Home DBS Group Holdings Ltd Annual Report 2001
  In an evolving global market increasingly characterised by diverse customer segmentation, our goal is to be the best - not just to rank among the best. Realising this vision depends on our attaining a critical mass so that we can deliver world-class products and services at competitive prices to our customers.

Building the Best bank in Asia
This philosophy transcends size, diversity and geographical reach. We believe it is about building our capabilities and capitalising on our strengths. It is about creating competitive advantages in the areas of technology and speed of response. It is a resolute customer focus that translates into needsbased products and services. It is enhancing our knowledge capital and expertise through investments in people.

The DBS Strategy for Growth
The development and consolidation of its pan-Asian franchise is at the core of the Banks developmental plans, in addition to leveraging its strengths - a strong shareholder base and robust brand equity and visibility. DBS intends to grow its geographic footprint in the region - primarily Hong Kong and the emerging China market in North Asia, and Thailand and Indonesia in Southeast Asia - through tactical mergers and acquisitions and strategic alliances with different sectors of the financial services industry. This will enable us to maximise market knowledge, competencies and capabilities and take full advantage of existing and new channels of distribution.

The transforming transaction in 2001 was the acquisition of Dao Heng Bank, creating the first truly Asian bank with a pan-Asian presence. It was an important step driving DBS?regional operations forward and DBS became the first bank in Asia with significant corporate and retail presence in both Singapore and Hong Kong.

Hong Kong is a key beachhead to China and other major markets in Northeast Asia. It has developed its own critical mass from its early days as the Chinese centre of trade during British colonisation to its current unique position as a Chinese Special Administrative Region. Its service industries, as well as its special network of Mainland contacts, provide significant support to corporations seeking access to Chinas markets.top

Economies of Scale
This is a critical element of any cost-benefit analysis of investing in services, systems and capabilities that are either centralised or shared. Economies of scale give an organisation the flexibility to provide innovative technological investments at lower unit costs to a larger number of customer segments with specific requirements.

Customers are being wooed with faster and better services at competitive prices everywhere. To ensure that DBS provides best-in-class products and services, our businesses are continually reviewed and changes implemented as required. Ongoing integration initiatives have rationalised our businesses and realised synergies resulting in cost savings, cross-selling, streamlining of operations and improved efficiency.

Increasing the Size of Operations
Expanding size and reach - via the development or sale of new products and services or the expansion of businesses and cross selling abilities - underpins DBS?strategy for growth in the region. The results in 2001 included some notable successes:

•  The growth of our credit card business in Hong Kong through DBS Kwong On Credit Cards
•  The launch of Hong Kongs first savings account with the flexibility of a checking account which attracted around 10,000 customers in the second half of 2001
•  The 25% increase in our Singapore credit card base and a corresponding 30% increase in our outstanding receivables, which took us to second position in the market
•  S$1.3 billion in new unit trust sales (in a difficult year for equity investments) making DBS the leading fund distributor in Singapore in 2001

Creating Value through Mergers and Acquisitions (M&As)
This tactical thrust in our pan-Asian operations will enhance the DBS franchise through customers, capabilities and country presence. M&As facilitate leadership in a particular business by leveraging an organisations local brand recognition and market expertise.

As in the Dao Heng acquisition, DBS?M&A strategy combines opportunity with precise timing. Our acquisition of Vickers Ballas in September 2001 was crucial in strengthening our leadership in the area of total wealth management - part of our refocused strategy on profitability targeting higher margin, fee-based businesses.

Both DBS and Dao Heng operate branch offices in mainland China. DBS is well positioned to take advantage of the opportunities presented in China as its banking environment develops.

Global Scope and Local Insights
Strategic alliances, we believe, is the 21st Century approach to growth in the banking industry. Through partnerships, exemplified by Star Alliance and One World in the airline industry, DBS can access market knowledge, capabilities and customers without acquiring assets. Partnerships allow organisations to think global, yet remain local. Even as markets are shaped by global developments, local knowledge, local relationships and local brand presence remain vital to the success of any initiative.top

Optimum Size, rather than Absolute Size
The precise targeting of products and services to specific customer segments depends on the size of this segment. DBS?value-based management philosophy believes that companies are becoming increasingly sophisticated in their allocation of resources to lines of business and customer segments that deliver superior returns. A fundamental element that enables an organisation to target its investments in a more cost-effective manner is its evaluation of the areas in which it knows it has a competitive edge.

