Trading places

Stories By Goola Warden & Joan Ng

2786 words
22 September 2008
The Edge Singapore
English
(c) 2008 The Edge Publishing Pte Ltd. All Rights Reserved.

Singapore’s banking sector is trembling as behemoths like AIG, Lehman Brothers and
Morgan Stanley are forced to restructure and downsize. But Asia is increasingly
becoming a provider of capital rather than just a user of it. If that continues,
it might only be the players rather than the playing field that’s about to change.

Muhammad Aurangzeb is walking, talking proof that takeovers and mergers in the
global banking industry don’t necessarily have to mean significant job losses or
office closures — at least, not in Asia. Last week, as the pace of bank busts in
the US quickened dramatically, the debonair and eloquent banker was putting the
finishing touches on an 11-month-long exercise of consolidating ABN Amro’s
businesses in Southeast Asia under the Royal Bank of Scotland Group (RBS). While
the 184-year-old ABN Amro name will now be replaced by RBS across Asia, the scope
of the combined group’s business isn’t shrinking, he says. And, its regional
headquarters in Singapore will be busier than ever.

“We are going to be running our global hub for RBS group operations and RBS
Coutts, and the regional hub for transaction banking for Asia, local markets
trading and commodity market trading… and credit risk management for Asia out of
Singapore,” Aurangzeb tells The Edge Singapore. A long-time employee of ABN Amro
himself, Aurangzeb relocated from Amsterdam to Singapore three months ago to
oversee the combined group’s operations across six Asian markets, including
Thailand, Indonesia, the Philippines and Malaysia. “With all this combined,
Singapore is going to be playing a very important part in RBS.”

To be sure, the purchase of ABN Amro by RBS, announced in May last year, was done
under very different circumstances compared with the takeover of Bear Stearns by
JPMorgan Chase in March this year and the proposed takeover of Merrill Lynch by
Bank of America Corp announced last week. ABN Amro had been put up for sale as a
result of pressure from its shareholders unhappy about its low market valuation.
And, it had more than one suitor. Among them was the UK’s third-largest bank
Barclays, which fortified its balance sheet for the bid by selling shares to China
Development Bank and Temasek Holdings.

In the end, the RBS consortium that included Banco Santander of Spain and Belgian-
Dutch financial services group Fortis won with an offer of €72.2 billion ($148.5
billion) or €39 per share — a third more than ABN Amro’s market value before the
bidding started. ABN Amro was then carved up with Santander acquiring its
operations in Brazil and Italy, and Fortis taking its Dutch retail businesses,
private clients operations and asset management businesses.

By contrast, it is financial market turmoil and massive losses that are driving
major financial institutions into each other’s arms now, as they desperately seek
to shore up their balance sheets. Bear Stearns was bought for just US$236 million
($338 million) or US$2 per share, about 2% of its market value as at November last
year; and Merrill Lynch has agreed to be acquired for US$50 billion, about 70% of
its value a year ago. Meanwhile, worries are now growing that many troubled
financial institutions will collapse before finding a suitor. Last week, the 158-
year-old Lehman Brothers Holdings filed for bankruptcy while insurance giant
American International Group (AIG) teetered on the brink of collapse before the US
Federal Reserve reluctantly threw it a US$85 billion lifeline.
Will these companies now fold up their businesses around the world, leaving a
trail of white-collar unemployment and vacant commercial property in their wake?
And, will Singapore be especially hard-hit because of its role as a regional
financial centre? Or, will pieces of these busted financial behemoths eventually
regroup under new corporate names — the way ABN Amro has — and return to business?

US crisis hits home

For many Singaporeans, the impact of the US banking bust, which has been unfolding
for more than a year, is now hitting home. Stories of slumping property prices in
faraway Florida and California and mounting problems in the US mortgage market
over the past several months didn’t really mean much to most people here, other
than that it was depressing share prices on the local bourse. But news of the
mounting financial troubles at AIG over the past fortnight was a different matter
altogether.

Last week, queues of anxious people appeared in front of AIA Tower on Robinson
Road, determined to cash in their policies. AIA is a unit of AIG that sells
insurance policies and other financial products in Singapore. It has some 3,800
agents, 800 staffers and some 2.5 million policies in force. Even assurances from
the Monetary Authority of Singapore that AIA is adequately capitalised — it has a
capital adequacy ratio of 160% versus the regulatory minimum of 120% — failed to
calm nerves. And, the abrupt departure of AIA Singapore’s executive vice-president
and general manager Mark O’Dell for a rival company did little to inspire
confidence.

