Thailand: Can Bangkok Bank rise to the challenge?

By Ben Davies

Bangkok Bank, controlled and run over the decades by three successive generations of the Thai-Chinese Sophonpanich family, has dominated large swathes of Thailand’s banking landscape for more than half a century. It is the country’s biggest bank in terms of assets – Bt3.1 trillion ($95 billion) in total, putting it just ahead of its nearest rival, Siam Commercial Bank (SCB) with Bt3 trillion – and has the most extensive branch network of any bank, with 1,165 outlets covering virtually every nook and cranny of the kingdom.

The bank has a top-tier position in business sectors ranging from investment banking (through its subsidiary Bualuang Securities) to mutual funds and provident funds (through BBL Asset Management). Regionally, too, it is not to be sniffed at, with offices in more countries than most of its rivals combined and an impressive 25% market share in trade finance.

Yet talk to many senior bankers and analysts in Thailand and a less flattering picture emerges: rarely does Bangkok Bank’s name crop up in discussions about the movers and shakers in the Thai banking industry.

While its rivals SCB and Kasikornbank are seen as nimble and innovative, Bangkok Bank is widely viewed as overly conservative, tired and lacking in direction.

The numbers back up this view. SCB and Kasikorn have achieved returns on equity as high as 20% over the last five years, whereas the best Bangkok Bank could muster was 11.7%. Its shares trade at a slight discount to book value, compared with a 1.44% premium for Kasikorn and a 1.34% premium for SCB, meaning that investors are less confident about Bangkok Bank’s prospects.

Even more surprising has been its eclipse by regional players. For much of the 1970s and 1980s, Bangkok Bank was the largest bank in southeast Asia, financing more than 40% of Thailand exports. Today it ranks seventh in the region by assets and 12th by market capitalization, overtaken not only by the big three Singapore banks, but by Malaysian lenders Maybank, CIMB and Public Bank.

Bangkok Bank was hit especially hard by the Asian financial crisis in the late 1990s and, unlike Singapore’s DBS and United Overseas Bank (UOB), did not benefit from strategic acquisitions in its aftermath. And one could argue that, like all Thai banks, it has been unfairly penalized by 15 years of utterly dysfunctional politics in Thailand, including two military coups and close to a dozen prime ministers.

“Bangkok Bank is the story of lost opportunities,” says one senior foreign investment banker who, like many interviewed for this feature, preferred not to be quoted by name.

Yet there are others in the Thai capital who believe that Bangkok Bank’s long-standing relationships with governments and the cream of Thai corporates (particularly in the Thai-Chinese community), its unrivalled track record in financing the country’s infrastructure and its reputation for loyalty (which is frequently reciprocated), will see it through a rough patch.

“Does Bangkok Bank have what it takes to be a champion bank?” asks the head of one investment bank. “The answer is yes. Absolutely. They have the balance sheet to do it. They have a formidable presence in local and regional markets. Do they have the bench depth in management and the vision? I am not sure I know the answer.” 

President and chief executive Chartsiri Sophonpanich, the 58-year-old grandson of the bank’s founder Chin, has run the bank since 1994. When Asiamoney asks him why many analysts believe the bank has been slow to come to terms with the changing banking landscape and what he intends to do about it, to his credit, he prefers not to get involved in a mud-slinging match.

“There are many challenges and opportunities ahead for all banks and the whole financial services sector,” says Chartsiri, whose nickname is Tony. “We are confident we have strategies in place that will ensure we remain relevant to our customers.”

There is a truism that can be applied to banking as much as it can to any other industry. One foreign investment banker describes it as follows: “Remember when Kodak dominated the photographic industry? Look what happened next. There was a significant industry shift. A lot of smaller players suffered but were able to reinvent themselves by moving into niche areas. Then you had Kodak who was so integral to the system that they were slow to change. Is this Bangkok Bank’s Kodak moment? What does Tony have up his sleeve?”

Bangkok Bank is the best capitalized bank in the country, or as one analyst puts it “as safe as houses”. Still, the Kodak comparison is not without merit. Consider what happened in Thai retail banking.

