ref no.: abcc-2017-005 danielle yew and neo boon siong · 8 bank of singapore was previously a...

Senior Research Scientist Danielle Yew and Professor Boon-Siong Neo prepared this case based on interviews with OCBC Bank. This case is intended for class discussion and learning, and not intended as source of research material or as illustration of effective or ineffective management. COPYRIGHT © 2017 Nanyang Technological University, Singapore. All rights reserved. No part of this publication may be copied, stored, transmitted, altered, reproduced or distributed in any form or medium whatsoever without the written consent of Nanyang Technological University. The Asian Business Case Centre, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798. Phone: +65-6790-4864/6552, E-mail: [email protected]

OCBC – INTEGRATING STRATEGIC ACQUISITIONS

Danielle Yew and Neo Boon Siong In 2016, two years after leading OCBC through its largest acquisition of Wing Hang Bank, Group CEO Samuel Tsien settled into his flight home from a townhall meeting with his new colleagues in Hong Kong. Addressing them in Cantonese, he felt that the session went well, and that the cultural fit was good. Tsien continued the OCBC tradition of being sensitive to the concerns of staff in the acquired entities and their local business and regulatory requirements, even as OCBC integrated them to group standards in finance, compliance, audit and risk management. In the previous decade, OCBC had also acquired Bank NISP in Indonesia, and ING Asia Private Bank (IAPB) to spur the group’s regional growth. Looking back, Tsien was satisfied that OCBC had successfully integrated them to achieve its strategic intent. Key executives in the acquired banks had stayed with the new owner. Major customers were successfully retained and had expanded their business with the OCBC Group. The growth trajectory of the acquired banks accelerated and new horizons opened. How did OCBC execute its acquisition strategy? What was its approach to integrating its acquisitions?

HBSP No.: NTU109 Ref No.: ABCC-2017-005 Date: 13 April 2017

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This document is authorized for educator review use only by Florencio Lopez De Silanes, SKEMA Business School Sophia Antipolis Campus until August 2018. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860

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BACKGROUND As Singapore’s oldest bank, OCBC traces its commercial banking roots to 1912 with the merger of three banks in 1932 to create the current entity: Chinese Commercial Bank (incorporated in 1912), Ho Hong Bank (1917) and Oversea-Chinese Bank (1919). In 1925, it opened its first branch in Xiamen (China), being the first Singapore bank to do so. Under the leadership of founders Dato Lee Kong Chian1 (chairmanship from 1938 – 1964), Mr Lee Choon Seng2 (1965 – 1966), and Tan Sri Tan Chin Tuan3 (1966 – 1983), OCBC flourished and was listed prior to Singapore’s independence in 1965. It is now the second largest financial services group in Southeast Asia and a constituent of the benchmark Straits Times Index (STI), with the second heaviest weighting at 12.3%. Beyond organic growth, OCBC expanded through various acquisitions over the years. OCBC acquired Four Seas Communications Bank in 1972, and in 2001, embraced consolidation in Singapore’s banking sector with the purchase of Keppel Capital Holdings Ltd and subsidiaries (see Annex A for financial industry background). Not content with having just a Malayan presence to grow organically, OCBC sought complementary services and newer markets, targeting in particular populous countries in the region to support its desire to be a significant Asian financial services group, with a broad diversified footprint in North and South East Asia. In 2004, OCBC increased its 48.8% stake in associate company4 Great Eastern Holdings (“GEH”) to 81.1%5, thereby creating a diversified financial services group. In the same year, it raised its 22.5% stake in Indonesia’s PT Bank NISP to 51%6 by buying out the stakes of the founding family, thereby triggering a general offer and making it the first Singapore company to gain a majority stake in an Indonesian bank. It currently holds 85% in OCBC NISP. Further diversification saw the formation of Lion Global Investors in 2005, from the merger of OCBC Asset Management and Straits Lion Asset Management, to realize synergies in investment product capabilities across a broad array of asset classes. The acquisition of ING Asia Private Bank7 in 2010 (subsequently renamed Bank of Singapore Limited8, with the injection of OCBC’s private banking business), transformed OCBC’s wealth management strategy, by providing it with a strong presence in the high net worth segment and cementing OCBC’s position as a leading wealth management player in Asia.

1 As the general manager and vice-chairman of Huayi Bank, Lee spearheaded the merger of the three banks to create

OCBC. Also known as “Southeast Asia's Rubber and Pineapple King”, he was one of the richest men in the region. 2 Lee started several local Chinese banks, including Ho Hong Bank, to assist businessmen who had newly arrived in

Singapore, and had difficulty obtaining loans from established Western banks. Other interests included confectionery, property development, and rubber plantation cultivation.

3 Tan grew up during the Great Depression under austere conditions, which formed the foundation of his conservative approach to financing. In 1925, he joined the Chinese Commercial Bank as a junior bank clerk at the age of 17. His 58 years of service at OCBC earned him the credit as the man who made significant contributions to OCBC’s growth and development.

4 Since 1958. 5 Subsequent purchases raised OCBC’s holdings in GEH to 88% as of Dec 2015. GEH is now amongst the oldest

and most established insurance group in Singapore and Malaysia, with over 4 million policyholders. 6 This buyout was at an estimated cost of $160 million, based on the same price formula of 2.5 times Net Tangible

Assets for the initial 22.5% stake. Cost of total stake estimated at S$900 million. 7 Cost of total stake estimated at S$2.024 billion, based on 17 times normalised 2008 net profit of US$88 million, or

1.6 times net asset value of US$925 million at August 2009. 8 Bank of Singapore was previously a commercial banking subsidiary of OCBC and became an internet bank in 2000.

In Jan 2010, OCBC transferred the Bank of Singapore name to ING Asia Private Bank after acquiring the entity. The internet bank ceased operations in 2013. Do N

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To augment its Greater China presence from its 20%-owned associate company Bank of Ningbo9 and its subsidiary OCBC Bank China Limited10, OCBC acquired11 family-owned Wing Hang Bank in July 2014. This was the largest takeover of a Hong Kong lender12 since 2011. Today, OCBC provides corporate, investment and retail banking via its more than 610 branches and representative offices in 18 countries and territories, in the key markets of Singapore, Malaysia13, Indonesia and Greater China, and amongst others, the developing markets of Vietnam and Myanmar. Between 2011 and 2016, total net profit grew at a CAGR14 of 9% to $3.5 billion, with overseas contributions outside Singapore and Malaysia more than doubling from 15% of the group’s total in 2011 to 31% in 2016. See Exhibit 1 for financial information and Exhibit 2 for segmental breakdown. The Group’s Common Equity Tier 1 capital adequacy ratio (CAR) was 14.7%, with Tier 1 CAR and Total CAR at 15.1% and 17.1% respectively, well above the regulatory minima of 6.5%, 8% and 10% respectively. This, plus its strong capital base, has earned it its ranking as ASEAN's15 strongest bank, and a place among the world's five strongest banks, for five consecutive years by Bloomberg Markets since its ranking inception in 2011. OCBC was also named the Best Bank in Singapore by Euromoney’s Awards for Excellence in 2015 and ASEAN SME16 Bank of the Year for the fifth consecutive year by Asian Banking & Finance Retail Banking Awards 2015. MANAGEMENT AND CULTURE A key and long-serving member of the OCBC Board, Mr Lee Seng Wee17 was a cornerstone of OCBC’s growth. Throughout his almost 50 years as director from 1966 to 2015, he also doubled up as Chairman and Chief Executive Officer (CEO) from 1995 to 2003. He passed away on 7 August 2015. During his tenure, he nurtured and guided two succeeding CEOs: David Conner18 (2002 – 2012) and Samuel Tsien (2012 – to present).

