CEO Conversations XIII: Terence Tai, Chairman; John Tsai, Vice Chairman, King’s Town Bank, Part I
Source：King’s Town Bank
If someone asked you, “Which banks in Taiwan have the highest growth potential?”, which banks would you think of? We think it is likely that King’s Town Bank (2809 TT) would not be the first name to enter your mind. Over the past ten years: i) the bank hasn’t been involved in any large-scale mergers or acquisitions of other banks; ii) it hasn’t expanded abroad, and still has no overseas branches; and iii) management even sold its credit card operations to a local peer. However, from January 2009 – when Terence Tai was named Chairman – until the end of November this year, the total shareholder return created by King’s Town Bank reached 930%. This is higher than the 868% total shareholder return produced over the same period by E.Sun FHC (2884 TT), a local bank-centric Financial Holding Company which has also delivered industry-leading growth and which has an outstanding reputation. So, while some observers may not think of King’s Town Bank as a growth bank, there is no denying that it is a bank that has rapidly grown the wealth of its shareholders.
King’s Town Bank was formerly the Tainan Business Bank, and is the only TWSE-listed bank with its Headquarters in Tainan. It has less than 1,000 employees and a total of 66 branches in Taiwan, about 73% of which are located in southern Taiwan. When we arrive at King’s Town Bank’s Songshan branch on Dunhua North Road in Taipei, we immediately become aware of one of the important ways in which King’s Town Bank differs from its local peers. The Songshan branch is not located on the first floor nor even on the second floor, but on the eighth floor. King’s Town Bank started to move its northern Taiwan branches to upper floor locations several years ago, ahead of local peers. Since King’s Town Bank focuses on corporate banking in northern Taiwan, moving to higher floors can reduce costs but has little impact on customer service. It is from seemingly minor differences such as this that one can begin to understand King’s Town Bank’s management philosophy and attention to detail. "We treat shareholders' money as if it is our own money," says John Tsai, Vice Chairman of King’s Town Bank.
When we arrive, we wait for a while at the entrance of the office on the eighth floor. John walks over, greets us warmly and takes us to the meeting room. He tells us that he has just finished talking with Terence, and that Terence will join us shortly. Once the meeting begins, we casually chat with John and Terence for a while, only to discover that their offices are right next to each other. These two, as well as other key senior executives are in the habit of visiting each other’s offices frequently to strategize and to maintain an open and ongoing dialogue. As we will soon discover, this is a recurring theme at King’s Town Bank. Management plans have been laid out thoughtfully and carefully, and the impact is seen from top management levels down to the operations of the bank’s retail locations.
Creating Robust Returns for Shareholders
Since January 2009 – when Terence Tai was named Chairman – until the end of November this year, the total shareholder return created by King’s Town Bank reached 930%. This is higher than the 868% total shareholder return produced over the same period by E.Sun FHC, a local bank-centric Financial Holding Company which has also delivered industry-leading growth and which has an outstanding reputation for corporate governance and social engagement. So, while some observers may not think of King’s Town Bank as a growth bank, there is no denying that it is a bank that has rapidly grown the wealth of its shareholders. Compared to the 395% total return provided by the TWSE index during the same period, both banks have delivered excellent results. This performance is an indication of how the management of King’s Town Bank has been accountable to shareholders, all the while blazing its own trail. For example, the bank is owner-operated. The board of directors and the management team hold roughly a 30%-stake, led by the Tsai and Tai families, a far higher percentage than the vast majority of its local peers.
Source: Bloomberg, from January 31, 2009 to November 30, 2020
Note: Total Shareholder Return (TSR, including capital gains & cash dividends, and assuming reinvestment of cash dividends)
Note: BIS Ratio for E.Sun is bank-only and as of 2020/06/30
Focusing on Doing What They Do Best, Not Growth for Growth’s sake
John says, “We focus on doing what we do best.” More than anything else, this sentence sums up the difference between King’s Town Bank’s growth strategy and that of local peers. Adds John, “Our business is very simple. We do not believe in trying to be all things to all clients. We don’t have a credit card department, and see ourselves as a community bank. While other banks may focus on expanding overseas, we have chosen to focus on the Taiwan SME lending market. Other banks concern themselves with expanding the scale of services they provide, but we focus on growing in areas where we are favorably positioned and have competitive advantages.