In the wake of the 1997 Asian financial crisis that shook Thai banks to the core, smaller rivals such as SCB and Kasikorn, then known as Thai Farmers Bank, quickly realized that in order to survive, they had to diversify into new areas such as consumer banking, which at that time was almost wholly untapped. But rather than throw its hat in the ring, big, conservative Bangkok Bank stuck to what it knew and was good at, namely corporate banking.

As it turned out, consumer banking proved to be the most profitable banking opportunity of the decade, with annual growth rates as high as 40% and attractive margins. By contrast, corporate banking grew in single digits, held back by Thailand’s post-crisis corporate deleveraging. How could the bank have got it so badly wrong?

It is easy to criticize Bangkok Bank with the benefit of hindsight. But at the time, many bankers doubted if personal loans were a good credit risk. Andrew Stotz, who was ranked Thailand’s top banking analyst by Asiamoney in 2008 and 2009 and who now heads up A Stotz Investment Research, defends the actions of top management.

“Never underestimate how hard it is to shift a big bank’s strategy,” he says. “The other smaller banks had no choice but to move. But remember, Bangkok Bank was the leading corporate bank. It did not have to change.”

But change it has. Today, consumer loans at Bangkok Bank account for 13% of its total lending portfolio, compared to 41% for its corporate banking. But just take a look at SCB, where consumer loans account for 44.7% of lending, or Kasikorn where the figure is close to 25%.

The reason this is important is because consumer loans yield higher net interest margins – typically of between 3.5% and 4.5% – than corporate loans, where the margins are between 2.2% and 2.4%. In the case of SMEs, the figure is usually between 4% and 5%. This lost opportunity in terms of higher-margin consumer loans helps to explain why ROE at Bangkok Bank has been consistently lower than at its domestic rivals in recent years.

Many bankers say Bangkok Bank has also missed out on other opportunities. It was late to move into the fast-expanding SME space, which is one of the most important sectors of the Thai economy these days, contributing an estimated 36% of GDP.

To its credit, the bank has since addressed this weakness by aggressively building up lending to larger SMEs. Last year, SMEs accounted for a healthy 30% of Bangkok Bank’s loans. In recognition of its success in this area, Asiamoney named Bangkok Bank Thailand’s best bank for SMEs in 2017.

More recently, Bangkok Bank appears to have been slow to wheel out new digital technology and to sell products and services in the area of wealth management, viewed as one of the brightest spots in Thai banking today.

One former insider who spent decades working at Bangkok Bank blames the reluctance to change on the rigid corporate banking mindset and risk-averse culture at the highest levels of the bank.

“If the head does not move strongly, the tail does not wag,” he says. “Perhaps when you are the biggest, you get a bit complacent.”

Prinn Panitchpakdi, Thailand country head of CLSA Securities, takes a more generous view.

“Experience and caution come at a price,” he tells Asiamoney. “In a world where the cost of money is cheap, perhaps Bangkok Bank could have been more aggressive. But when the tide turns, as it inevitably will, Bangkok Bank will outperform.”

If Bangkok Bank has been slower to adapt to the fast-changing banking landscape than some of its rivals, Chartsiri is clearly working hard to ensure that it gets back on track. “Our business strategy is focused on benefiting from three major trends: regionalization, urbanization and digitalization,” he says.

These are all sensible strategies that could offer considerable upside.

To take the first: regional banking. This is undoubtedly one of Bangkok Bank’s key strengths. The bank has the largest international presence of any Thai bank by far. Its network comprises 32 branches in 15 countries, including Hong Kong, Japan, Taiwan, the Philippines, Singapore, Indonesia, the UK and the US. It has a wholly owned subsidiary in Malaysia, incorporated back in May 1994 and with five branches. To round it off, Bangkok Bank has a wholly owned subsidiary in China with branches in Shanghai, Beijing, Xiamen, Shenzhen and Chongqing, plus a sub-branch in the Shanghai Pilot Free Trade Zone.