In various statements, AIA has said that O’Dell’s resignation had nothing to do
with AIG’s troubles, and that some 2,500 policies have been cashed in by its
customers in Singapore. The troubles at AIG stem from an obscure unit within the
group called AIG Financial Products (AIG FP) that writes credit default swaps.
These instruments essentially allow banks and hedge funds to insure against bad
loans. In effect, when defaults arise, AIG is on the hook for the losses. With one
financial institution after another being pushed to the wall now, the pressure is
building on AIG even though its life insurance units are performing well. AIG FP
has reportedly lost US$14.7 billion in 1H2008. Together with mark-to-market losses
on its investment portfolios, the company faced a massive liquidity crunch.

With that episode, ordinary Singaporeans are beginning to grasp how the financial
bust in the US is having a real impact on their lives. And, it’s creating an acute
awareness of what the severe stress faced by other major financial institutions
could mean for the local economy. Financial services account for only about 12% of
Singapore’s GDP, but rapid growth in private banking and asset management over the
past decade has also helped fuel a boom in everything from legal services to
restaurants and luxury condominiums. “It was the government’s policy to build
Singapore as a financial hub,” says Alvin Liew, an economist at Standard Chartered
Bank. “We’ve had good success in wealth management and private banking, which was
also due to economic growth, and a rebound from the financial crisis in the
region.”

But as the global financial system now de-leverages, forcing down asset prices
everywhere from San Francisco to Sydney, the financial services industry in
Singapore could be headed for a period of consolidation that’s felt across a broad
swathe of its economy.

Lehman Brothers’ business in Singapore over the last couple of years is a

microcosm of what’s happening. The bank was expanding fast here in 2006 and 2007.
Among other things, it had a hand in Marina Bay Sands’ $5.4 billion senior secured
credit facilities, the largest private Singapore dollar-denominated financing
deal. It had also teamed up with Kajima Overseas Asia to develop a $450 million,
280,000-sq ft commercial office building on Robinson Road that’s supposed to be
completed next year. Just before it went bust, Lehman employed some 270 people in
Singapore — more than quadruple what it had only two years before. And, it clearly
wanted to keep expanding, with its office premises at Suntec City Office Tower
Five said to have been fitted out to accommodate as many as 500 staffers.

The 40,000 sq ft of space it rents at Suntec is now at risk of being abruptly

vacated. According to a report by DMG and Partners, that represents about 3.1% of
the total office space at Suntec. And, it is just 1.4% of the entire property
portfolio owned by its landlord Suntec REIT. Assuming Lehman’s lease is terminated
this month, and six months passes before a new tenant is secured, Suntec REIT is
likely to suffer only a modest 0.9% dip in its distribution per unit for the
financial year to Sept 30, 2009, DMG says.

However, Lehman might not be the only financial services group that’s moving out.
What, for instance, will happen to the Singapore-based operations of Bank of
America and Merrill Lynch when the two groups combine? Merrill Lynch currently
occupies some 80,000 sq feet of office space at Marina Bayfront on 2 Raffles Link.
Its six-storey, 200,000 sq ft, “built-to-suit” Merrill Lynch Harbourfront — built
by Mapletree Investments — was supposed, by year-end, to house about 900
employees.

Meanwhile, many other commercial tenants might be preparing to downsize too, which
could result in commercial rents across the market being weighed down over the
next couple of years. Just as the booming financial sector stoked activity
elsewhere in the economy, a bust now will have a wide impact. “You will definitely
see a spillover into other industries,” says Ho Wei Chen, an economist at United
Overseas Bank, referring to the financial market turmoil emanating from the US.
“It’s not just financial. Due to the uncertainty in the US economy, everything is
affected.”

Moreover, the supply of office space in Singapore is set to expand by 3.2 million
sq ft, or 56% by 2010, according to estimates by Merrill Lynch, thanks to frenetic
building activity. Most of the additional space due to become available next year
has already been booked, but the market is only likely to become progressively
softer in the next two years, some property market watchers say. According to
Douglas Dunkerley, founder and managing director of Corporate Locations, a
specialist letting agent, office rents could fall as much as 40% in 2010-11.

All that spells downward pressure on economic growth in Singapore. “Based on

preliminary 2Q numbers, we are quite bearish on growth,” says Liew of Standard
Chartered. “We think it will come in at 3.5% this year.” He adds that Asia is
likely to go through a period of slower growth rather than a recession, and that
the economic slowdown in the US is likely to be shallow but protracted.

Citi takes centrestage

Even if the stress that the global financial system faces now begins to stabilise,
there looks to be more consolidation ahead for financial players worldwide. That
global trend could continue to weigh down sentiment in the white-collar employment
market and in the property sector in Singapore for several more months. While
mergers among banks can lead to synergies, some staff retrenchments are
unavoidable, says Liew. “For instance, the HR function is a duplication; and
backroom, middle office will see some overlap. So, you would have to be
streamlining.”
Last week, British bank Lloyds TSB said it would buy Halifax Bank of Scotland for
£12.2 billion ($32 billion) in a deal that reportedly could result in thousands of
job cuts. Meanwhile, with its shares sinking steadily, Morgan Stanley is reported
to have held merger talks with Wachovia Corp. It is also reported to have talked
to the Government of Singapore Investment Corp and China Investment Corp about
raising fresh capital.

