As DBS Acquires Dao Heng Bank, Hong Kong Speculates On The Future Of Its Banking Sector

by Mary Swire, Tax-news.com, Hong Kong

20 April 2001

Singapore's DBS Group Holdings, South East Asia's largest bank, has acquired Dao Heng Bank in a deal worth HK$45 billion (US$5.8 bn) giving DBS a substantial presence in Hong Kong. Under the deal DBS will hold 80 per cent of Dao Heng Bank and the remainder will be bought by the Guoco Group.

Kwek Leng Hai, president of the the Guoco Group - Dao Heng's majority shareholder - told the Financial Times: 'We recognised that our ability to provide the services and range of products that our customers deserve would increasingly require the resources that can only be offered by large, well-managed institutions with an international outlook.'

Indeed, this acquisition is the third major consolidation operation to take place in Hong Kong's banking sector in the past few months. In September last year Standard Chartered acquired Chase Manhattan's Hong Kong credit card business, and earlier this year the Bank of East Asia bought out FPB Bank Holding.

Dao Heng is the fourth largest bank in Hong Kong with US$18.20 billion in assets. DBS says the deal will boost its assets to a total of US$81 billion when it is completed. Philippe Paillart, chief executive of DBS, told a Hong Kong press conference: 'We are here to buy Dao Heng Bank and make it the best Asian Bank. We want to be pan-Asian ... we want to have two pillars, one in Singapore and one in Hong Kong.'

Consolidation looks inevitable for many banks, particularly in the long term. Mr Kwek said the increasing number of global institutions and the need for continued heavy investment in technology in the banking sector will result in the demise of many of the smaller banks which cannot compete on a global scale. These banks are finding it difficult to compete with the current trend of the major banks to diversify their services to provide wealth management for the super rich. According to the Financial Times, the traditional source of income for banks, i.e. mortgages and corporate lending, have been under huge competitive pressure from a slow-moving property market and weak corporate demand. Currently Hong Kong's banking sector is overcrowded and it is expected that the first three major consolidation deals are just the tip of the iceberg.

For example, Grant Chan, banking analyst with the Lehman Brothers in Hong Kong, said it is rumoured that Citic Ka Wah has been considering consolidation and the smaller banks such as HKCB and Liu Chong Hing Bank are rumoured to be the targets of a potential takeover. Mr Chan explained: 'The family owners are going to start thinking: If I don't realise the valuation of this asset now, then two years down the road, when I don't have any competitive advantage any more, it's going to be very difficult for me.'

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