So, what are the bank’s plans for China?

“Bangkok Bank has always had strong connections with China,” says Chartsiri. The bank, he notes, has had a formal presence on the mainland since 1986. Operations have expanded in line with China’s burgeoning influence in the region.

“By making it easier for businesses and individuals from both countries to invest in each other, we can benefit our customers and ourselves,” he says.

Given the fact that many of Thailand’s biggest companies are active on the mainland, and China is now Thailand’s leading trading partner, this would appear to be a good bet. However, with the growing clout of Chinese banks around the region, it may be only a matter of time before they pose a serious long-term threat to Bangkok Bank, both on the mainland and in Thailand itself.

Chinese banks are not the only threat. DBS of Singapore has 29 branches in 10 big cities on the mainland, as well as 50 branches in Hong Kong and 43 branches in Taiwan.

Bangkok Bank’s response has been to focus increasing attention on the greater Mekong sub-region that holds Cambodia, Laos, Myanmar and Vietnam (CLMV), which has a population of roughly 150 million people, many of them young. More importantly, it is under-banked, which, in theory, could mean decades of growth ahead. This is especially important given the political uncertainty and limited lending opportunities in Bangkok Bank’s home market.

“We are particularly excited about our near neighbours in the CLMV, which all have growing per-capita incomes and middle classes,” says Chartsiri. “Bangkok Bank has a branch presence and is very active in all four countries.”

Longer term, there is another obvious question. What impact will the much-touted Asean Banking Integration Framework (ABIF) have on Bangkok Bank and the other Thai banks?

Parson Singha, senior director at Fitch Ratings, smiles at the question.

“The ABIF has been all talk and very little action for eight years,” he says. “Thailand is engaged in bilateral negotiations with Malaysia, Indonesia and Myanmar. But we will probably not see a big bang in the near future.”

 

So where does that leave Bangkok Bank? Currently foreign loans account for 17% of total loans. The figure is the highest of any Thai bank, but still leaves plenty of room for growth.

“We see the region’s financial integration as a great opportunity for Thailand and for Bangkok Bank,” says Chartsiri. “Thailand has entered the stage of wealth accumulation, with surplus savings and well-functioning capital markets. So now is the time to mobilize such accumulated savings and use Thailand as a funding base for the rest of the region.”

Urbanization is another important area of growth for Bangkok Bank highlighted by Chartsiri. Over the next five years, the Thai government has said it will spend at least Bt1.7 trillion on road and rail development, mass transit extensions and port and airport expansion as part of its plans to transform the country into a high-value economy and logistics hub for Asean.

As the largest corporate lender with a track record, balance sheet and in-house expertise to match, Bangkok Bank is well placed to ride the wave. In 2017, it was the lead arranger and adviser for the Bt55 billion MRT Pink Line and Yellow Line monorail extensions in Bangkok. The projects are being financed under a public-private partnership structure.

Another side of urbanization is the demand for wealth management products and insurance. In October 2017, the bank signed an agreement with AIA, the largest independent publicly listed pan-Asian life insurance group, that will give Bangkok Bank the right to distribute AIA’s range of life insurance products in Thailand for the next 15 years. Chartsiri sees “tremendous scope for future growth”.

Could more strategic alliances be in the offing?

“We are always looking for new opportunity and are open to considering partnerships that will benefit our customers – either directly or by helping develop our expertise,” he says.

This leads to another question. Would Chartsiri consider a merger, say with one of the smaller local banks such as Tisco Bank, in order to bag itself a consumer and hire-purchase business while boosting the size of its balance sheet?

It’s an intriguing idea and one which the Thai authorities would almost certainly welcome given their stated goal of creating champion banks capable of taking on bigger regional rivals.

“The government has woken up to the fact that Singapore only has three commercial banks. So why does Thailand need more than a dozen?” says Kongkiat Opaswongkarn, chief executive of securities house Asia Plus Group. “At some stage, there will definitely be a shakeout in the Thai banking sector.”

Chartsiri’s response to the idea of a merger, however, has been unenthusiastic.