This knowledge enables DBS to deliver superior value propositions to its target customers, which in turn further reinforces its competitive strengths in the market. The days of trying to be all things for all people are gone and it is crucial for Asia-based financial institutions to realise and implement this philosophy in their strategic planning.

A Partner of Choice
Forging strategic partnerships with world-class providers is an integral part of DBS?strategy to acquire a global presence. Our partnership with CGNU, the UK-based insurance giant, developed from our belief that insurance products form a critical section in a portfolio of wealth management products - an area in which we have an advantage in sales. While creating insurance products is not our core business - we do not have competitive advantages in actuarial expertise and insurance underwriting - our partnership with CGNU will enable us to offer our customers third-party products that augment our fee-based income.

Our alliance with Frank Russell, one of the worlds leading firms offering investment services, enables DBS to deliver a premium investment management programme to its investors - a programme that leverages our advantage in distribution, customer service and knowledge of the local market with Frank Russells expertise, evident in its multi-asset, multi-manager, multi-style investment approach.

Through a third partnership with TD Waterhouse, DBS can now offer its customers world-class self-directed online brokerage services.top

The Numerical Bottom Line
The Banks performance in the region validates its strategic initiatives. The acquisition of Dao Heng Bank in 2001 directly impacted the growth of DBS?businesses, customer bases and skills.

Through this acquisition, DBS Group and its subsidiaries became one of the largest banking groups in the region in terms of shareholders?funds (S$13.5 billion or US$7.5 billion) and total assets (S$151.3 billion or US$84 billion). In terms of loans and shareholders?funds, DBS emerged the fourth largest bank in Hong Kong, while reducing its Singapore share of total assets to just 59.6%.

With the inclusion of Dao Heng and DBS Vickers earnings, income before operating expenses increased 20.9% to S$3.5 billion and operating profit to S$1.8 billion before goodwill charges, up 7% from 2000. These figures represent some impressive market gains, including a 6.5% market share and fourth place ranking for the DBS Group among Hong Kongs mortgage banks.

In addition to DBS Kwong On Banks (DKOB) noteworthy efforts to develop the credit card business in Hong Kong, Dao Hengs contribution has boosted the numbers to an impressive figure of 854,000, helping establish DBS as a prominent issuer of credit cards. From a card base of 359,000 at the end of 2000, DBS realised a base of 1.3 million cards - regionally - by the end of 2001, moving to second place in the Singapore market and third in the Hong Kong market.

DBS?acquisition of 60% of Vickers Ballas created an Asian securities powerhouse. With operations in Singapore, Hong Kong, Thailand, The Philippines and Indonesia, DBS Vickers is now the largest securities brokerage in Singapore and one of the largest in the region.

2001 was a memorable year for DBS Thai Danu Bank (DTDB). Amidst a sustained overall weak economic environment in Thailand, the Bank managed to achieve most of its stated objectives, the main one being turn-around to full profitability. DTDB recorded a net profit of Baht 170 million in 2001 - its first net profit since the Asian financial crisis erupted in 1997. The Bank made further inroads into the Thai corporate, small and medium enterprise and consumer markets, achieving cautious growth, through very stringent credit policies to ensure the quality of assets, of 12% or Baht 8 billion in its non-bank loan portfolio. Non-bank deposits grew 10% to Baht 77.2 billion. DTDB also gained ground in its custody business, winning a Thai Government mandate to safe-keep documents of assets worth Baht 140 billion. The Banks excellent reputation in the custody business was further acknowledged when it was elected the Best Custodian Bank in Thailand for 2001 in the Global Custodian Emerging Market Survey.

2001 was a year of formidable challenges for PT Bank DBS Indonesia, foremost of which was the pursuit of strategic plans in an environment of continuing political uncertainty which culminated with a dramatic change of the nations President. Indonesias persistent economic crisis was fuelled by a continuing decline in investments and offshore lending, a depreciating currency and high interest rates. The situation further deteriorated after the tragic incident of September 11, 2001. The Banks focus on small to medium-sized manufacturers helped it avoid some of the fallout from the slide in the US economy and the resulting decline in export volumes which directly impacted larger exportoriented Indonesian companies.

The Banks cross-selling initiatives recorded a marked improvement in deposit mobilisation and increased foreign exchange business. Customer-centric businesses witnessed increased trade finance volumes and the retail customer base increased by 50%. In addition, an increased deposit base assisted in reducing head-office funding support. In 2002, the Bank will additionally target domestic economy-related businesses that drive growth in any recovery.