In Singapore, the foreign bank that’s being most closely watched is Citigroup,
because of its sheer heft. With some 9,000 staff here alone, Citigroup is actually
the largest bank employer in the country. It occupies substantial office space at
Centennial Tower, Millenia Tower and Capital Square. In November last year,
Citigroup announced that it would commit $220 million to a 400,000 sq ft office at
the Changi Business Park to accommodate 4,000 of its employees.

For the six months to June, Citigroup made a loss of US$7.6 billion, largely
because of write-downs in the US. Even though earnings at its Asian division were
down 34%, the unit emerged as a key money spinner for the group, contributing
US$1.5 billion to the group’s earnings during the half-year. Even after a steep
bounce last Thursday, shares in Citigroup are down more than 40% since the
beginning of the year.

Amid fears about how the group will be affected by the US financial crisis,
Citigroup’s country head for Singapore, Jonathan Larsen, has been trying to
convince its local customers that it is in good shape. Last Wednesday, letters
were sent out to its local customers assuring them of Citigroup’s continued
strength and liquidity. And, last Friday, he held a media briefing.

“Deposit levels are stable. We see no significant outflow of deposits,” he told

reporters. “Of course, there are individual or isolated customers who want to
diversify [their deposit base] to other banks and that’s absolutely fine.” He
added that Citigroup has no plans to downsize its presence in Singapore. Larsen
also insisted that the wider Citigroup has ample capital. “We’ve raised more than
US$50 billion in capital since November 2007, from investors like GIC and
sovereign wealth funds,” Larsen said.

Citigroup raised US$7.5 billion in fresh capital from the Abu Dhabi Investment
Authority and US$12.5 billion from GIC last year. The rest came from public
offerings of preferred shares and equity. With that, Citigroup has shareholders
funds of US$136.6 billion. Last Friday, Citigroup was reported to be considering
making a bid for Washington Mutual, which Larsen said reflected the strength of
Citigroup’s balance sheet.

“We are extremely committed to Singapore and to Asia,” he reiterated. “The

businesses that we have are doing extremely well and we continue to invest.”

Going east

Other major financial institutions are likely to be just as eager to continue

developing their businesses in Asia even as their global operations consolidate.
And, Asian units of troubled global banks as well as the executives who run them
might be well sought after in the months ahead. Barclays is in talks to pick up
Lehman’s assets in the US and Europe, while Sumitomo Mitsui Financial Group is
looking to acquire Lehman’s Japanese assets. Some market watchers also see AIG
being eventually broken up and sold in pieces. It has a two-year timeline to
dispose of assets to repay the Fed.

“Over the next few years, financial services activity might be more evenly
distributed than just being centred in New York and London,” Dr V Anantha-
Nageswaran, chief strategist at Julius Baer, says. According to him, the centre of
gravity of the financial services business is gradually shifting to Asia because
the region is increasingly becoming a provider of capital instead of just a user
of it. And, as the region’s global clout grows, the most important financial
centres in the future might well be in an Asian time zone, he says. “Singapore and
Hong Kong have advantages.”

Back at RBS, there is no doubt in Aurangzeb’s mind about the importance of Asia to
his group. According to him, retrenchments in the region have not been significant
as there was very little overlap between the businesses of the two groups. “We
have let some people go, but that is part of the overall businesses and global
businesses disappearing,” he says. RBS now has some 2,400 staff in Singapore.
“Roughly 1,500 were from the ABN side and 900 joined from the RBS side. RBS had no
retail, and was essentially wholesale and operations.”

RBS has also shifted some of its units like credit risk management and IT from
Hong Kong to Singapore. As a result, RBS hasn’t given up any space occupied by ABN
Amro at One Raffles Quay, except for the floor used by ABN Amro Private Bank,
which was sold to Fortis. RBS still occupies Levels 21 to 24, and 26 in the South
Tower of One Raffles Quay. These moves to beef up its presence helped it secure
the Qualifying Full Bank licence once held by ABN Amro. “We reaffirmed the
commitment made by ABN Amro,” Aurangzeb says. “MAS took this into account.”

As other major financial institutions around the globe consolidate in the wake of
the US financial crisis, there may well be more such reorganisations of banking
operations in Singapore. But, if the region remains an attractive place to do
business and grow, it might only be the players rather than the playing field that
is set to change.

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