Thailand: MUFJ mixes well with Ayudhya

Bank of Tokyo-Mitsubishi’s acquisition of a controlling stake in Bank of Ayudhya in 2013 confounded plenty of critics. Overnight, the core banking unit of Mitsubishi UFJ Financial Group, Japan’s largest lender by assets, became Thailand’s fifth-largest bank in a market that has seldom proved a happy hunting ground for foreign names.

Twenty years on from the Asian financial crisis, Thailand’s banking sector remains dominated by local players, some ambitious and driven by new blood and fresh thinking, others big but stodgy and uninspiring.

True, a handful of foreign names stands out from the crowd, most notably Citi, with its trio of Bangkok branches, and Credit Suisse, with its fully licensed broking operation and growing team of stock pickers, investment bankers and asset managers. 

But a better example of the often hit-and-miss nature of foreign players on Thai soil is Standard Chartered. The UK lender sold its retail lending business to Bangkok-based Tisco Financial in December 2016 for $153 million, citing a perennial struggle to generate sufficient returns.

Opinions differ as to why foreign banks struggle. Some point to the moribund Thai economy, which is locked into a low-growth holding pattern, while others blame cultural conflicts, or the reluctance on the part of lenders to expand the scope of their ambitions far beyond the capital. 

In an October 2015 interview with Euromoney, Thai finance minister Apisak Tantivorawong warned it was “very difficult for foreign lenders” to break into the retail sector. “It would take a lot of money,” he said, adding: “It’s not worth it for them to do so.”

Well, that’s not entirely true in the case of Bank of Tokyo-Mitsubishi (BTM).

Take the scale of the deal. Bangkok-based Bank of Ayudhya, branded as and known locally as Krungsri, did not come cheap. BTM shelled out $5.6 billion for a 72% stake in a lender with 670 branches scattered across the country.

It was an expensive but calculated gamble. Bank of Ayudhya was a respected upper-second tier lender with a solid corporate and retail banking division, a tiny foreign presence, and a waning focus on small and medium-sized enterprises.

But its real value lay hidden within. 

Bank of Ayudhya was already different from its local peers, thanks to its 2007 decision to sell a 33% stake to the financial services unit of US conglomerate General Electric. By the time GE Capital exited the Thai lender in 2013, it had transformed Krungsri from a good but ordinary lender into a leading provider of consumer and auto finance services.

That gave Bank of Tokyo-Mitsubishi a running start. 

First, it profited from the fruits of GE’s labours, says Noriaki Goto, president and chief executive at Bank of Ayudhya, buying a “leading consumer finance company” that had successfully “leveraged GE’s expertise and knowhow”. 

Second, that expertise was locked inside an institution boasting a “workforce…already well-diversified in terms of talents, skills, and nationalities”, adds Goto, who ran the Japanese bank’s Americas division for four years from 2010 before being transferred to Bangkok.

Krungsri had “changed a lot under GE control, becoming more focused and profitable, and reducing their cost of funding”, notes Ian Gisbourne, head of Asean research at UBS. It had Thailand’s best digital banking service and an impressive and influential CSR division.

The Japanese lender, which had set up its first Bangkok branch in 1965 and knew the market, was well aware that it had struck lucky. Thanks to the sheer weight of jobs and investment capital that Japan’s leading companies have brought to Thailand, Japanese institutions were already viewed favourably in Bangkok. 

That, notes a local banker, “was a major reason why the regulators allowed it to buy” a controlling stake in Krungsri, a big local lender with no visible financial or structural flaws. 

“That doesn’t happen every year here,” notes one analyst.

So at first, BTM trod carefully. Japanese banks have an unfortunate reputation of wading into markets and imposing their culture, making mistakes they have to rectify later.

“That has been a problem in the past,” admits Rohit Khanna, head of corporate strategy and planning at Krungsri. “I worked in Japan, so I know how it works. But this is why the Tokyo leadership was very clear from the start, they did not want to grow another Japanese bank out of Krungsri – and that may be why [this deal] will succeed. Tokyo supports us, but the management here is pretty independent. The CEO has the ability to drive his own decisions.”

