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Twinning in AsiaThe Role of State-Owned Financial Institutions: Policy and PracticeSession 4: Exiting State OwnershipApril 26-27, 2004, World Bank

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Twinning and its benefits

An agreement between two banking institutions (a foreign private bank with an Asian bank, often state-owned) where the foreign "twin" transfers knowledge and skills for a fee to the Asian “twin”, typically through the temporary commitment of specialized personnel

Foreign "twin"Asian bank

Local government/ Banking

environment

Benefits: Develop strong relationship with major local player and regulatory bodies

Improving capabilities of local player increases potential for future business opportunities (e.g., capital raising)

Access to modern banking practices through on-site practitioners

More control over pace of change than if strategic sale or an equity partnership

Reduced risks in banking sector (particularly if risk management processes strengthened)

Better products and services for local consumers

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Twinning agreements in Asia

MongoliaMongolia

Trade Development Bank of Mongolia

Trade Development Bank of Mongolia

KoreaKorea

Seoul Bank KEB

Seoul Bank KEB

TaiwanTaiwan

Chang Hwa Chang Hwa

VietnamVietnam

Vietcombank Vietcombank

ThailandThailand

Siam Commercial Bank Siam Commercial Bank

IndonesiaIndonesia

Bank Rakyat Indonesia Bank Mandiri Bank Central Asia Lippo Bank Bank Danamon

Bank Rakyat Indonesia Bank Mandiri Bank Central Asia Lippo Bank Bank Danamon

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Putting Twinning in context

Top 100 Asian banks’ assets Top 10 in each market

Twinning has generally been used in cases of severe distress

Have not used

Twinning99%

Have used

Twinning1%

5

2

1

1

0

0

0

0

0

0

0

0 2 4 6

Singapore

Philippines

Malaysia

Japan

India

Hong Kong

China

Thailand

Taiwan

Korea

Indonesia

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How Twinning complements other corporate actions

Twinning is a process and not an event

Banks sometimes mistake a specific corporate action as a substitute for the Twinning process

Corporate actionCorporate actionCorporate actionCorporate action CommentsCommentsCommentsComments

Substitutes for Twinning because the benefits of Twinning are embedded in the strategic partnership/takeover and are linked to the acquiror’s economic return

Exceptions apply to private equity investors

Strategic investment Strategic investment or Takeoveror Takeover

Strategic investment Strategic investment or Takeoveror Takeover

Public market capital Public market capital raisingraising

Public market capital Public market capital raisingraising

Asian banks attractive to investors may directly tap the capital markets for funds

Risk to investors is that without proper fix of risk management systems, asset quality problems may re-occur

Availability of capital does not mean that Twinning is unnecessary

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When Twinning works

Organisational inertia has been Organisational inertia has been removed (commitment of both removed (commitment of both bank and state)bank and state)

Fundamental belief that ‘bottom-Fundamental belief that ‘bottom-up’ fix is importantup’ fix is important

Bank does not want to sell to a Bank does not want to sell to a foreign strategic investorforeign strategic investor

Regulatory changes (e.g., Basel Regulatory changes (e.g., Basel II) and increasing foreign II) and increasing foreign competition are driving many competition are driving many banks to seek a quicker solution banks to seek a quicker solution rather than develop all rather than develop all capabilities organicallycapabilities organically

Organisational inertia has been Organisational inertia has been removed (commitment of both removed (commitment of both bank and state)bank and state)

Fundamental belief that ‘bottom-Fundamental belief that ‘bottom-up’ fix is importantup’ fix is important

Bank does not want to sell to a Bank does not want to sell to a foreign strategic investorforeign strategic investor

Regulatory changes (e.g., Basel Regulatory changes (e.g., Basel II) and increasing foreign II) and increasing foreign competition are driving many competition are driving many banks to seek a quicker solution banks to seek a quicker solution rather than develop all rather than develop all capabilities organicallycapabilities organically

Few experienced providers of Few experienced providers of Twinning servicesTwinning services

Economic incentives for Economic incentives for providers are lowproviders are low

Other alternatives may be easier Other alternatives may be easier for Asian banks to execute (e.g., for Asian banks to execute (e.g., capital raising) but creates risk of capital raising) but creates risk of burying problems that will later burying problems that will later resurfaceresurface

Reluctance to introduce a Reluctance to introduce a potential competitor/greater potential competitor/greater comfort and understanding of comfort and understanding of management consulting servicesmanagement consulting services

Reluctance to pursue radical Reluctance to pursue radical changechange

Few experienced providers of Few experienced providers of Twinning servicesTwinning services

