by Elizabeth Suzanne Miller and Cynthia Pornavalai
July 2005
Over the past few years, Thailand has begun to exhibit signs
of a financial metamorphosis. Since the introduction of the Financial
Sector Master Plan by the Bank of Thailand (BoT) in 2003 and its
subsequent approval by the Thai Cabinet, an explosion of mergers,
reorganization, re-licensing, and acquisitions have begun turning
some of the country's top financial institutions into even stronger
economic powers. Though these changes precede full implementation
of the Plan's policies, they are expected to continue and even
intensify over the next decade.
The BoT organized a committee in February 2002 comprised of government,
financial, consumer, and public representatives, among others.
The group set out to evaluate the need for innovative reformation
of the Thai financial sector, still recovering from the 1997 crash,
and develop a vision and framework for a solution. Over the next
two years, the committee produced the Master Plan, which focused
development on public access to financial services, general efficiency
in the financial sector, and consumer protection. Among its suggested
adjustments, the Plan proposes renovating regulations that govern
licensing, foreign institutions, and internal efficiency.
Licensing
Traditionally, Thai financial policy allowed all types of financial
institutions to apply for and receive licenses, a policy which
reflected regulatory distinctions between commercial banks, finance
companies, and credit fonciers. The Master Plan alters the policy,
recognizing only two types of deposit-taking institutions: commercial
banks and retail banks. Commercial banks are qualified and well-capitalized
financial institutions requiring a minimum of Bt5 billion of tier-1
capital. These banks may provide most financial services to all
groups of customers, but are not permitted to engage in trading,
insurance underwriting and brokering, or underwriting equity securities.
Until now, commercial banks have been the only institutions that
could be defined as "banks" (CBA Sec. 9). The Master
Plan now includes retail banks in the definition, distinguishing
them from commercial banks with smaller capital requirement (Bt250
million of tier-1 capital) and a different range of services.
Retail banks may offer financial services to retail customers
and SMEs within the same limitations as commercial banks, but
they cannot conduct business related to foreign exchange and derivatives
products.
By acknowledging only two types of banking licenses, the Master
Plan gives incentives to financial institutions for consolidating
their services. The Plan also proposes a "one presence"
policy that makes distinctions between the types of services listed
above redundant. Rather, it encourages financial conglomerates
to operate only a single deposit-taking institution under their
umbrella.
Foreign Branches
Foreign banking institutions have long had a presence in Thailand
in the form of full branches and Bangkok International Banking
Facilities ("BIBFs"). Under the Plan, full branches
of foreign banks are still permitted, while BIBFs are replaced
by subsidiaries of foreign banks. Both full branches and subsidiaries
of foreign banks may engage in the same scope of business as commercial
banks, but they differ in capital requirements and branch allowances.
Subsidiaries must maintain a minimum of Bt4 billion in capital.
They are given a choice between keeping a maximum of four branches
in the country (one of which is allowed inside Bangkok and metropolitan
areas, and the remaining three outside) and merging or acquiring
another institution in order to upgrade its status. Full branches,
on the other hand, are required a minimum of Bt3 billion, but
may not open any branches. (Bank of Thailand, Financial Sector
Master Plan Summary)
Internal Regulations
The Plan relaxes several points of regulation governing the operations
of banks in Thailand. For instance, previous policy required that
banks planning to open branches in dense, well-serviced areas
open a corresponding branch in a rural area. The Master Plan eliminates
this rule. In addition, the Plan removes the requirements on provincial
bank branches to lend within their operating region at least 60%
of the total amount of deposit and on foreign bank branches to
lend and maintain exposure in Thailand no less than 70% of their
total deposit and borrowings raised in the country. It also softens
conditions under which commercial banks may close down their last
branch within a given ampur and eases the limits on the
number of expatriate staff the BoT will endorse to the Immigration
Office on behalf of a commercial bank.
Of all the new regulations, those providing incentives toward
consolidation have had the most immediate effect. The Plan steers
large banks toward becoming universal banks and leaves smaller
institutions to choose between merging or downgrading to credit-provider
status. Ultimately, the total number of banks and financial institutions
is expected to decrease by 50% and has certainly inspired a flurry
of merger and acquisition activity so far. Following is an overview
of some of the merging activity recently seen among Thai banks
and other institutions.
Thai Military Bank Merger
First out of the starting gate was the Thai Military Bank, which
began negotiations with the DBS Thai Danu Bank and the Siam Commercial
bank in January 2004. The combination was expected to create a
Bt1.25 trillion organization, making it one of the largest in
the country. However, Siam Commercial was eventually blocked from
the deal by some "influential figures," and ultimately
decided not to pursue a merger that year. In the end, the Thai
Military Bank executed a merger with Industrial Finance Corp of
Thailand Plc. and DBS Thai Danu Bank Plc.
Subhak Siwaraksa, leader of the TMB, expressed a hope that the
merger would assist in moving his bank from seventh to third place
in the ranks of Thai institutions. He noted that while the bank
may not be top three in size, "market capitalization and
service quality is more important. Size isn't everything; it's
how investors see us that's important". ("TMB, DTDB
to sign MoU this week", Business Day, January 27, 2004) His
ambition seemed well-enough placed, considering the price gain
the bank experienced while undergoing the merger arrangements.
Upon finalization of the merger, the new entity boasted an asset
size of Bt277 billion, 169 branches and 384 ATM's across the country.
