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SCB puts emphasis on liquidity

May 21, 1999 -- SIAM Commercial Bank (SCB) is unlikely to return to profitability before the end of next year despite its recent massive recapitalisation of Bt65 billion and the completion of 100 per cent of loan-loss provisions.

But Jada Wattanasiritham, who has broken the all-male turf to become president of Thailand's fourth largest commercial bank, seems confident that under her leadership SCB is well on its way to staging a turnaround.

The immediate problem facing Jada and other bank executives is how to stop the continuing negative margin in their banks' books.

Despite the wide nominal spread of about 5 per cent between the lending and deposit rates, banks are still losing money every day they open their doors for business because almost half of their loans are non-performing. So this year, despite the market enthusiasm for bank stocks, Thai banks will continue to suffer losses.

Last year, SCB posted losses of Bt12.41 billion, compared with a profit of Bt3.19 billion in 1997 and Bt9.1 billion in 1996.

With the market awash with liquidity by hundreds of billion baht, interest rates have been coming down rapidly. This has improved the banks' chances of cleaning up their non-performing loans (NPLs) and enhancing their solvency.

The discrepancy between the lending and deposit rates has become a hot political issue, with accusations that the banks are again passing on the burden to good customers who have been forced into subsidising the banks' NPLs. Good small customers are still charged punitive loan rates of 12-13 per cent, while the banks pay their depositors only 4-5 per cent. Even Prime Minister Chuan Leekpai seems concerned about this issue.

Jada admits that there is a distortion in the present interest rate structure. Time deposits of three or six months carry a rate of 5 per cent, compared with a savings rate of 4.5 per cent. But if the withholding tax of 15 per cent is taken into account, the time deposit rate has an effective yield of 4.25 per cent -- lower than the savings rate. This has led to a shift of deposits from the long-term accounts to the shorter-term savings accounts.

For Jada, however, there is room for the savings rate to fall further to 4 per cent, which still beats inflation. With the International Monetary Fund's projection that this year's inflation will fall to 0.5 or 1 per cent, there is ample room for interest rates in general to fall further. As a rule of thumb, according to a foreign banker in Bangkok, savers should be satisfied if their yield on savings beats inflation by a nominal 2.5 per cent.

In Thailand, only savers with interest income of more than Bt20,000 will be subject to a 15 per cent withholding tax. This means that a saver must have at least Bt440,000 in his or her account.

Reducing the savings rate from 4.5 to 4 per cent would mean a loss in purchasing power of Bt50 a year, which Jada says is not a big amount. At the moment savings accounts make up about 18-20 per cent of SCB's funding base. Unlike the time deposits, which are more disciplined, savings accounts are more costly for the banks to manage because the money moves in and out quickly. ''If we can reduce our funding costs, it will be good for the bank and our situation will improve,'' says Jada.

She emphasises that unless banks are liquid they will eventually become a social burden on the tax-payers. Currently, bank incomes are not covering operating expenses.

At the April roadshow, during which the bank successfully placed Bt32.5 billion in a global equity offering to international investors, Jada promised investors that SCB would streamline its operations and refocus its strategy on the core banking business. This would entail the bank consolidating or liquidating its 101 subsidiaries and associated companies.

Over the next three years, Jada says, SCB will be liquidating strategic investments that are not performing to expectations and reducing its role from an investor to the lender alone of its subsidiaries. SCB classifies its subsidiaries and associated companies into three groups: the core business in the financial and banking sector, the support or specialised business that serves the bank, and the strategic investments.

In the core financial business, covering finance companies, securities companies and leasing companies, the bank will retain units according to their prospects and viability. ''Of course, some will be merged or liquidated since there is no need to have more than one company in each business,'' she says. For instance, Book Club has been merged with SCB Securities as part of the consolidation. Others are trying to chart the course of their business strategy by becoming a boutique house with specialised services.

As for the support businesses that serve the bank's special needs, such as the law firm or research house, Jada emphasises that they have to be able to stand on their own feet. Jada says these companies need to compete with other firms in the same industry jockeying to serve SCB. The SCB Research Co, for example, will also need to produce research reports that meet the need of the bank.