Khanna recognizes the perils of jamming together two lenders that hail from two distinctive and proud cultures: “When a deal is struck, cultural differences will always linger, so you have to recognize them, and to try to harness them to your benefit.” 

GE ran a highly successful consumer and auto finance business in Thailand for 20 years – including the periods that preceded and included GM’s partnership with Krungsri – Khanna points out, “so it’s not like foreign firms can’t do well. 

“BTM is Japanese, but it didn’t look to bring in Japan’s culture. Krungsri is Thai and it has a Thai culture, so our aim was to mix the best of GE, Krungsri and Japan.”

What, then, has changed at Krungsri over the past four years? 

Khanna ponders the question: his career began at GE in 1999, taking him from New York to Tokyo, and then Bangkok. He spent three years from 2006 heading up the Thai division of GE Capital’s global banking group, giving him a unique vantage point from which to assess how life has altered under Japanese ownership.

“GE was far more interested in quarterly results,” he says. “Quarterlies are still important, yes, but BTM is all about the long-term view and building a platform.” 

Khanna refers to a discussion he had with Nobuyuke Hirano, president and CEO of Mitsubishi UFJ, at the time of the takeover. 

“I asked him what would constitute a successful deal,” Khanna says. “His reply was: ‘Wait 10 years. Only then can we evaluate how good it was.’

Once the deal was complete, Krungsri’s new leadership settled down to plan for the future. One of the bank’s genuine points of weakness concerned lending to Thailand’s army of smaller corporates, many of which have struggled for traction in recent years, held back by sluggish growth, a slowdown in bank lending and political instability.

Banking SMEs was, admits Khanna, “an area in which we haven’t done so well, partly because it was our choice [not to]. But it’s going to be a key focus and an area of growth for us and the economy going forward. We see the economy improving; SMEs will play a big role, and we want to be part of that.”

Goto adds: “We aim to be a main operating bank for our SME customers.”

What about scale? Bank of Ayudhya was never the biggest player on home soil. Thai customers at every level are stubbornly loyal to their chosen banking provider, which is a boon to the big players, but an inconvenience to ambitious lenders stuck in the second tier. 

Krungsri is the nation’s fifth-largest lender by assets and the fourth-biggest in terms of market capitalization and its first-half profit this year. But with a stock market value of Bt288 billion ($8.7 billion) at the end of August, it still lags Thailand’s financial top-tier: Bangkok Bank with a market capitalization of Bt355 billion, Kasikornbank with Bt488 billion and Siam Commercial Bank (SCB) with Bt512 billion.

That ranking puts Krungsri in a quandary. 

“Our aspiration is to be a top-tier financial group in Thailand,” says Goto. And it is making strides. Outstanding lending expanded at a compound rate of 13% in the three years to the end of 2016, with net profits growing at a compound rate of 17% over the same period, “helping us to narrow the gap between us and the biggest banks in Thailand,” Goto adds. 

It posted a record net profit of Bt21.4 billion in 2016, an annualized increase of 14.9%. Earnings rose 10.5% year on year to Bt11.5 billion in the first half of 2017, on interest income of Bt23.42 billion.

But it’s also painfully aware of the gap between itself and its first-tier peers. Krungsri’s total assets stood at Bt1.88 trillion at the end of 2016, against Bt2.47 billion for Kasikornbank, Bt2.91 trillion for SCB and Bt2.95 trillion for Bangkok Bank. 

“We just aren’t going to catch up with them any time soon in terms of lending,” says Khanna. “Our loan book is 80% of the size of the top three or four lenders.” 

He then adds: “We could become a top-three bank in the long-term. But do we necessarily want to catch them up? I’m not so sure.”

Rather than addressing its flaws, most notably scale, Krungsri’s new owners decided to build up the bank’s core strengths. And by far the biggest weapon at its disposal lies in the international reach and institutional expertise of its Japanese owners – for three reasons.