9 First acquired in 2006 as a strategic investment, then raised to the maximum holding level allowed under China

banking regulations. 10 Incorporated in 2007. 11 Cost of total stake estimated at S$6.2 billion. 12 DBS bought Hong Kong's Dao Heng Bank for US$5.8 billion in 2001. 13 Through OCBC Al-Amin, OCBC is the only Singapore-based bank that operates a standalone Islamic bank. 14 Compound annual growth rate. 15 Association of Southeast Asian Nations. 16 Small and Medium-sized Enterprise. 17 The third son of Mr Lee Kong Chian, Lee also served as a board member of the Government of Singapore Investment

Corporation and sat on the Council of Presidential Advisors. Always taking a long-term perspective to the business, he built a strong home-base, from which OCBC could springboard into the region. In 2001, he led the successful acquisition of Keppel Capital Holdings and subsidiaries, and was the driving force behind the subsequent investments in Bank NISP and Bank of Ningbo, as well as the purchase of ING Asia Private Bank and Wing Hang Bank. Lee was more than just a far-sighted captain of the industry. Recognized for his equitable business practices and deep demonstration of concern for the common good beyond financials, he was conferred in 2006 the international Woodrow Wilson Award for Corporate Citizenship by the Woodrow Wilson International Centre for Scholars, USA. This embodied his life-long belief that the fortunate “should pay back to society what we get from it” and underscored his low-profile life, as a distinguished banker, philanthropist and gentleman. His values of humility, integrity and a deep-seated sense of social responsibility continue to be embraced in OCBC today.

18 A commercial banker with more than 30 years of experience, David Conner had a luminous 25-year career with Citibank, starting in New York. He eventually became Country Corporate Officer for Singapore, CEO of India and Managing Director of Japan before joining OCBC in 2002. A member of the Corporate Governance Council of the Monetary Authority of Singapore (MAS), Conner grew OCBC into a regional bank with the successful integration of two major acquisitions under his charge: Bank NISP and ING Asia Private Bank. Capping off his 10-year service with OCBC, he won the Outstanding CEO of the Year award at the Singapore Business Awards in 2011. Do N

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Born in Shanghai, Samuel Tsien spent 15 years of his 39-year banking career in Hong Kong, as President and CEO of Bank of America (Asia) and China Construction Bank (Asia) Corp, before joining OCBC in 2007 as Senior Executive Vice President, managing the Group’s corporate and commercial banking business. He was then appointed Global Head of Global Corporate Bank in 2008, taking on added responsibilities of overseeing the financial institution and transaction banking businesses. In 2012, he took over the helm as Group CEO. With the acquisition of Wing Hang Bank in 2014 and the integration of OCBC’s China operations with Wing Hang’s, Tsien confidently steered OCBC to North Asia. Very focused on relationships, Tsien said,

“In my dealings with friends and colleagues, being sincere is very important... You want to be your true self, and you want the other person you interact with also to be their true selves.”

Believing that building a business is more than just putting in capital investment, Tsien views his main task as making sure that the bank stays on the right course. These are some of the very reasons why he was named winner of the Asian Banker CEO Leadership Achievement Award for Asia Pacific19 for achievements in the period of 2013 – 2016. Said the founder of the award, Emmanuel Daniel,

“We believe that leadership is best validated in the most competitive or difficult marketplaces… M&A integration, especially large scale and cross-border ones, is an indication of an ability to tackle a degree of difficulty… Great CEOs are also characterised by the people they surround themselves with… Samuel Tsien represents a personality that has brought together team players with a very strong sense of ownership.”

STRATEGY One of the first tasks former OCBC CEO David Conner undertook upon assuming the helm was a structured strategic planning process, from which the New Horizons strategy, spanning 2003 – 2005, was born. This framework outlined the expansion of OCBC’s regional network through strategic investments in Indonesia and China, and the transformation of its Malaysian operations. Subsequent plans were extended to cover a five-year period. New Horizons II (2006 – 2010) laid the thrust to extend OCBC’s wealth management franchise and improve market positioning in Singapore and Malaysia while strengthening OCBC’s presence in Indonesia and China. Approximately S$3.2 billion was spent during this period on strategic investments20, while gains of S$820 million were realized on the sale of non-core assets.21 Having made good progress and meeting every goal in transforming OCBC into a larger, stronger, and more diversified financial services group, the New Horizons III was crafted to address the following trends from 2011 to 2015: 1. Intensified competition for customers, talent, capital and licenses; 2. Entry of non-bank players in financial services, enabled by new technologies (“fin-tech”); and 3. More stringent capital, funding and liquidity requirements given the proposed Basel III regulations.

19 Awarded only once every three years, to provide gestation of strategies and for the more enduring qualities of

leadership to become evident. CEOs from banks across 30 countries in Asia, the Middle East and Africa, are assessed.

20 Including GEH, Bank OCBC NISP, and Bank of Ningbo. 21 Including some properties plus equity stakes in Robinsons, Straits Trading Company and Raffles Holdings. Do N

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OCBC’s strategy going forward thus focused on four key elements: 1. Business scorecard, to strengthen its market position in Singapore, enhance customer and product

capabilities, extend risk management and capital management capabilities across the Group, and strengthen employee engagement;

2. Deeper presence in Malaysia, Indonesia and Greater China, by expanding distribution capabilities to

expand market share in Malaysia, building on the enlarged OCBC NISP franchise in Indonesia as a single business presence, establishing closer integration of operations across Greater China and building its private banking business through Bank of Singapore;

3. Experience, by investing in customer experience delivery capabilities across the Group and tapping on

customer insights to develop and implement superior value propositions to gain sustainable competitive advantage; and

4. Leveraging group synergies, by increasing cross-selling and customer referrals across the Group, and

enhancing operational effectiveness through the deployment of common corporate resources. Conner explained,

“We're working hard to differentiate OCBC. Frankly, differentiating in business is a very difficult thing to do, but once you're able to do it, you can deliver a sustained competitive advantage. Given the constraints on resources and the ability to apply existing models to new overseas markets, the preferred approach was to be focused on just a few markets….. My attitude is not so much that we want to control that bank; that we want to be able to put our people in and kick other people out….... The issue from my vantage point is we have capabilities and want to inject them into banks where we get a fair return on our skill set.”

He believed in following OCBC’s mapped-out strategy in a disciplined manner, not in comparison with any competitor bank, but with the steadfast aim to create something unique to OCBC, that will work and pay off for shareholders over time. Thus, his selection criteria for acquisition targets was not size dependent, but critically, whether they fit with OCBC, which to him, lay either in distribution (network) to inject products to add value; or product, to reverse the process by injecting OCBC’s existing network. If neither were available and the only resultant was the footprint, then the acquiree had better be inexpensive. As New Horizons III drew to a close, Samuel Tsien since taking over, confirmed the approach of the earlier years:

"Because I came from within, as part of the original leadership, if there's any new direction that I think is worth moving into for the bank, I would have recommended it already. So it's fair to say that directionally I think we are correct …. Past investments were all in our four core markets of Singapore, Malaysia, Indonesia, and Greater China. Our strategy had been about broadening and deepening our presence in these markets – we’ve never veered away from that focus.”

Just as Singapore had capitalized on its position as a natural hub for trade flows across the region, Tsien has similar plans for OCBC to leverage on the rising flow of capital, investment, wealth and people between countries in Asia, and tap into the rise of China as the dominant driver of Asia's economies. Tsien said,

“These countries are big economies but we continue to have significant ability to scale up and deepen our presence in them. It is a good foundation for future growth.”

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He does not have ambitions for OCBC to be a global bank; being an international bank will suffice, with the distinction that,

“If an acquisition supplements our franchise in our core markets, we will definitely look at it. If it is simply to enter a new country outside our core markets, then that’s not our preferred route.”

