Conrad Maria Jayaraj

Once again the possibility of DBS Bank and Oversea-Chinese Banking Corporation merging is being raised - this time by Nomura Equity Research. While certain quarters in Government and at Temasek Holdings may welcome the possible move, a merger of the two will certainly be met with dismay by the business community.

Nomura's speculation comes a year after former Minister Mentor Lee Kuan Yew called for a consolidation of the local banking sector. Mr Lee felt that the three local banks had to combine to expand meaningfully within and outside of Singapore. (Askmelah's note: the same argument was put forth by the Government more than 20 years ago, resulting in the banks drastically reduced from 6 to 3. The same reasoning back then was that you need scale to compete overseas,  more than 20 years on, not only the banks failed to make an impact overseas, the competition in the local markets have greatly reduced in the form of poorer services and choosy bankers.)

"I would have preferred personally that there be only two banks, because I don't think Singapore is big enough for three banks," he told 600 bankers gathered for the 37th annual Association of Banks in Singapore (ABS) dinner on June 25 last year. (Askmelah thinks Mr Lee is dead wrong and proposes what we need is just one mega bank like SIA to compete overseas, DBS-OCBC merger will not do the job. Who cares even if Singaporeans complain about the monopolisitic behaviour of SIA and the new "DBS". Nation pride and profitability should come first, you hear it first here!)

Mr Lee further noted: "You can't go abroad in a big way because there's a limit to what you can do in the Singapore market and you need a big solid bank with the capabilities and the capital to debt ratios to go abroad."

Like Mr Lee, the advocates of merger almost invariably cite size as the main reason for such a move. As Nomura put it: "A merged banking group would rank well within the top 30 banks globally by market capitalisation and provide a distinct, wholly pan-Asian franchise headquartered in AAA-rated Singapore, boosting customer acquisition and franchise valuation."

It further noted that: "Geographically, we believe OCBC would deliver dominance of the core SGD (Singapore dollar) market (citing a 35 per cent market share) and a deep, scaled up ASEAN presence, the latter a key gap for DBS that otherwise would require expensive and integration-challenging acquisitions to bridge.

"Operationally, OCBC's peer-leading, strongly branded fee income franchise would offer DBS opportunity to integrate and scale-up highly synergistic product platforms i.e. life insurance, private banking and Islamic finance; while expertise in SMEs (small and medium sized enterprises), CASA (current accounts/savings accounts) capture and risk management would also be very valuable."

For the critics, a merger would mean one less competitor - not good where customers really want to be spoilt for choice. I had argued against further consolidation then and do so again.

Barely two decades ago, we had more than half-a-dozen independent local banks, now we have just three-four, if you include the locally-incorporated company of America's Citibank and six if you look at the Monetary Authority of Singapore's website.

According to the MAS, besides United Overseas Bank, OCBC Bank and DBS, there is also the UOB subsidiary Far Eastern Bank, and the OCBC subsidiaries, Bank of Singapore and Singapore Island Bank.

Earlier the market had more than a dozen local banks. First Tat Lee Bank merged with Keppel Bank and that entity was swallowed up by OCBC which had previously taken over the Bank of Singapore. POSB Bank got bought up by DBS while Overseas Union Bank got taken over by UOB which had earlier taken control of Far Eastern Bank, Lee Wah Bank and Chung Khiaw Bank.

The inital round of mergers - prior to the mid '80s - did indeed help UOB and OCBC to scale up. But the later rounds did not deliver as much and for their respective customers, especially the SMEs, the reduction in choice left many of them stranded without loan facilities as a different set of risk management rules kicked in.

In the case of DBS' purchase of POSB Bank, thousands of the latter's customers were denied banking facilities as DBS felt, at the time, that it was not at all viable to maintain accounts below a certain level (the policy was later changed).

With less competition, transaction costs also went up as the banks started charging for services previously free or minimal.

And will all the benefits cited by Nomura be realised?

After all, there are plenty of overlapping customers, especially among the sought-after wealthier customers who are loath to keep all their eggs in one basket. Many are likely to move - at least part of their wealth and business - to other banks, perhaps to foreign banks like Citi, Standard Chartered or HSBC.

So the merged entity may not have the sum total of the separate banks.

Like I had said previously, instead of spending their time, money and effort in the local mergers in the mid/late '80s, perhaps they would have been better off purchasing banks overseas. But then in those days, the MAS did not really encourage our local banks from venturing too much overseas. The MAS probably felt that our banks just did not have the capacity or the resources to take on foreign partners.

Although much of their more recent experience overseas has been far from satisfactory, our local banks should take another look at foreign ventures.

Let's at least maintain the current trinity and if someone or some group here can raise the money and resources to start another bank, it should be looked upon favourably.

Conrad Raj is Today's editor-at-large.