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.
BY JIWAMOL KANOKSILP and