However, where customer requirements so dictate, OCBC is prepared to establish a presence, such as developed markets like Japan and the UK, or emerging ones like Myanmar. Tsien’s strategy, for OCBC to be a leading and well-diversified Asian financial services group with a broad footprint in North and Southeast Asia, is to ensure that its level of service overseas is comparable to that back home. Thus, he will continue to build on areas where OCBC has competitive advantage, namely retail and commercial banking, wealth management and insurance. Said Tsien, “We will need to continue to deepen our presence …. and complement it with services we currently do not have”. Further details can be seen in Exhibit 3. In seeking acquirees, Tsien emphasizes cultural fit as the key element. As the world changes and OCBC becomes a regional bank, OCBC is prepared to modify its own culture to be in tune with market changes and consumer preferences. Recognizing that OCBC does not have all the pieces to compete in new markets, Tsien thus makes it a point to respect the management and culture of the acquirees, so that the enlarged OCBC entity is better positioned to take on new challenges. He terms this “value accretion”, where parts of each entity if left on its own, will be unable to reach stretch goals, but when combined, reaps synergistic benefits to enable them to scale new heights. To Tsien, this, is even more important than mere earnings accretion, which tends to be short-term focused. Thus, OCBC embraces a “group approach which accommodates the acquirees’ strengths and legacy”, premised on his baseline belief that everyone wishes to perform. The more resources and capabilities they are endowed with (typically in the first phase of the integration exercise), the more quickly they can move onto the next and more critical value accretion phase for the OCBC group. OCBC’S ACQUISITION APPROACH Often described as a bank with patience, OCBC’s approach towards acquisition plays that out to the “T”. Recognizing that most of the assets acquired “travel up and down escalators everyday”, OCBC takes great pains to retain the talents it has acquired of each entity, so that business can function with minimal interruptions upon takeover. The combination of retention packages for key personnel and OCBC management’s attitude, approach and assurance to the acquirees’ staff convey the bank’s sincerity to work collaboratively and synergistically. With most top management and senior staff of acquirees still in place, OCBC gains not only continuity of operations but also retention of most acquirees’ customers and portfolios. To safeguard against differing practices and tolerances towards risk, OCBC emphasizes the alignment of the four key functions of Finance, Risk Management, Compliance and Audit of its acquired entities, with that of the head office’s (HQ). While not all sub-segments of these functions have to be aligned immediately, OCBC has a detailed blueprint of all the critical areas that need to be managed. Spearheaded by an Integration office at HQ and supported by similar set-ups in each acquiree, integration begins the moment the official news is released. Critical functions to be ready by Business Day One22 are tackled first, with reporting done weekly for all the workstreams under each function, to an overseeing panel constituting management team members of both OCBC and the acquiree, to facilitate the quick resolution of issues. Other non-critical functions have their place in the workplan, which can stretch to three years, though introduction of new products and systems sometimes have timelines beyond that, depending on the ability of both the acquiree and the acquired market to receive them. 22 First day of business as the merged entity. Do N

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INDONESIA: ACQUISITION OF NISP History NV Nederlandsch Indische Spaar En Deposito Bank was established in 1941 in Bandung, West Java. In 1958, it was renamed Nilai Inti Sari Penyimpan, and further shortened in 1981 to NISP, with the abbreviation becoming the bank’s name. Following OCBC’s purchase and NISP subsequently being its majority-owned subsidiary in 2005, the name of PT Bank NISP Tbk changed to PT Bank OCBC NISP in 2008. To date, NISP is the fourth oldest bank with a 75-year history in Indonesia, having benefitted from investments by the International Finance Corporation (IFC) of the World Bank in the earlier years. Focusing on the mass-market and SME segments, NISP’s culture was inseparable from the role of Karmaka Surjaudaja and Lelarati Lukman, the Founding Chairman and Chairwoman23 respectively. In 1990, it became a licensed foreign exchange bank, and in 1994, it was listed on the Indonesian Stock Exchange. Despite the “worst banking meltdown” (according to the World Bank) in the late 1990s, NISP managed to survive without any government support. The IFC was thus comfortable enough with the stability of the bank, to sell its stake to OCBC in 2010. In 2011, NISP reached an important milestone: OCBC consolidated its subsidiary, Bank OCBC Indonesia, with NISP, leaving Bank OCBC NISP as the remaining entity, in a move belying HQ’s confidence in and commitment to the standing of NISP. Strategy and Management Pramukti Surjaudaja24, the son of NISP founder Karmaka Surjaudaja, has been Chairman of OCBC NISP since December 2008, after having served 11 years as its President Director. Since 2004, he is also concurrently a Non-Executive Director at OCBC Bank. With his sister Parwati Surjaudaja25 as the President Director of OCBC NISP since 2008 and its CEO, they have collectively 48 years of experience in commercial banking. In 2015, Ms Surjaudaja was ranked one of the Best CEOs in the Bisnis Indonesia Award by Bisnis Indonesia Newspaper. From 2009 to 2013, Globe Asia Magazine also named her as one of the 99 Most Powerful Women in Indonesia. An OCBC veteran since 1990, Mr Na Wu Beng was posted to OCBC NISP in 2005, shortly after it became a subsidiary of OCBC. He oversaw the integration of NISP into the OCBC family, and subsequently, the injection of Bank OCBC Indonesia into NISP. Together with the Surjaudaja siblings in 2012, he introduced a new corporate concept named ONe PIC26, to strengthen the bank’s preparedness for the future, especially as he extended the bank’s business segments to serve small businesses, and at the other extreme, the high-end corporate segment, targeting in particular Indonesian-Chinese businessmen, who saw the banks familiar to them disappear during the “worst banking meltdown”. After having served five years as Deputy President Director of OCBC NISP, Mr Na was called upon to be the CEO and Executive Director of OCBC Wing Hang in 2014. 23 Official titles accorded by OCBC NISP. 24 Subsequent purchases raised OCBC’s holdings in GEH to 88% as of Dec 2015. GEH is now amongst the oldest

and most established insurance group in Singapore and Malaysia, with over 4 million policyholders. 25 Previously served as Deputy President Director (1997 – 2008) and Managing Director (1990 – 1997) handling

various areas, including Human Resources, Finance and Planning in NISP. She was also Senior Consultant at SGV Utomo / Arthur Andersen (1987 – 1990), Board of Management of Perbanas (2012 – present) and Board of Management of Indonesian Bankers Association (2011 – present).

26 ONe PIC is abbreviated from OCBC NISP one, Professionalism, Integrity, and Customer Focus. Professionalism: Employees take pride in being professional and accountable for everything they do. Integrity: Employees consistently act on what they say with integrity. Customer Focus: Employees focus on customers in everything they do. Do N

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Integration Approach / Process, Obstacles, and Lessons Learnt With a relationship nurtured over the years from its first purchase of a minority stake of 22.5% in 2004, OCBC had the opportunity to build relationships and familiarize itself with the style of its partner before taking majority control by raising its equity holding in NISP to 74.7% in 2008. Mindful that NISP had, through the years, been well managed and not in need of any financial rescue, OCBC management assured the Surjaudaja family of the importance of not only their, but the staff’s, continued presence. This assurance was particularly appreciated against the back-drop of significant industry consolidation27 and retrenchments upon takeover. Concurrently, NISP was keen to take their relationship with OCBC to the next level, to capitalize on the OJK’s28 blueprint to develop the banking industry in 2012, and NISP’s recognition of their own limitations in capital, technology and products to transform the bank to the next stage. The Surjaudaja siblings thus took great pains to explain to the staff, the vision of NISP being part of a larger financial services group, with a more extensive regional reach beyond Indonesian shores, and also with a broader capital base. Given the deep entrenchment of the NISP brand within the hearts and minds of Indonesians, OCBC retained the name as part of the merged entity. Despite the generally positive reception by both parties, some obstacles did surface: 1. Difference in expectations, management culture, language, etc. Moving from a minority to a controlling

stakeholder in a well-managed bank was not an easy process. Previous dealings set expectations, thus rendering changes difficult. While initial efforts to align the four critical functions were successful, subsequent introduction of new products and systems took much longer. Complicated by a vastly different culture across two countries, language differences and a family- versus professional-management approach, the early staff sent by OCBC to oversee NISP faced numerous challenges. NISP employees were unsure of OCBC requirements, resulting in second guessing. In a country where seniors are often referred to as “pak” (father) or “ibu” (mother), the Indonesians found the Singaporeans’ requests somewhat insensitive. Coupled with having to learn a new language to file multiple new reports to HQ, the Indonesians were overwhelmed, which similarly frustrated their counterparts in Singapore. This not only slowed down the process of knowledge transfer, but also significantly held back the upside benefits of cross-border product and system introduction.

