PT CIMB Bank Niaga’s annual net income has climbed sixfold since Bloomberg began compiling data in 2004. The lender is now Indonesia’s fifth largest by assets.
CIMB, which bought most of Royal Bank of Scotland Group Plc’s Asia-Pacific investment banking assets in 2012, returned 16 percent including dividends annually to shareholders over the five years.
Malaysia’s Hong Leong Bank Bhd. returned 26 percent in that period, while Thailand’s Kasikornbank gave 24 percent, for the second- and third-best performances among Southeast Asian lenders. Both derive at least 95 percent of their revenues from their home markets, data compiled by Bloomberg show.
“Investors are voting with their wallets and putting their money in the better domestic banks in the market,” Vincent Chin, a Kuala Lumpur-based senior partner and managing director at Boston Consulting, said by phone on Sept. 4. “Going regional is not for the faint-hearted as you need capital and a certain scale and position in a non-home market.”