As M&A fever sweeps Europe, is DBS a target?

We are delighted to welcome Keith Mullin who begins writing a bi-weekly column for The Asset

Viewpoint

With this issue, we are delighted to welcome Keith Mullin who begins writing a bi-weekly column for The Asset. Keith, who is based in London, will share his sense of the ins and outs in the world of banking and finance across the globe, the implications for Asia and look at technological change. A keen observer of the industry, Keith is the former editor-at-large of International Financing Review (IFR), prior to which he was editor-in-chief at the capital markets publishing group and served as editor of IFR. He has authored two books and has written in depth about a range of market segments for investment banking professionals including debt, equity and loan capital markets. Here he shares his wisdom if Barclays were to merge with Singapore's DBS.

Bank merger fever is back. Even if the narrative is being agitated and fanned by market speculation and some of the mooted discussions are re-hashes of old stories, there's no smoke without fire.

In Europe, bank M&A could be 2018's summer sizzler. The ECB has changed its attitude towards big bank mergers (especially cross-border). Whereas until recently it gave any mooted large-scale associations the evil eye as too big to fail monsters posing systemic-risk perils, now it wants larger more efficient European banking champions to foil the US takeover plot.

We've already had stories this year of Deutsche Bank eyeing Commerzbank again (following talk of BNP Paribas, UniCredit and Nordea all doing the same); Jean Pierre Mustier (UniCredit) continuing to ogle his old shop (Societe Generale); and Barclays contemplating theoretical tie-ups with Standard Chartered, Credit Suisse, Deutsche Bank and DBS Bank.

While there have been plenty of "no comment" or "not in the next two years" half-rebuttals, we've had no formal denials. Mind you, Barclays' motley target list sounds less like the result of a board strategy meeting; more like the outcome of a Friday-night drinking game. Yet there is a compelling angle to the Standard Chartered and DBS Bank story: Asia.

Most of Europe's largest banks have reached or are reaching the end of painful post-financial crisis rehabilitation that has seen them retreat to markets close to home or to core products where they have global value-add. The big question now is what next?

Barclays has reframed its footprint, finalised its UK ring-fence, and is targeting sustainable core group RoTE of >9% in 2019 and >10% in 2020. The bank has reinvented itself as a transatlantic consumer, corporate and investment bank anchored in its two home markets: UK and the US.

That's specific and by definition excludes Asia as core. It was only in 2016 that Barclays shuttered Asian cash equity and convertibles sales, research and trading, sold its wealth and investment management business in Singapore and Hong Kong, and quit a series of countries in the region for the loss of around 1,000 jobs. Its remaining businesses in Asia are pedestrian. But there have been whispers recently about Barclays re-thinking its Asia strategy. Could other European banks be thinking along similar lines?

Treating Asia as non-core automatically excludes you from so much. Like capturing a share of intermediating Asia's substantial wealth, which has become one of the world's most intense banking battles. Or garnering lucrative investment banking wallet: Asia (including Japan) generated more investment banking fees than Europe in 1Q 2018, per Thomson Reuters.

Since the crisis, the Asia wealth and private banking story has centred on non-Asian banks offloading their non-core private banking/wealth management businesses to local players: SocGen and ANZ selling to DBS; Barclays, ING and NAB selling to OCBC.

Since the strategy changes at European banks were forced by poor profitability, high costs and an imperative to streamline, could it be a case of "that was then, this is now" and as the banks near the end of current plans they've got the consultants in? With Barclays, is the board hearing that real growth might be outside the transatlantic corridor? Or is chairman John McFarlane turning Barclays' strategy into CEO Jes Staley's strategy and publicly distancing himself from it to push something different?

Would such a rapid volte-face by European banks that have retreated from Asia be greeted by potential Asian clients with derision or even hostility? Maybe.

Unless, instead of re-building organically you go for a knock-out punch. If your end-game is acquiring a profitable stand-alone pan-Asian corporate and consumer bank with a best-in-class brand, a progressive digital platform and positions in key countries, wouldn't DBS be a catch? Its 1Q 2018 net profit soared 26% to a record SGD1.52bn on a cost-income ratio of just 42%, while its 13% return on equity was the highest in a decade.

Who knows how the Singapore government, which calls the shots at DBS, would react to an approach? Asian retail, consumer and corporate banking is cutthroat. DBS is competing not just with in-country incumbents but also with Japanese mega-commercial banks, Chinese banks and other Asian banks pursuing pan-regional strategies. Could DBS do with some assistance if the end-game is to expand market share?

On the other hand, an approach might just as easily be greeted with horror, with DBS wincing at the prospect of foregoing its regional build strategy in favour of being held hostage to a volatile investment banking cycle half a world away that is the antithesis of what it has built, or to the known-unknowns of Brexit. In which case, Barclays may want DBS but DBS would want Barclays like the proverbial hole in the head.