2. Regulatory constraints. Integration of NISP was also complicated by banking secrecy rules and other

requirements established by the OJK. Despite being the parent and controlling shareholder, the flow of information to OCBC was hampered. Additionally, the inability to get regulatory approval to station more OCBC staff on-site to facilitate the integration process meant sending OCBC staff over only on project-based and adhoc requests.

3. Differing risk management / credit approval approach. While NISP had one of the lowest default rates in

the industry then, it had operated mainly on a collateralised, relationship basis. As risk management is one of the four functions critical to OCBC’s oversight, it wanted to introduce a more systematic scoring system, to assess clients’ credit worthiness. The lack of available data points in the face of a completely new approach to underwriting risks, led to many iterations and thus staff unhappiness between not only between NISP and OCBC, but also between NISP’s Credit and Marketing departments.

To resolve these issues, OCBC sent one of its senior executives, Mr Na Wu Beng, to facilitate the integration process. As regulatory requirements were extended mainly to staff, and to a lesser extent the board of directors / commissioners, Na was seconded initially as a Commissioner before eventually heading the Credit Department, to introduce the new approach to credit approval. Na, in turn, was supported by an OCBC Board Director, who was not only familiar with Indonesia, but also highly respected and trusted by the Surjaudaja family. Describing his experience in NISP and the key to success in overcoming obstacles

27 Buana Bank was acquired by UOB, Lippo Bank by Malaysian-owned CIMB, and Bank Danamon by DBS. 28 Otoritas Jasa Keuangan, the Financial Services Authority of Indonesia. Do N

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and introducing changes, Na said, “A decision that was taken earlier was probably the best at that point in time. We cannot come in to criticize the move now”. This created a friendly and neutral platform to seek solutions to any obstacle that arose post-merger. Years later post Na’s departure, the Surjaudaja siblings in their reflections, wondered “how they had been able to manage a bank in Indonesian waters without OCBC’s best practices!” SINGAPORE: ACQUISITION OF ING ASIA PRIVATE BANK History ING Asia Private Bank (IAPB) was the Singapore-based Asia Pacific asset management arm of ING Bank. Consistently ranked among the top five private banks in Asia by Asiamoney, IAPB derived its success from its solid foundation of an experienced senior management team, seasoned relationship managers, loyal customers and extensive product capabilities supported by an efficient technology platform. Its 150 relationship managers served more than 5,000 clients from South East Asia, India, Greater China, Japan and Korea, resulting in approximately US$16 billion AUM29 as at 2009, with a very respectable CAGR of 24% from 2002. The 2008 financial crisis rocked the very foundation on which IAPB was built. The value of client assets plummeted while parent ING Group saw its share price plunge as it fought off fears of it going under. IAPB was thus slapped with a triple conundrum: (1) clients threatening to liquidate portfolios; (2) its inability to raise cash, especially in a declining financial market, and (3) clients’ concern over the owner’s financial weakness. As a jewel of the ING Group, IAPB ended up being offered to new owners. In October 2009, OCBC emerged winner in fierce bidding, at a cost of almost $2 billion, outbidding established banks like HSBC and DBS. On completion of the acquisition in January 2010, IAPB was merged with OCBC’s existing private banking arm, and renamed Bank of Singapore Limited (BOS). Chosen to leverage on Singapore’s brand image as a world-class financial centre famed for its efficiency, transparency and best-in-class services, BOS became the only dedicated, fully licensed private bank headquartered in Singapore. Existing OCBC private bank customers benefitted from BOS’s open architecture product platform and proprietary research, while former IAPB customers benefitted from access to OCBC’s offerings, such as property financing, brokerage, insurance and retail and SME banking products and services. Such cross-marketing allowed its mass affluent segments to enjoy the level of service accorded to the high net worth segment. The addition of IAPB almost tripled OCBC’s scale with more than 7,000 clients across Asia, a dedicated team of 200 relationship managers and combined AUM of US$23 billion, the highest amongst its local rivals. The acquisition thus marked not only a transformational leap in OCBC’s goal to become a leading player in private banking (as articulated in New Horizons II), but also built on earlier initiatives to expand OCBC’s wealth management capabilities, namely the increase of its stake in Great Eastern Holdings to 81.1% in 2004, the merger of the asset management businesses to form Lion Global Investors in 2005, and the acquisition of Malaysia’s PacificMas Berhad30 in 2008.

29 Assets Under Management. 30 PacificMas Berhad provides hire purchase, leasing, factoring, as well as the management of unit trust funds and

private investment mandates, comprising equity, balanced, fixed income, money market and mixed asset funds comprising conventional and Islamic funds. Do N

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Strategy and Management With 33 years of banking experience under his belt, Mr Renato de Guzman cut his teeth in the industry in the Philippines, joining ING in 1990 as country manager. After successfully setting up and distinguishing ING's Asia-Pacific private bank in a landscape dominated by giants such as Citibank, de Guzman was appointed CEO in 2000, with US$3 billion AUM. Said to move easily among the monied circle, de Guzman was also able to inspire loyalty among his staff – a rarity in an industry where staff turnover was rife. He attributed this to his strict discipline to spend a third of his time with clients, a third on management and a third on investments. As CEO of BOS post-acquisition and a member of OCBC's management committee, de Guzman set BOS the ambitious goal to become one of the top three private banks in its core markets, riding on BOS’s strategic positioning:

"High net worth clients looking to diversify to Asia would want to bank with a Singapore bank. A pure play private bank like BOS stands out – we react faster to market changes and are not exposed to the risks relating to commercial or investment banking. Our ability to tap on OCBC's network of branches and corporate banking services assures us of multiple streams of revenue.”

The financial strength of OCBC and Singapore's reputation as a leading wealth management centre, surely were distinctive advantages of BOS that de Guzman sought to capitalize on. Upon de Guzman’s retirement in Feb 2015, Mr Bahren Shaari took over. A private banking veteran with the Union Bank of Switzerland, he joined IAPB just before it was offered for sale. Despite having part of his South East Asia portfolio carved out for the jurisdiction to be retained by the OCBC private banking team, Mr Bahren was positive about the integration exercise as he felt that OCBC was very clear in communicating the changes,

“Everyone wanted to believe in the story of the future, especially since the “Bank of Singapore” name really resonated with overseas clients who had been rocked by the financial crisis.”

Mr Olivier Denis, who had headed OCBC's private banking business for three years prior to the merger, was credited for integrating OCBC's private banking business into BOS, as part of de Guzman's senior management team. He stabilized the boat in the face of about half of OCBC’s private banking team seeking to leave. Integration Approach / Process, Obstacles and Lessons Learnt OCBC was very clear that in buying IAPB, it was not just IAPB’s assets but a new business that it was after: wealth management was a strategic growth market and it did not have a strong presence in the high net worth customer segment then. Prior to the merger, OCBC only had a small private banking set-up. Having thus to be business operational from day one post-merger was even more critical, particularly in an environment where staff turnover was typically higher than commercial banking, and where clients tended to follow their relationship managers. Unlike the case of NISP, where OCBC had the luxury of slowly courting the partner, OCBC had precious little time after winning the competitive bid for IAPB to get a deep understanding of its operations. Retaining the senior management team in place not only ensured the resumption of business as usual upon takeover, but bought the cooperation of rank and file staff in identifying and integrating key procedures. For instance, the IT infrastructure critical to supporting all business dealings on Day One, had to be in place since its parent infrastructure (ING’s network) would terminate the second after midnight on the day of change in ownership. Such time sensitivity and the lack of a long pursuit of the bride, especially in the face of a new business inherently had its obstacles: Do N

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1. Difference in operational structure and business culture etc. In an environment where decision making was very decentralized away from ING, de Guzman and his two deputies were thus very hands-on, and readily made business and operational decisions in quick response to changing market conditions. This potentially necessitated the reversal of earlier decisions, in light of new sources of information or changing circumstances. With OCBC’s decision making process being a lot more structured and thus described as slow and “civil service-like” by IAPB staff, such reversals by the IAPB management were seen as indecisive flip-flopping by their OCBC counterparts. While most business decisions were left to de Guzman and his team, in recognition of their deep understanding of the business, OCBC brought BOS’s Compliance function under its direct oversight and sent a senior staff member to take charge of Audit;

2. Difference in staff retention practices. IAPB employees were all offered retention bonuses, but this was

unfortunately not extended to OCBC’s own private bankers. Frustrated with the difference in treatment towards “foreigners” (IAPB was like a mini United Nations, with staff of many nationalities), about half of OCBC’s 12 private banking team members left, with their departure hitting the news. Although the number was small, the damage was done, and OCBC had to extend the bonus to the half who stayed; and

3. Alignment of staff salary within BOS, and across OCBC group. OCBC staff involved in the integration

and who eventually stepped over to BOS had an immediate pay rise since BOS’s salary scale was largely pegged to international market rates, while OCBC’s was largely based on local conditions. OCBC very quickly stepped in to manage staff expectations across the rest of the group by keeping BOS separate and seconding only staff required for critical functions. Other staffing needs were sourced externally, thereby speeding up the process of removing the distinction between the “IAPB” and “OCBC” camps and resulting in a quicker “think BOS” mentality.