“We have no M&A plans at this moment,” he says. “We already have the capacity to serve our customers in both domestic and regional markets.”

The third and final part of Chartsiri’s strategy focuses on improving technology infrastructure and working processes inside the bank.

“We are undergoing our own digital transformation,” he says.

However, regional rivals have aggressively moved into fintech, while some of the bank’s domestic rivals are taking a more ruthless approach. SCB has said it will slash the number of local branches from 1,153 to 400 over the next three years and reduce the headcount from 27,000 employees to 15,000 in a bid to ready itself for the new digital banking era.

“Banks have to think differently if they are to survive,” says its senior vice-president, Dechapol Lamwilai.

Bangkok Bank’s reaction to all this has been curious to say the least. Last year, it was one of the only commercial banks in Thailand to actually increase its branch network. As of May this year, it had a total of 1,165 branches nationwide, up from 1,157 at the start of 2017.

“We expect our total number of branches at the end of 2018 will be the same as at the start of the year,” says Chartsiri. “We may open some new branches, but these will be balanced against the relocation or merging of existing branches.”

He argues that branches remain important as a contact point and for providing customer services, “but at the same time we’re changing the role of our branches from providing basic transactional services to expanding financial advisory services and asset management for both business and individual customers.”

Some investment bankers defend the bank.

“The danger with moving too quickly on digital banking is you get ahead of your clients,” says Therapong Vachirapong, managing director of Phatra Securities. “Unless you move at their pace, they may simply go to another bank.”

The fact that Bangkok Bank’s focus is on corporate clients rather than on the retail market also gives it a powerful line of defence lacking in many of its rivals. Still, if the aim of technology is to lower fixed costs and boost efficiency in the long run, Bangkok Bank clearly needs to get in on the act fast.

Chartsiri believes the bank may already be having some success. In June 2017, it launched Bangkok Bank InnoHub, a global accelerator programme for startups. The programme aims to provide financial support for the country’s best digital innovators.

“We are also working with machine learning, big data and artificial intelligence to provide greater convenience and to offer relevant products and services while reducing operating costs,” he says.

A graduate of chemical engineering and management at the Massachusetts Institute of Technology, Chartsiri is well known for his meticulous style.What of Bangkok Bank’s leadership? Chartsiri joined Bangkok Bank in February 1986 before working his way up the ranks to become a board member in April 1992 and two years later to take up his current post as chief executive and president. He follows in the footsteps of his father Chatri and grandfather Chin, who founded the bank in December 1944. 

“I like the systematic, analytical approach in Western management,” he says. “However, we are a Thai bank, and I want to maintain continuity with the values of earlier generations and give high importance to people and relationships.”

Fellow bankers describe him as hard working, impeccably mannered and immensely private. It is telling that in a world where everyone knows everything about each other, fellow bankers trot out the same old stories about him: that he burns the midnight oil and signs loan documents until the wee hours of the morning.

The question arises, why is the chief executive of Thailand’s largest bank working such long hours and wouldn’t it be better if he delegated some tasks to staff?

One Bangkok Bank veteran who has now left the bank had this to say: “Chartsiri puts himself under a lot of pressure because of the family’s history [as founders]. He wants to know every detail, but he takes too long to make decisions. It is very frustrating.”

Given Chartsiri’s pedigree and high expectations, his fear of failure is understandable. But that does not make it right.

A bigger issue lies with the board of directors, made up of 18 executive and non-executive members.

“We call it the 1,000-year-old board,” quips one chief executive, referring to the total age of its members.

A quick back-of-the-envelope calculation confirms the truth of this statement. The age of Bangkok Bank’s board directors ranges from a sprightly 50 to a somewhat less sprightly 87 years old. And the average? A solid 71 years – giving a total of 1,278.

One argument for having these loyal and impeccably connected lieutenants on the board is that many of them helped to build up the business at Bangkok Bank and helped to bring it through the Asian financial crisis.