The first reason is local knowledge. When it bought Krungsri in 2013, BTM had just one onshore branch. But that one office was powerful, notes a local banker. “It had been around for ever, and as a standalone entity it was probably the country’s seventh-largest lender.” It banked the biggest Japanese companies, as well as a slew of Thai multinationals, offering a full range of world-class corporate and commercial banking services. 

That strength would have reassured regulators when approving the takeover of a healthy Thai bank.

Second, this was one of those rare takeovers where each side had something tangible to offer the other. Take the auto sector. 

By itself, Krungsri was Thailand’s leading provider of capital to individuals or companies that wanted to buy cars. But add in BTM’s client roster, which included Japan’s largest makers of cars and car parts, and you have, notes Khanna, “a front end where people buy cars, and a back end where others assemble them. That’s a complete value chain, and it has been paying rich dividends for us over the past few years. It’s why we are so keen to continue to maintain our leading position in consumer and auto finance.”

And then there are the wider synergies. Bank of Ayudhya may not have the domestic presence of a Kasikornbank or an SCB – though big in banking terms is no longer always beautiful. What it does have is a presence in every province, from Chiang Mai in the far north, to Yala on the Malaysian border. That allows Krungsri to channel a host of world-class corporate banking services, perfected by Bank of Tokyo-Mitsubishi, to its local clients.

Before 2013, BTM was stymied by its own lack of local scale in Thailand. 

“In the past, it couldn’t offer the basic stuff to local firms or global corporates [outside Bangkok] – payroll services, cheque collection services, and the like – due to a lack of reach,” says Khanna. “It always had to partner with local lenders. Now, it doesn’t have to.”

And this works both ways. Joining forces with Japan’s most international lender allows Krungsri to offer high-quality corporate banking services to Thai firms keen to expand their regional footprint.

“Krungsri now possesses [BTM’s] capabilities in product development, in its global network and in its connections to multinational companies,” notes Goto. “This allows us to support Krungsri’s customers in overseas expansion, trade finance, foreign exchange and global cash management. Such competitiveness is quite unique to Krungsri, which allows us to differentiate ourselves from other rivals.”

This collaboration may come to matter deeply to both the bank and to Thailand itself. Much has been said about the potential for a Greater Mekong economic bloc that takes in Thailand, Myanmar, Laos, Vietnam, Cambodia and southern China. The fact that economists seldom mention this probably has as much to do with Thailand’s woes (several years of poor growth rates, plus political uncertainty) as it has with the state of the region’s infrastructure (ailing) and the nature of the inland terrain (densely forested and formidable mountains).

But this is likely to change over the next several years. Bangkok and Beijing are working to cut a high-speed rail line through Laos, and Thailand’s prime minister, Prayuth Chan-ocha, talks often and fondly about the creation of a Greater Mekong economic hub that encompasses 300 million people.

Thailand naturally wants to dominate a bloc that offers a large, growing, entrepreneurial and consumption-oriented middle-class. And for its part, Bank of Ayudhya sees itself as one of the few lenders with the ambition and the drive to become a genuine player in Greater Mekong.

“We are well-positioned to expand across the Cambodia-Laos-Myanmar-Vietnam [CLMV] region,” says Goto. BTM has a presence in all four countries, while Krungsri has one branch in Cambodia and two in Laos.

At the heart of this process will be the kind of basic financial services at which Krungsri excels. 

Khanna identifies the vast potential in the areas like consumer finance and auto finance, “particularly in frontier states like Myanmar, Cambodia and Laos”. 

Goto points to Krungsri’s acquisition in September 2016 of Hattha Kaksekar, Cambodia’s fourth-largest microfinance institution, which had assets of $517 million at the end of that year. 

That deal, notes Goto, was a “concrete step toward the long-term realization of Krungsri’s CLMV strategy.”

Japanese lenders have a long history of pushing into markets, only to withdraw. But it’s hard to see that happening in this case, given the size of the acquisition and Krungsri’s potential.

“This was a big commitment and a clear commitment of what we are trying to,” says Khanna. “The transition from GE to BTM has clearly been good to the bank. We are not in the big leagues yet, but we are heading in the right direction.”