As CEO of BOS, Mr Bahren subsequently applied a similar approach in its 2016 acquisition of Barclays Bank’s Wealth and Investment Management business in Singapore and Hong Kong. He believes that in any integration exercise, it is critical to build an organizational structure upfront, and clearly communicate that to all staff first and foremost, regardless of whether they have a place in the new structure. With the top and second-level management in place, business can then resume, serving clients quickly whilst managing operational integration issues. Secondly, the business has to communicate clearly its risk framework to guide the new comers to the preferred approach to business. With the perspective that the newcomers are equal partners, BOS is prepared to adopt selected platforms and products from the acquirees, thereby retaining not only the talent but the clients who were familiar with them. Finally, in managing the cultural difference between the two organizations, Mr Bahren is open to changing BOS’ existing practices where necessary to better cater to acquired clients. He attributes the success of BOS to OCBC’s decision to operate its private banking business as a separate entity, thereby allowing BOS the speed to quickly respond to changes in its operating environment, which may be different from commercial banking. GREATER CHINA: ACQUISITION OF WING HANG History Founded in 1937 in Canton as a money changer by Mr Y. K. Fung, Wing Hang was among the oldest local Chinese banks in Hong Kong. With the outbreak of the second World War in 1941, it diversified into Macau, setting up a subsidiary, Banco Weng Hang. In 1945, like many other Chinese banks, it resumed operations in Hong Kong. In 1973, the Irving Trust Company (ITC) of New York acquired a majority interest in Wing Hang, offering it a stronger capital base and the expertise of a major international bank. ITC itself then Do N

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merged with The Bank of New York (BNY)31 in 1989. Four years later, Wing Hang Bank listed its shares on the Hong Kong Exchange. With that as financial currency, Wing Hang acquired two banks in the next decade: in 2004, Chekiang First Bank, for its solid credit history and high quality portfolio; and in 2007, Inchroy Credit Corporation, for its hire purchase and lease financing business. The resultant Wing Hang largely served small and medium-sized enterprises in Hong Kong, Macau, and the Pearl Delta Region, with a focus in the automobile and equipment financing business. Competition to acquire Wing Hang in 2013 was keen, with no less than eight suitors including Singapore's UOB, Australia & New Zealand Banking Group, and China's Anbang Insurance. In January 2014, OCBC entered into exclusive talks with Wing Hang, but discussions over price only came to a conclusion in April, with OCBC securing consent to buy over, at HK$12532 apiece, the combined stakes of at least 50.66% from the founding Fung family, BNY and other key shareholders. While OCBC’s acquisition was never in doubt, complications arose when activist hedge fund Elliott Management accumulated an almost 7.8% stake. With OCBC holding firm to its offer and indicating its preparedness to keep Wing Hang listed, Elliott and other remaining shareholders eventually tendered their holdings on the closing offer date of July 29, giving OCBC 97.5% ownership and thus the ability to delist Wing Hang. On 1 October 2014, Wing Hang was rebranded as OCBC Wing Hang. Strategy and Management Son of founder Y. K. Fung, Patrick Fung relinquished33 his role as CEO upon the takeover, as OCBC appointed him chairman of OCBC Wing Hang. A Justice of Peace as well as vice-president of the Hong Kong Institute of Bankers, Fung had extensive experience at Wing Hang, having served since 1976 before being appointed Director in 1980, CEO in 1992, and finally Chairman in 1996. Given his experience at OCBC NISP, Mr Na Wu Beng was posted to manage OCBC Wing Hang in 2014. Na first joined OCBC as the General Manager of the bank’s Hong Kong branch, and was responsible for the operations in Hong Kong for nine years before being appointed Head of North Asia, OCBC. Prior to OCBC, Mr Na also had extensive experience in Taipei, Taiwan as the General Manager of the International Bank of Singapore. Even prior to the acquisition of Wing Hang, OCBC had had a Greater China business council since 2011 to better position the bank to capture business opportunities in the economic bloc of China, Hong Kong and Taiwan. Chaired by Tsien, the council’s members included country managers in China, Hong Kong and Taiwan and heads of key business groups such as consumer banking, corporate banking, treasury, and private banking, along with risk management representatives. Through the monthly council meetings, the members shared information about the region and coordinated and integrated efforts to better serve the onshore and offshore needs of customers. With little overlap or duplication between the businesses of the two banks, there was little room to extract cost savings. However, the acquisition of Wing Hang provided OCBC with not only earnings diversification34, but also the following three competitive advantages:

31 Now named Bank of New York Mellon Corp. 32 At 1.77 times December 2013 net book value, versus the 1.2 times at which Wing Hang was trading and the 1.9 to

2 times investors were expecting. 33 As with Wing Hang's directors – Cheng Hon Kwan, Billy Li Sze Kuen, Brian Gerard Rogan, Stephen Dubois Lackey,

Ho Chi Wai Louis, and Michael Fung Yuk Sing. 34 With Wing Hang, the Greater China region accounted for 20% of OCBC Group pre-tax profits in 2015, versus single-

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1. Enlarged Greater China platform, in particular, expanded presence in the Pearl River Delta35 region. With 13 of its 31 branches in China located in the Pearl River Delta, versus only one branch in Guangzhou previously, OCBC Wing Hang now has a strong foothold in the region relative to foreign banks, which generally are better-established in northern China, but have little presence in the south. The Pearl River Delta is one of China’s growth hubs, accounting for more than 25% of China's total exports in 2012. Its economy is on par with Indonesia, and it overtook Tokyo to become the world’s largest urban area in size and population as early as 2010;36

2. Greater wealth management opportunities to cross-sell wealth and bancassurance products to OCBC

Wing Hang’s affluent retail customers and SME entrepreneurs; and 3. Access to a larger funding base in renminbi and Hong Kong dollars37, which by virtue of the currency

peg, provides an ample supply of US dollars. Southeast Asia does not have a large supply of US dollars to facilitate cross-border trade, investments or capital injections. Prior to the acquisition, OCBC's deposit base comprised largely of the Singapore dollar, Malaysian ringgit and Indonesian rupiah, which are not international currencies. Without Wing Hang, OCBC had limited access to the US$600 billion trade between China and the Asean-4 (Singapore, Malaysia, Indonesia and Thailand) and its US$90 billion investment flow. The internationalization of the renminbi will also render it an increasingly important currency for trade settlement, thereby improving OCBC’s standing to capture cross-border transactions.