We expect the interplay between the various elements of this emerging pan-Asian franchise to escalate with the exchange of business opportunities, knowledge and experience. Cross-selling opportunities have already begun to emerge. With support from the strong derivatives team in Singapore, Treasury & Markets (T&M), for example, have channelled more than 30 derivatives products through Dao Heng in just two months. In another significant deal, the joint marketing efforts of the DBS Consumer Banking Group and T&M in promoting the Hong Kong Mortgage Corporation retail bonds in September helped Dao Heng rise to second place, after HSBC, in subscriptions.top

Cross-Border Potential for Greater Operational Efficiency
The successful integration of our businesses across the region has enabled us to optimise synergies in revenue, cost and people faster than expected. The roll-out of treasury trading systems and risk management systems in Hong Kong and Thailand have effectively extended capabilities developed in Singapore to subsidiaries in the region.

The integration of Dao Heng with the DBS Group is a concerted effort of a team comprising members of the Hong Kong and Singapore offices, who bring their combined experience, management vision, processes, systems and culture to bear on the successful conclusion of the exercise. As a result, the integration infrastructure is in operation and already showing significant results.

The Customer Relationship Management (CRM) system was launched in all branches and call centres in Singapore. Hong Kong is already using CRM and making considerable contributions.

Most of our December 2001 rationalisation objectives in Hong Kong were met. We have accelerated channel rationalisation and co-location will be completed by April 2002. We have also completed a substantial portion of capacity re-alignment, largely through attrition and branch closures. We simultaneously increased sales capacity and staff competency through the introduction of a core training plan, allowing individuals to acquire the skills required for the new organisation. In all areas - products and services, information technology, back office and infrastructure - we have successfully achieved our key integration objectives in aligning all major processes and policies between the two organisations.

There is still much to do. We have a number of additional targets that we expect to achieve by January 2003. These involve re-aligning both brand and capacity so that customers will view the organisation as one bank. With the completion of the integration, products and services would have been totally rationalised and we would have fully leveraged on the product capabilities of DKOB, Dao Heng and DBS. We will further consolidate the branch network and rationalise our regional and international branch locations, as well as fully implement alternate channels and outbound capabilities in DKOB and DBS. All processes and policies will be aligned to DBS. The regional IT architecture and the back office infrastructure will be optimised across the region and will be fully scalable for the growth of new businesses.

It is critical that the process of harmonising the Banks systems, businesses and processes does not interfere with business operations. To this end, the merger is currently being conducted almost entirely out of Hong Kong, with a minimal need for Singapore resources in the integration process at this stage. From new money management accounts to the DBS TD Waterhouse global stock offer, we are pleased to note that a long list of new initiatives has been rolled out in Hong Kong, ensuring that we remain one of the most innovative banks in Hong Kong.

In Thailand, the consolidation of DTDBs systems and processes continued throughout 2001 and will continue as the Bank seeks to leverage on technology to improve its delivery channels and transactional processing.top

Realising Synergies within the Franchise
The harmonisation efforts between DBS and Dao Heng are on target to be completed on time and to realise the expected synergies.

The gains to date have been largely cost gains arising from the immediate returns from branch and staff reductions. Important revenue gains have also been achieved primarily from the launch of new funds and enhanced asset-liability management. We expect these revenue areas to ultimately surpass potential cost savings as we have just commenced sale, through the Dao Heng channels, of new unit trusts and products from the T&M, private banking and bancassurance divisions. We also expect to optimise cross-selling between Dao Heng and DKOB through our CRM capability. By leveraging winning products from Dao Heng and DKOB, identifying prospective customers from each banks database, customer profiling and predictive models, dedicated marketing efforts are being directed at specific product and customer segments with the highest potential for profits.

The sharing of the Best of Breed?capabilities has generated discernible cost and operational efficiencies. Apart from the T&M know-how and products being implemented in Hong Kong, risk management best practices are being carried out, common credit card practices are being employed (such as the Dao Heng scorecard being implemented at DKOB) and credit policies for consumer banking, aligned.

We are confident that the foundation for further growth is firmly in position. The country management team is in place and the new organisational structure has taken effect with managers co-employed or seconded between the banks to maximise the sharing of knowledge and resources. A sales culture harmonisation is underway and the new trade processing platform is being put into operation. These changes are very important for DBS. However, the ultimate and real winners will be our customers who, across the region, will have access to a wide range of high quality products and services that rank among the best in the world.

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