There are no new ideas in banking -- no equivalents of flying cars, or even 20-foot containers. The revolutionary thinking in finance is usually dusted off from the archives. Singapore's plan to let bankers play businessmen is no different.
That's what J.P. Morgan was: a banker-businessman who created U.S. Steel and controlled railroad pricing. Now, the city-state wants its guardians of other people's money to engage in "permissible non-financial businesses" up to 10 percent of their shareholder funds. What should investors make of this back-to-the-future move?
Widows and orphans should be a little nervous. Already, shares in Australian, Japanese and Hong Kong banks hold the promise of higher dividend yields than their three homegrown Singapore cousins, whose expected payouts over the next year range between 3.2 percent and 3.5 percent. Landlords in Singapore make more from renting out apartments. If lenders were to invest a tenth of their $82 billion in common equity into e-commerce platforms, the $2 billion they paid out over the past 12 months could also be at risk.
With risk, however, could also come outsize rewards. Double-digit returns on equity are becoming rare in developed Asian banking markets outside of Australia. If by deploying capital outside of lending and advising, DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd. can squeeze a couple of percentage points of extra juice from their ROEs -- battered by bankruptcies in the offshore-and-marine services industry -- then nobody should complain.
It all depends on the nature of the bets. E-commerce is a winner-take-all derby, and finding the right horse to back is often a matter of dumb luck. Besides, Singapore's state investment fund owns more than 29 percent of DBS. If the latter decided to become an equity owner of future "national champions," investors in the bank could be riding white elephants. The island-state is thankfully both more pragmatic and more prudent to go down that route.
In 2000, then Finance Minister Lee Hsien Loong, who's now prime minister, told the Association of Banks in Singapore that the Asian financial crisis of 1997-98 underscored the dangers of commingling financial and non-financial activities within a corporate group. Singapore's local lenders were then asked to wind down such cross-shareholdings.
The threat assessment has changed. Lenders now fear that they'll be made irrelevant by BAT -- Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd.
The Chinese trio is expanding in Southeast Asia and will use its growing expertise in everything from payment systems to funds management to outgun Singapore's banks, which still take a day to deposit a cashier's order into a customer's account. It's only now that retail clients of DBS, OCBC and UOB, as well as local customers of Citibank Singapore Ltd., HSBC Holdings Plc, Malayan Banking Bhd. and Standard Chartered Plc, are being allowed to do interbank fund transfers via mobile phones free-of-charge without knowing the receiving parties' bank-account details. Cutting-edge Singapore is embracing a functionality that already exists in Thailand and India.
As banks dismantle their lazy, float-based business models, they need to muscle up elsewhere. So, speaking at the same annual dinner of bankers where his prime minister banned commingling 17 years earlier, Finance Minister Heng Swee Keat proposed to allow it again. After the Monetary Authority of Singapore releases operational guidelines in September, lenders can invest in any business that is related or complementary to their core financial activities. The MAS won't let them invest in real estate and hotels, however.
Becoming the owner of a fleet of flying taxis would still be fine, one imagines. If 20 years from now, Singapore's biggest banker is found mediating a minimum fare lest all owners of air capsules go broke, politicians will shout, "Gilded Age!" and bring back anti-commingling laws.
There really are no new ideas in banking.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Property investments by Singapore banks was the main argument against commingling even after the Asian financial crisis. OCBC and UOB, being family run, had amassed significant real-estate assets. OCBC and its insurance subsidiary also owned large chunks in Asia Pacific Breweries Ltd. and Fraser and Neave Ltd., which the banking group sold in 2012.
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