Thus, with Wing Hang's network, OCBC will be plugged in to the fastest-growing region in the world's second biggest economy and largest trading nation. Integration Approach / Process, Obstacles and Lessons Learnt The first merger and integration under Tsien, OCBC’s approach was not dissimilar to that of its previous mergers though the courtship was distinct from the others. Credited as the “match-maker”, Tsien played a pivotal role in introducing Patrick to the Lee family. With Wing Hang being one of the last few family-owned banks available on the market, it was not short of suitors – it just had to decide who it would accept, and when. In Patrick’s words, his first meeting with Mr Lee Seng Wee was not very different from “相见” (siang jian, the pre-nuptial meeting between parents of a couple). Similar educational experiences from the University of Toronto between Mr Lee and Patrick, together with their conservative banking approaches and deep concern for staff, were common grounds they had. Feeling at home with the potential “in-laws”, the Fung family was confident of OCBC’s commitment to maintain the stability of the Wing Hang business and to protect Wing Hang’s loyal employees. OCBC guaranteed the retention of all Wing Hang staff for an 18-month period, with Tsien in particular reminding OCBC staff that in integration, “HQ practice is not necessarily the best practice”, recognizing the strength of Wing Hang’s entrenched loyalty and goodwill with its customers. OCBC was in turn enthused by the dedicated and experienced management team who were deeply convinced of the need for marriage (having themselves taken over other banks before) and the desire to make the marriage work. OCBC also kept the Wing Hang name in the bank’s new brand identity, OCBC Wing Hang. Despite such assurances and mutual understanding, integration was not entirely smooth sailing despite the by then tried-and-tested and very detailed integration blueprint, broken into bite-sized workstreams mapped over 3 years: 35 Encompassing a sizeable chunk of China’s manufacturing heartland – Shenzhen, Guangzhou, Foshan and

Dongguan – with a population of 42 million. Shenzhen, in particular, is famed for its culture of innovation, focusing on high-tech consumer gadgets.

36 Per World Bank 2015 Report: “East Asia’s Changing Urban Landscape: Measuring a Decade of Spatial Growth”. 37 According to the Hong Kong Monetary Authority, RMB deposits at 925.9 billion yuan and USD deposits at US$377.3

billion in June 2014 made up 11% and 30% respectively of the HK$9.6 trillion deposit pool in Hong Kong. For the same period in Singapore, RMB deposits totaled 142 billion yuan, while Asian currency unit deposits (in US dollars) totaled US$179 billion. Do N

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1. Integration within integration. While the purchase of Wing Hang gave OCBC the very exposure it desired in Hong Kong, China and Macau, its businesses spanned three different governmental regions, three different cultures, and were accountable to a number of regulatory supervising bodies. The integration of the Hong Kong and Macau businesses was relatively straightforward but this was not so for the China business.

China required a single presence via a single banking licence, which necessitated the consolidation of OCBC’s operations with Wing Hang’s. While there were very few overlaps in terms of branches, there was duplication in the HQ functions of OCBC’s wholly-owned subsidiary, OCBC China headquartered in Shanghai and Wing Hang China, 100%-owned by Wing Hang Bank based in Shenzhen. The first issue to be addressed: OCBC formed an integration panel comprising senior management representatives from Wing Hang China and OCBC China, to interview and select staff for reassignment. Those reassigned were offered a different portfolio of similar seniority. Completed within the first week of integration, this task clarified the new corporate structure, and delegated ownership of workstreams to be integrated.

The same panel met weekly to resolve issues, fostering teamwork from the very start. The most pressing challenge was the need to quickly obtain the relevant regulatory approvals before Legal Day One38 of the combined entity could be determined. Other than the Hong Kong Monetary Authority (HKMA), the team had to seek approvals from the China Banking Regulatory Commission, State Administration for Industry and Commerce, and other relevant regulators in Chinese cities where the bank has presence (totaling about 170!). As this was the first cross-border merger of licences, there was very little precedence for OCBC and even the Chinese regulators to follow. It helped significantly that the designated CEO of the combined China operations, Ms Kng Hwee Tin, was very fluent in Mandarin and could navigate communications with the various parties, and even vet legal documents! Nonetheless, getting all licences in place was a long drawn process, with Legal Day One pushed back several times;

2. Staff handling. With Chinese laws being very protective of employees, employers had to adhere to

multiple stipulations, especially in the face of potential retrenchment. Legal recourse for aggrieved employees is also very affordable (RMB20, or less than US$5, to lodge a complaint). While employees may not be unfairly treated in the greater scheme of arrangements, any spark of unhappiness would trigger a drawn-out process, delaying Business Day One. In the reassignment of staff to resolve post-merger duplication, some staff were dissatisfied with their new positions, compensation tiers, perks and titles. Through multiple one-on-one sessions, townhalls and the identification of “influencers” or champions to persuade the aggrieved staff, OCBC was able to help employees accept their revised packages and roles; and

3. Staff overload. Wing Hang had a fairly lean operation, with “one person handling multiple functions”,

while OCBC, being a much larger bank and having a more structured approach to business, had “different persons handling multiple parts of one function”. Similar to NISP, Wing Hang management had spent considerable time communicating the bank’s need to be part of a larger set-up. As a result, Wing Hang’s staff embraced the concept of having new owners, particularly in recognition of their improved financial standing, as signalled by an improved credit rating accorded by Moody’s upon the merger.

Despite their positivity and management’s desire to make it work so as to leave a legacy, the sheer volume of integration work coupled with “business as usual” wore staff down. Arrangements and solutions, which had been successful at other integrations, had to be reworked into more manageable bite-sized alternatives, thereby slowing the process. This was further complicated by an Information Technology system that was unable to produce the data required by HQ. Mr Na Wu Beng, having “brokered” the two shores in NISP, played a similar role, emphasizing the importance for both sides to

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recognize that failure to achieve a task’s original timeframe and intent, was not due to failure on either side.

“We must be willing to listen because people have their reasons for taking a decision. Two parties having differences does not mean either is right or wrong.”

Na was impressed by the Wing Hang staff’s team spirit and never-say-die attitude. In turn, Na earned the respect of the staff through his willingness to understand the situation before passing any judgment. Critically, Tsien had set the stage by recognizing that OCBC and its acquirees

“Are different organizations operating in different markets with different customers. Broad policies, such as policy and control, must be totally aligned, but the enlarged organization must be nimble.”

ACQUISITION OUTCOMES While each acquisition was different, Tsien was pleased that overall, the captains he had put in place had understood the aims and culture of OCBC to manage the integration process across all three acquisitions smoothly. The various integration approaches that OCBC had adopted to address the issues faced can be found in Table 1.

Table 1 Summary of Acquisitions, Approaches and Issues

NISP BOS WH

Investment process

Relationship nurtured over more than 10 years, from first purchase of minority stake. OCBC was familiar with acquiree’s culture and processes prior to merger.

Immediate 100% takeover

Immediate 100% takeover

Approach Aligned key processes: Risk Management, Finance, Audit, IT Sent senior OCBC representative: Na Wu Beng

Aligned key processes: Risk Management, Finance, Audit, IT Hands-off: OCBC was very clear that it was buying into the business, not just assets.

Aligned key processes: Risk Management, Finance, Audit, IT Sent senior OCBC representative: Na Wu Beng “HQ practice not necessarily the best practice”. Two main jurisdictions: Shanghai & HK. Integration was very detailed and well planned, broken into many workstreams. Integration undertaken to introduce practices best suited to local requirements while fulfilling MAS regulations. MAS itself prepared to give grace period for the enlarged OCBC group to adhere. OCBC in turn mapped integration process over three years, with more critical systems to be in place before Legal Day One, and others subsequently rolled out gradually.

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NISP BOS WH Previous management

Retained as Chairman and CEO Retained as CEO but retired in 2015

Retained as Chairman

Staff transferred from OCBC in the immediate period post-integration

2 6 (team from OCBC absorbed into new entity)

1

Staff retention promise

OCBC promised no retrenchment, which was particularly important given the slew of retrenchments following other foreign banks’ Indonesian acquisition during that time.

IAPB staff given retention bonus but not OCBC PB staff initially. Retention bonus was subsequently extended to OCBC PB staff.

OCBC promised no retrenchment; staff given employment guarantee of 18 months.

Issues Staff retention None Departure of some

OCBC PB staff who felt the acquiree’s staff had received relatively better treatment.

None but had to persuade some staff to remain with the organization.

Other staff issues

Language barriers and miscommunication. Staff were unsure of what HQ wanted, which led to second guessing, etc. Staff were upset by tone of HQ staff, and frustrated by the need to learn a new language, new filing and data requirements, etc. as two sets of reports were now required: Bahasa for Indonesian regulators, and English for HQ.

HQ staff who stepped over to BOS had an immediate pay rise since BOS was largely pegged to international market rates, while staff who stayed on with HQ remained on local terms.