Economic incentives for Economic incentives for providers are lowproviders are low

Other alternatives may be easier Other alternatives may be easier for Asian banks to execute (e.g., for Asian banks to execute (e.g., capital raising) but creates risk of capital raising) but creates risk of burying problems that will later burying problems that will later resurfaceresurface

Reluctance to introduce a Reluctance to introduce a potential competitor/greater potential competitor/greater comfort and understanding of comfort and understanding of management consulting servicesmanagement consulting services

Reluctance to pursue radical Reluctance to pursue radical changechange

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Deutsche Bank has a successful history of Twinning arrangements in Asia Deutsche Bank has a team dedicated to advising banks – its Risk

Management Advisory Group – and has worked with a number of banks for more than 5 years

Key mandates include:

– Bank Rakyat Indonesia “BRI”, Indonesia (Restructuring, Recapitalisation and NPL Management)

– Seoul Bank, South Korea(Restructuring and Capital Raising)

– Bank Mandiri, Indonesia(Pre-Merger Due Diligence of four state-owned banks, post-merger Risk Management integration, restructuring, capital raising, and corporate NPL Management)

– Bank Central Asia “BCA”, Indonesia(Implementation of an integrated Risk Management)

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Case study I – South-east Asian bank

Summary of situation pre-Twinning Deutsche Bank's brief

Non-compliance with Basel II and International “Best Practice”

Insufficient risk culture throughout the bank

Insufficient Risk Management systems and expertise in the areas of

Asset Liability Management

Market Risk Management

Operational Risk Management

Credit Risk Management

Time consuming credit processes

Basel II and “Best-Practice” compliance for national/international competitive standing

Build-up of Risk Awareness through integrated and comprehensive Risk Management

Enhance Risk Management expertise and training capabilities and create ability to qualify for defined Basel II approaches in Asset Liability, Market, Operational and Credit Risk Management

Create timely and effective credit processes

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Case study I – South-east Asian Bank (continued)

Over the course of 24 months, Deutsche Bank worked with the local bank on enhancements of its Market, Asset Liability, Operational and Credit Risk Management capabilities

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Case study II – North Asian bank

Summary of situation pre-Twinning Deutsche Bank's brief

Corporate and Retail banking business units not selective in targeting customers and products

Unclear strategic direction and focus on unprofitable customer segments

Inadequate Risk Management processes

Human Resource strategies not defined, with more hierarchy levels than shown on organisation chart

Develop framework and processes for business units to focus on attractive targets and products

Develop short- and long-term strategic goals and roadmap to increase profitability

Enhance capabilities in Risk Management

Assist in development of Human Resource strategy, and streamlining of organisation structure

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Case study II – North Asian bank (continued)

Over the course of 12 months, Deutsche Bank worked with the local bank on enhancements of its strategic and risk management capabilities

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Key success factors for Twinning

Local bank Foreign bank

Senior management and government-level support for initiative

Recognition that changes will take time and will often involve fundamental changes to traditional way of doing things

Aggressive timetable and political will to “stick to it”

Regular communication throughout bank highlighting progress status and showcasing milestone completions

Ability and willingness to commit on-the-ground resources on a sustained basis

Flexible approach – does not adopt a one-size-fits-all approach

Sensitivity to local customs and way of doing business

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Future of Twinning in Asia

Significant NPL problems still exist around Asia, and expertise in restructuring loan portfolios is required. Efforts to date mainly focussed on resolution of NPLs (“symptoms”) rather than implementation of risk management capabilities (“causes”)

Regulators and banking associations are beginning to proactively seek out foreign banks to act as “twins” - smaller players encouraged to group together to share costs

All countries in Asia have banks that can benefit from advice provided from other banks who have “done it before”, although more advanced countries like Japan and Taiwan have different needs (sophisticated risk management) compared with developing economies like Indonesia and Sri Lanka (setting up more basic risk management systems)

Scope of adoption limited by small number of practitioners

Commercial priorities drive “twins” to become owners rather than advisors

Ultimate test may be yet to come in China with “Big 4” state banks

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Twinning for Chinese state-owned banks

Chinese state-owned banks may provide the biggest opportunities for Twinning agreements in Asia

Banking regulator and bank management are committed to improving overall quality of the banking sector and reducing the level of NPLs ahead of WTO

Large size of state-owned banks prevents significant strategic investment by foreign player

Ability to tap capital markets may be limited until more advanced restructuring completed (press reports on 4/15/2004 suggest that CCB’s IPO may be delayed due to the need for restructuring)