But if the responsibility of the board is to lay down long-term strategy, on everything from fintech to the merits of retail banking, then clearly there is a problem. Chartsiri’s response to this is strangely matter-of-fact.

“In line with the good corporate governance standards that the bank follows, all our directors regularly have to stand for re-election,” he says.

There are signs of change at the top, which in time may be expected to trickle down through the ranks, presaging a changing of the guard. The appointment of Charamporn Jotikasthira, 61, to the board last year appears far-sighted.

A former president of the Stock Exchange of Thailand, Charamporn previously worked at SCB, where he proved to be something of an IT visionary during his stint as chief information officer from 2008 to 2010.

“Does he need a job? He does not. Does he need the money? Probably not,” says one finance chief who knows Charamporn well. “But he may have wanted a challenge, which it is. This guy is very savvy and he gets the disruptive nature of technology.”

Charamporn was joined on the board by Chokechai Niljianskul, 60, a top lawyer who spent 13 years as a senior legal adviser and litigator at Linklaters (Thailand). It is likely to be only a matter of time before there are other new appointees, giving Chartsiri a freer hand to act.

This raises another important question. Who will run the bank when Chartsiri eventually decides to step aside? Currently the only other member of the Sophonpanich family who is on the board is Chartsiri’s uncle Charn. At age 77, however, he is deemed an unlikely successor.

Could one of Chartsiri’s children step up to the plate? His two oldest sons are both US-educated and said to be bright and business savvy. But they are still in their 20s and too young to take up the job, although one of them recently interned at a foreign securities house in Bangkok.

Chartsiri understandably refuses to be drawn on such sensitive matters.

“Bangkok Bank is a public, listed company and decisions on leadership are made by our board of directors in line with the highest standards of corporate governance, for the benefit of our stakeholders,” he says.

The good news for Chartsiri is that the tide may finally be turning. For the first half of 2018, Bangkok Bank reported net profit of Bt18.19 billion, up 11% over the corresponding period of 2017, on the back of higher interest income and increased loan growth, especially from large corporate customers. As of the beginning of August, a dozen local securities houses had a buy recommendation on the stock, more than any other large bank in the sector.

Chartsiri can also take comfort from the fact that rival banks that moved aggressively into consumer banking and SME lending a decade ago are now taking a hit from rising NPLs and stagnant lending conditions.

“The heady days of growth in the Thai banking sector are over,” says Dan Fineman, head of research at Credit Suisse in Bangkok. “Credit growth over the next five years will be in the mid-single digits. The same goes for fee income.”

If the economy were to slow sharply or if household debt, which currently stands at 76% of GDP, were to spike, Bangkok Bank could find itself in a much stronger position to cope than many of its rivals.

As of June, the bank’s capital adequacy ratio was 18%, well above the 12% minimum that the Bank of Thailand requires all domestic banks to meet under Basel III. Meanwhile, its NPL coverage ratio stood at a hefty 176%, compared with 139% for the banking sector as a whole.

Following the appointment of younger board members, the slow but steady implementation of Chartsiri’s strategic plan and the bank’s belated embrace of digital technology, Bangkok Bank should find itself on a clearer growth trajectory. It will still need to be more innovative and aggressive and to address the problem of overly conservative management if it is to keep its nimbler rivals at bay. But while it will take time, these issues can eventually be ironed out.

Whether Bangkok Bank can ever go head to head with the likes of DBS or UOB on the regional stage seems less likely. As Chartsiri admits, “size is important, but it’s only one factor in being successful.”

Prinn at CLSA strikes an optimistic note.

“I would argue that 10 years from now, Bangkok Bank will be playing a more aggressive and proactive role,” he says. “With the Eastern Economic Corridor and a few other mega-projects moving forward, with exports doing well and with solid global growth, I can see Bangkok Bank gaining market share.”

Does Chartsiri believe that Bangkok Bank can be a champion bank in the future? “That depends on the definition of a champion bank,” he says. “But we certainly aim to be a champion for our customers, for Thai society and for our stakeholders, and we plan to continue to grow and make the most of our opportunities in a rapidly changing world.”