Significantly under-resourced. Wing Hang’s operations was relatively lean whereas OCBC had a more structured and differentiated approach to business. Lack of familiarity with new reporting tools and requirements, etc.

Management style

Centralized Decentralized, unstructured. Decision making resided mainly with top 3 managers, thus was very efficient, but sometimes viewed as “wishy washy” by HQ, as decisions could quickly be reversed. HQ was viewed as slow and bureaucratic.

Centralized

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NISP BOS WH Regulation Acquired entity not allowed to transfer

information to controlling shareholder and other organizations within same corporate family. Many functions had to be done locally, which created extra work. The inability to get regulatory approval to station more OCBC staff on-site to facilitate the integration process compounded the problem, thereby requiring HQ staff to be posted over on project-based and ad-hoc request basis.

Not an issue. Four sets of regulators in four markets to deal with, and within China, multiple government agencies and provincial authorities involved prior to Legal Day One. First acquisition crossing a number of regulatory jurisdictions. Getting all the necessary licences and approvals in place was thus a new and long drawn process.

Risk management / credit approval process

Lots of re-learning required. NISP operated mainly on a collateral, relationship basis. HQ wanted to introduce scoring, to assess credit worthiness of client and to file reports based on loan amounts to review committee. Many data points unavailable, leading to many iterations and thus staff unhappiness between Credit and Marketing / Sales departments. System also not able to support new approach, thus requiring manual input. Loan approval process relaxed after HQ was assured that staff was able to evaluate clients based on new criteria. Higher limits required HQ approval (which had to be filed in English), while those below the revised threshold could be filed in Bahasa.

Aligned with HQ. Aided by changes in regulatory environment (e.g. money laundering), which required IAPB to introduce new practices.

Re-learning required. Wing Hang operated mainly on a collateral, relationship basis. HQ wanted to introduce scoring, to assess credit worthiness of client and to file reports.

IT systems None. Immediate cut-off from seller’s systems.

Significantly under-invested.

Client impact Increased client confidence, No major accounts lost.

Increased AUM. Increased client confidence, No major accounts lost.

Culture Indonesians more “courteous”, less vocal as to why things cannot be done.

Private banking international culture vs commercial banking local culture.

Some differences, which were partially offset by very positive staff attitude.

Source: OCBC, NTU In light of the various issues faced, Tsien felt that the outcome for Wing Hang was comparable to, if not better than the earlier acquisitions (see Table 2). But, integration was still in its early days, and the value accretion advantages he sought from Wing Hang would take a bit more time to fully bear fruit. Do N

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Table 2 Summary of Acquisitions and Outcomes

NISP ING WH Date of Subsidiarization 2004 2005 2014

Strategic role of acquisition New market New asset class New market

Context Cost S$900 million S$2.024 billion S$6.2 billion Size of stake 85% 100% 100% Purchase process Negotiated sale Competitive bid Negotiated sale Seller Founding family Parent holding company Founding family

Assets bought Indonesian operations

Wealth management portfolio in South East

Asia, India, Greater China, Japan and Korea

Hong Kong, Macau and China operations

Outcome Revenue - at date of

acquisition* 0.58 0.22 4.30

- end 2015* 5.30 0.47 4.97 - growth (%) 817.0 109.1 15.5 Net profit - at date of

acquisition* 0.18 0.09 2.19

- end 2015* 1.50 0.12 2.03 - growth (%) 747.5 36.8 -7.3 Customer deposits / base - at date of

acquisition** 12.2 5000 177.9

- end 2015** 87.3 NA 180.0 - growth (%) 615.6 NA 1.2 Total Assets / Assets Under Management - at date of

acquisition* 15.4 15.9 214.4

- end 2015* 120.5 55.0 225.0 - growth (%) 682.5 246.8 4.9 Loan book - at date of

acquisition* 9.5 NA 142.2

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NISP ING WH Branch network - at date of acquisition 135 NA 95 - end 2015 339 NA 94 - growth (%) 151.1 NA -1.1 ATM network - at date of acquisition 125 NA 87 - end 2015 759 NA 87 - growth (%) 507.2 NA 0.0 Staff strength - at date of acquisition 2779 150 NA - at end 2015 6922 400 NA - growth (%) 149.1 166.7 NA Source: OCBC, NTU * denominated in trillion IDR for NISP, US$b for ING and HK$b for WH ** denominated in trillion IDR for NISP, absolute number for ING and HK$b for WH CONCLUSION Tsien closed the covers of the report before him, and decided to let time be the judge. At the end of the day, as long as he knows he had been true to himself and the people he had dealt with, he can say with sincerity:

“When we approached the target, we approached truly with respect. We looked at it not only as a business proposition. We also looked at it as bringing the entity in, as part of the newly formed family, of which they play a part.”

And that, is truly what business is about.

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ANNEX A

INDUSTRY BACKGROUND

SINGAPORE Commercial Banking The Singapore banking industry was dominated by foreign players since the 1840s. In the 1990s, a fundamental review of government policies led to the liberalization of the insurance and securities industries in the late 1990s, and the banking sector in 2001. Local banks were thus forced to bulk up in order to compete with the foreign banks: 1. Post Office Savings Bank (POSB), established by the British colonial government in 1877, went through

a series of reorganizations and transfers, before it was fully acquired by government-linked DBS in 1998; 2. Overseas Union Bank (OUB), Singapore’s fourth largest bank, was bought by United Overseas Bank

(UOB) at S$10 billion, in fierce bidding against DBS in 2001; and 3. Keppel TatLee Bank, itself an amalgamation between Tat Lee Bank and government-linked Keppel Bank

in 1998, was bought by OCBC in 2001. The massive industry consolidation resulted in the emergence of three banking giants: currently DBS at pole position, followed by OCBC, then UOB in terms of total assets. OCBC and UOB were ranked second and seventh respectively, among Asia Pacific’s strongest banks39 by The Asian Banker in 2015 (see Exhibit 4 for details). Wealth Management Singapore, Asia's largest centre for wealth management, rode on this fast-growing segment during Asia's rapid economic growth. Per Private Banker International (PBI) estimates, total assets under management (AUM) in Asia Pacific increased by 12% to US$1.54 trillion in 2014. Still largely dominated by global private banking entities such as UBS at the pinnacle, with US$272 billion in AUM at end 2014, Singapore’s DBS' private banking arm only managed to pull in at eighth place, with US$73 billion AUM, thanks largely to its acquisition of Societe Generale’s Asian private banking business.40 OCBC’s Bank of Singapore followed closely at 11th position with AUM of US$51 billion, just above the US$50 billion mark which PBI estimated as the point of inflexion where economies of scale kick in. See Exhibit 5 for PBI’s ranking. In 2015, it recorded strong revenue growth of 14% on the back of a 7% increase in AUM to US$55 billion, earning it for the sixth consecutive year, the Best Private Wealth Management Bank in Southeast Asia by Alpha Southeast Asia. At the turn of the 21st century, many players established a presence in Singapore to capitalize on the region's growing affluence. Several multinational banks had also pursued global consolidation in the face of slowing traditional markets in Europe due to weak financial markets and the dispute between Swiss banks and the United States over the disclosure of client data to tax authorities. It took Italy's Assicurazioni Generali SpA two years to sell BSI to Brazilian Grupo BTG Pactual SA in Sep 2015, only for it to be up for sale again; Bank Sarasin was sold off by Dutch owners Rabobank in 2012 to the Safra Group.41 In 2013, Julius Baer started absorbing the Singapore and Hong Kong wealth management businesses of Bank of America Corp's Merrill Lynch, which it had bought the year before. The result: a critical need to scale up,

39 Based on the largest 500 banks in Asia Pacific region by assets, ranking was premised on six areas: scale, balance

sheet growth, risk profile, profitability asset, quality and liquidity. 40 Purchased at S$280 million. 41 Which comprises a number of European private banks and Safra National Bank of New York. Do N