Kasikornbank
Kasikornbank announced plans for recapitalization in February
2004. In the spirit of the financial sector development of the
time, many assumed these plans implied Kasikornbank's intention
to buy up financial institutions and become a larger, universal
bank. While speculations that the bank's next move would include
acquisition of Tisco Finance never came to fruition, Kasikornbank
did take preliminary steps toward becoming a universal bank amid
the increasingly stronger competition in the banking industry.
In April 2005, the bank completed the amalgamation of its five
subsidiaries: Kasikorn Securities, Kasikorn Asset Management,
Kasikorn Factoring, Kasikorn Leasing, and Kasikorn Research Centre.
The new group was created with the goal of providing customers
a range of services under a single brand image.
Finansa Plc
Initially, Finansa Plc planned to merge its subsidiary, Finansa
Finance, with Bangkok First Investment & Trust Plc. The intended
result would have been a universal bank containing Bt11 billion
in assets to be completed early 2005. By February of that year,
however, Finansa had turned its attention to the hope of purchasing
ABN Amro Bank's 80-percent stake in the Bank of Asia. Finansa,
however, was not the only institution with their eyes on that
prize.
Bank of Asia / UOB
After ABN's stake in the Bank of Asia was brought to the table,
London-based Standard Chartered Bank (StanChar) and the Singapore's
United Overseas Bank (UOB) both expressed their interest in acquiring
the shares. Hoping to progress toward a more significant role
in Thai financial markets, StanChart had already announced its
intention to merge its wholesale banking operations in Thailand.
StanChart's CEO, Annemarie Durbin, acknowledged that the Financial
Sector Master Plan had lately been encouraging banks and financial
institutions to merge and implied that the Plan had also played
a role in StanChart's interest in expanding. Unfortunately, StanChart
stood at a disadvantage as a competitor for the BoA having not
participated in the initial bidding for the ABN shares.
The UOB began considering a merger for its small Thai bank, Radnasin,
in February 2004 and saw the BoA as a strong candidate. The possible
merger between the two banks drew varying responses from the financial
world. Fitch Ratings placed the Bank of Asia on a "rating
warning negative" due to the decision by the bank's major
shareholder to sell its stake and The Nation saw the UOB as a
less likely candidate than Finansa or other competitors, thinking
that authorities would prefer local investors. By March 2004,
however, the Bank of Thailand had already given its approval to
UOB's efforts toward the takeover and by April, the UOB was considered
the only competitor left on the playing field.
Standard Chartered
Still not ready to give up its consolidation efforts, Standard
Chartered next made plans to merge its branch business in Thailand
with its local unit, Standard Chartered Nakornthon Bank Plc, and
its auto-leasing unit, Standard Chartered Thailand. The move would
achieve consolidation by leaving the three organizations operating
under one license from its local unit.
National Finance / Thanachart
The merger trend remained strong into Summer 2004 as the National
Finance Group submitted a proposal to merge with Thanachart Bank
by June. After the merger, the resulting institution began planning
to increase its asset size to about Bt300 billion over the next
three years in preparation to become a medium-sized commercial
bank. The bank also planned to sell 689.8 million new shares to
former shareholders and put the proceeds toward business expansion.
These capital-raising strategies were intended to strengthen the
company enough to avoid the necessity of future mergers or additional
capital raising strategies. Instead, post-merger plans would either
consist of de-listing from the stock market or continuing to sell
new shares to the public through the equity market.
While mergers drew considerable attention from onlookers, banks
not requiring mergers were also undergoing substantial transformations.
New restructuring guidelines gave banks until the end of July
2004 to upgrade their licenses and become either commercial or
retail banks, while foreign subsidiaries were given the same amount
of time to comply with their new rules. The following will examine
some of these efforts.
BankThai
BankThai was established as a wholesale bank 1997, but changed
their course in March 2004. Intending to offer a full range of
services, they pursued a new license as a retail bank under the
regulations of the Master Plan. They also turned their eye to
the possibility of offering insurance and fund management on top
of consumer banking, and began looking for a foreign strategic
partner to help them meet these goals.
Kiatnakin
Kiatnakin Finance Plc ("KK"), on the other hand, applied
for a commercial bank license. According to the Master Plan, Kiatnakin
was required to merge with at least one other institution and
meet minimum requirements for capital funds, asset quality and
risk management systems. In preparation for this upgrade, they
acquired Radanatun Finance in 2003. As of December of that year,
KK's capital fund stood at Bt12.84 billion, more than double the
upgrade requirement. Managing Director Thitinan Wattanavekin explained
that the bank was aiming "to become a universal bank, focusing
on three business areas: hire-purchase, distressed asset management
and securities." ( Polkuamdee, Nuntawun. "Kiatnakin
Finance ready to pursue bank licence." Bangkok Post, June
17, 2004)
Thailand's financial reformation is at its beginning rather than
its end. The Master Plan, designed to gradually exact changes
over a ten-year period, has already yielded fruits reflective
of its goal. It has spurred into action major players in the Thai
financial sector and driven them towards the consolidation and
increased efficiency intended by the Plan. If the present is any
indication of the future, Thailand still has many changes to look
forward to.
For
further information, please contact Ms.
Cynthia Pornavalai, Partner & Head of Banking and Finance
Group, Tilleke & Gibbins (e-mail
cynthia.p@tillekeandgibbins.com).
August 2005