Most difficult to handle is how SCB will deal with its strategic investments, divided into those that the bank holds less than 10 per cent of and those in which the bank holds more than 10 per cent.

For the companies in which SCB has less than 10 per cent, Jada says the bank will be reviewing whether they have a prospect of generating long-term profits. Otherwise, she says, SCB may sell off its stake to the existing owners to get rid of the burden. For instance, SCB has been holding a minority stake in American Appraisal (Thailand) Ltd for a long time, and it may or may not suit its objective to continue to invest in this company depending on the review.

The other strategic investments, which have been a burden for the bank, include Siam Sindhrorn Co, the property developer, Christiani and Nielsen (Thai) Plc, the contractor, and Siam Media and Communication Co, operator of Independent Television or ITV.

Jada says these investments started out in good faith with the bank relying on professional management. Apart from acting as investor, the bank also participates in the management because it holds a sizeable stake in these firms. With the economic downturn, these companies have become a burden on the bank.

Jada says SCB will continue to support its subsidiaries in this category while reviewing their viability. If they are found not to have good prospects, the bank will sell off its stakes.

''The bank has to choose whether we will be the owner or the creditor. But since we're a commercial bank and our business is in the core banking and financial services, we have told the investors that we want to limit our role to the creditor alone. So we will step out from the directorships and withdraw our shareholder status from these companies. But this process will be done gradually,'' Jada says.

''The principle is that these firms will no longer be our investments but only our debtors. We're ready to liquidate them at a suitable time. But certainly this should not be prolonged.''

Another promise that SCB made to foreign investors during the global offering was to change the structure of both the board of directors and the executive board.

Following the latest recapitalisation, the bank's shareholding structure has changed as follows: The Ministry of Finance (40 per cent), the Crown Property Bureau (14.2 per cent), the Sanwa Bank of Japan (6.8 per cent) and foreign institutional investors (35 per cent). There will be one representative from the Ministry of Finance on the SCB's board of directors, and two representatives from institutional investors, whose names will be recommended by Salomon Brothers Smith Barney, the financial adviser.

The executive board has been restructured with three members from the outside: Chumpol Na Lamliang, Aswin Kongsiri and Banterng Tantiwit. The only two people from management who are on the executive board are Jada and Prikit Pradipasen. However, Prikit will resign on June 1st.

Chumpol, who is president of Siam Cement Plc, has indicated to her that he will be ready to step down when the time is right to avoid criticism that as the bank's largest debtor, he also plays the role of a creditor as chairman of the SCB's executive board.

In fact, Siam Cement's debt exposure to SCB accounts for only 5 per cent of its total borrowing portfolio. However, Siam Cement is SCB's single largest client, owing the bank more than Bt20 billion. But Jada says Siam Cement is a good customer, having no problem repaying its debts.

With the intensifying competition in the banking business due to the arrival of foreign banks, SCB will be focusing on its strength, the long-term relationship with customers. From its branch network of more than 400, the bank will be trying to improve its relationship with clients and to expand its services. ''If we cannot keep the relationship, we'll lose out our business,'' Jada says.

She admits that the foreign banks who are now knocking on the door of the Thai banking industry are formidable due to their huge capital base and technology. But she says technology is something that can be acquired and financial products can be developed or learned from others.

Internally, some departments will be subject to reorganisation. Some with dormant activity will be merged to reduce costs, such as the Business Development Department and the Banking Development Department.

SCB has also reduced its investments in overseas branches. The bank has reduced its stake in a bank joint venture in Nepal to only 5-6 per cent. The remaining stake will be sold later, Jada says. To reduce the burden of management, the Los Angeles branch will be downgraded into a loan production office, while the staff will be reduced form 20 to five workers.

The SCB's branches nationwide will be under review as well. Jada says that some of them will be encouraged to concentrate on the needs of businesses in their particular locations. Staff in each branch will be reduced since the operational back office will be replaced by a computerised system. ''Any branch that is not performing will be closed finally,'' she said.

Following the economic crisis, banks, including SCB, have seen less business and therefore need less staff. SCB has launched an early retirement programme with more than 1,000 staff already applying. The programme will cost at least Bt900 million.




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