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particularly in the face of the changing regulatory and competitive landscape. Industry estimates pointed to a minimum of US$20 billion to be able to compete in the Asian market. Indonesia In 2012, Otoritas Jasa Keuangan (OJK), or the Financial Services Authority of Indonesia, outlined a blueprint to develop the domestic banking sector, which was then dominated by small banks with capitalization of less than Rp5 trillion, as the top 15 banks garnered approximately 70% market share. A Bank Indonesia study concluded that a bank required a minimum of Rp 5 trillion of core capital to operate at optimal efficiency. Governor of Bank Indonesia Dr. Darmin Nasution explained his strategy to accelerate the development of the national banking structure, to stem widespread inefficiencies and to form robust banks that could serve domestic needs while competing at the ASEAN level. Of the 119 banks in existence, his blueprint entailed: 1. Two or three banks with potential to emerge as international banks, with total capital exceeding Rp 50

trillion; 2. Three to five national banks, with total capital of Rp 10 to 50 trillion; 3. 30 to 50 banks as focused players, operating in business segments based on their capability and

competence, with total capital of Rp 100 billion to Rp 10 trillion; and 4. Rural banks and banks with limited scope of business, with total capital of less than Rp 100 billion. Core to this thrust was capitalization, overlaid with strong corporate governance principles, encompassing risk management, compliance, human resource, work ethics and information technology. To propel capitalization, OJK embraced mergers42, though it limited each shareholding group to a single banking presence in the country. In 2015, Bank OCBC NISP was the eleventh biggest bank in the country and received several accolades: the Indonesian Institute for Corporate Governance named it Indonesia’s “Most Trusted Company”43 for the fourth consecutive year in 2015; it was also awarded Asian Banking & Finance’s Best SME Bank of the Year in Indonesia in 2015, Domestic Foreign Exchange Bank of the Year 2015, Domestic Operations & IT Bank of the Year 2015, and Domestic Mobile Banking Initiative of the Year 2015. Greater China Hong Kong has one of the highest concentrations of banking institutions in the world, with about 70 of the world’s 100 largest banks operating in the city, ranking it third44 in the financial centre league after New York and London. As of end 2015, there were 157 licensed banks, many of which had set up operations in other parts of Asia – typically in China. It was thus a natural base for the Chinese government to establish in 2004, its first offshore renminbi (RMB) market, which Hong Kong had since developed as the deepest and most liquid RMB market outside the Mainland. With about 22%45 of Chinese external trade settled in RMB and RMB being the world's fifth most-used payment currency46 as of October 2015, Hong Kong hosted the largest pool of RMB liquidity outside China, handling about 70%47 of global payments in RMB in 2014.

42 Merger incentives introduced to encourage bank consolidation: (a) Temporary relaxation of compliance with

prescribed minimum statutory reserve requirements; (b) Time extension to reduce resultant legal lending limit; (c) Ease of opening branches; and (d) Temporary relaxation of application of good corporate governance principles.

43 Awarded to public, non-public and regional state-owned companies, as well as state-owned enterprises, the theme of “Good Corporate Governance in the Perspective of Value Creation” necessitated the implementation of good corporate governance beyond compliance, by inculcating sustainable values.

44 Per the Global Financial Centres Index released by the Z/Yen Group in September 2015. 45 Per Hong Kong Trade Development Council. 46 Per the Society for Worldwide Interbank Financial Telecommunication (SWIFT), trailing the US dollar, Euro, British

pound and Japanese yen. 47 Per Hong Kong Trade Development Council. Do N

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Domestically, Hong Kong's banking industry is dominated by large players such as HSBC Holdings and Standard Chartered Plc, making it challenging for small-and mid-sized lenders. Rising competition squeezed their return on equity from about 20%48 in 2001 to single digits by the end of the decade. The Basel III rules also put strain on family-run banks to maintain higher core capital ratios, requiring the main shareholders to inject capital to maintain their stake, if there was any fund raising. Thus, many family-owned banks sought and found buyers post-Basel III: Dao Heng by DBS in 2001, Asia Commercial Bank by Malaysia’s Public Bank Bhd49 in 2006, Wing Lung by China Merchants Bank50 in 2008, Chong Hing by the Guangzhou Government Investment arm's Yue Xiu Group51 in 2013 and Wing Hang by OCBC52 in 2014. The remaining family-run banks left include industry leader Bank of East Asia Ltd and the smallest lender in the market, Dah Sing Financial Holdings. China’s entry into the World Trade Organization (WTO) in 2001 required it to liberalize its banking sector, amongst others. As a result, Chinese and foreign banks became subject to a unified regulatory regime, competing evenly under the same market environment. However, the Closer Economic Partnership Arrangement between Hong Kong and the Mainland (CEPA) provided for Hong Kong banks entering the Mainland with lower barriers. For example, the total asset requirement at the end of the year preceding application was not less than US$6 billion for Hong Kong banks, and US$20 billion for non-CEPA foreign banks. Such easing of restrictions under CEPA thus benefitted not only Hong Kong newcomers to the Mainland, but also Hong Kong banks that were already operating there. As of end 2015, 10 Hong Kong banking and financial services providers (excluding insurance and securities) had obtained certificates of Hong Kong Service Supplier status.53

48 Bank of America Merrill Lynch estimates. 49 Cost of HK$4.5 billion (US$580 million), at 2.5 times book value. 50 Cost of US$2.47 billion, at almost three times book value. 51 Cost of HK$11.6 billion (US$1.5 billion) for 75% stake, at 2.3 times book value. 52 To comply with the new Basel III requirements, OCBC itself took a hit of $2.8 billion on its Tier 1 ratio, arising from

goodwill related to the acquisition. It subsequently had to raise capital through a rights issue. 53 According to the Hong Kong Trade Development Council, “juridical persons” (including companies, partnerships and

sole proprietorships) as well as “natural persons” of Hong Kong would be able to enjoy preferential treatment granted by the Mainland under CEPA, provided they fulfil the definition and related requirements of Hong Kong service suppliers. Do N

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EXHIBIT 1

OCBC FINANCIAL INFORMATION

Source: OCBC Annual Report 2016. Do N

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EXHIBIT 2

OCBC SEGMENTAL BREAKDOWN

Source: OCBC 2016 Results Presentation.

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EXHIBIT 3

OCBC CORPORATE STRATEGY, 2015


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EXHIBIT 4

ASIA PACIFIC STRONGEST BANKS BY BALANCE SHEET

Strength Rank 2015

AB 500 Rank 2015 Commercial Bank Country

1 31 Bank of China (Hong Kong) Hong Kong

2 28 OCBC Bank Singapore

3 234 Industrial & Commercial Bank of China (Macau) Macau

4 70 Industrial & Commercial Bank of China (Asia) Hong Kong

5 11 HSBC Hong Kong

6 41 Hang Seng Bank Hong Kong

7 36 United Overseas Bank Singapore

8 1 Industrial & Commercial Bank of China China

9 164 Metropolitan Bank & Trust Company The Philippines

10 2 China Construction Bank Corporation China Source: The Asian Banker, 2015.

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EXHIBIT 5

ASIA PACIFIC PRIVATE BANKING RANKING

Source: Private Banker International, 2014.

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EXHIBIT 6

INDONESIAN BANKING KEY PLAYERS AS OF DECEMBER 2014

Bank Assets Loan TPF Revenue Net income

Bank Mandiri 855,040 533,854 576,326 51,120 19,872

Bank Rakyat Indonesia (BRI) 801,955 521,293 600,404 52,933 24,242

Bank Central Asia (BCA) 537,210 346,300 447,942 37,494 16,089

Bank Negara Indonesia (BNI) 416,574 280,484 299,021 27,593 10,783

Bank CIMB Niaga 233,162 178,407 168,269 10,031 2,342

Bank Danamon Indonesia 195,709 152,983 115,001 14,502 2,604

Bank Permata 185,350 136,441 135,700 6,209 1,587

Panin Bank 172,582 124,867 121,061 7,648 2,356

Bank Internasional Indonesia (BII) 143,318 108,852 98,796 6,069 699

Bank Tabungan Negara (BTN) 142,428 110,538 99,526 5,588 1,261

Source: EY Indonesian Banking Industry: Challenging yet still promising, 2015.

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ref no.: abcc-2017-005 danielle yew and neo boon siong · 8 bank of singapore was previously a...

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