Over the past decade, King’s Town Bank’s loan-to-deposit spread has consistently been 0.5-1 percentage point higher than that of its local peers. We asked Terence and John, how King’s Town Bank has been able to pull this off in the competitive market landscape of Taiwan banking. John replies, “Intuitively, people would think that SMEs are more risky than large corporates, or that we earn higher interest margins because we lend to companies in high-risk industries or which have high operating leverage. The real difference, however, lies in the fact that we are sufficiently focused, and have been able to accumulate lending experience and expertise in a few targeted industries and lending styles. We get to know our customers and their industry well, which provides us with an in-depth understanding of the risks. Thus, we are able to design our lending products to avoid these risks as much as possible. Actually, if you examined our loan book in detail, you’d see that it has a very low level of risk.”
Risk Management As a Core Competitive Advantage
A key focus for King’s Town Bank is construction loans. John gives us an example, “In terms of real estate, we lend mainly to residential property developers, and don’t do a whole lot of residential home mortgage lending. Loans to residential property developers are more attractive in terms of loan-to-asset value. For example, developers usually earn a gross profit margin of 20-30% on the sale of residential apartments. Therefore, an apartment that has a construction cost of NT$8 million, will be sold to a home buyer at roughly NT$10 million. If I lend to the home buyer, the home buyer can typically borrow NT$8m (up to 80% of the home’s value). However, developers borrow based on the cost of the building, and can generally only borrow 70% for land and 60% for the construction work. Therefore, the maximum that the developer can borrow is 70% of the cost, or NT$5.6 million. If we put the loan-to-collateral-value in terms of the building’s retail value, then lending to the developer, loan-to-collateral-value ratio is 56%, but for the same apartment unit, the loan-to-collateral value is 80%. Therefore, loans to developers are much more advantageous. However, the biggest risks in lending to developers are that it may not get completed and/or the construction work may be of poor quality. Therefore, we are very cautious about who we lend to. In addition, we have very strict process control regarding at which stages of the project we wire funds to the developer. The bottom line is that we want to make sure that building is completed, no matter what.”
John continues and explains, “We were one of the first to lend to the green energy industry. When we were contemplating doing so, we installed solar panels on the roof of our corporate headquarters. We wanted to understand the details of the entire process. Only after doing so by ourselves would we know the costs of building the solar installation, the cost of producing each kilowatt-hour of electricity, and the projected ROI. We also studied the statistics of sunshine duration and wind force over the past 20 to 30 years for each region in Taiwan. When making a loan to a solar project developer then, we would cross-check their cost and earnings projections with our own internal model. Hopefully, these previous two examples can demonstrate why we have greater expertise than most industry peers in our focus markets, and why we can loan in a more innovative way with higher spreads. This is a point that I cannot emphasize enough – we do not take greater risks than our peers. Rather, we understand the risks from the bottom up and we take care to minimize them.”
John pauses to think then says, “Allow me to share an example of how we are willing to innovate as long as we can create a win-win solution. Take the well-known BOT case – Taipei Q Square, which was a combined retail and residential development. Since the land is owned by the government, and the building is owned by the developer, the buyer of the residential units in those buildings has no land rights. Traditionally, banks are reluctant to lend to the owners of residential superficies. However, these superficies can create attractive cash flow streams. For example, at that time, the superficie residential apartments were being sold for NT$350,000 per ping, and comparable residential units that had land rights in the neighboring area were selling for NT$480,000 per ping. Since both units can be rented out for the same amount, the rate of return on the superficie units was actually more attractive for the owners than comparable units with land rights. Using cashflow analysis, we determined that these units did indeed have a value that could be lent against. After having some discussions with our accountants and lawyers, we lent to the buyers of these superficie residential units, with them pledging the unit as their collateral. This created a win-win-win situation for King’s Town Bank, the BOT developer and the home buyers. In fact, we won the Best Business Innovation Award at the 5th Taiwan Banking and Finance Best Practice Awards Ceremony for our work on this project.”
John points out, “Innovation in lending is part of our DNA and central to our SOP. If we are unable to lend to our customers under the terms that they propose, we will not go back to them with a ‘No’ answer. Instead, we design an alternative lending plan. This practice is the source of many our most innovative and creative lending programs. It also trains us, over time, to identify the key risks to control in each situation. More importantly, it creates customers who value us and stick with us over the long term.”
Note: Market Cap and Dividend Yield based on 30 November 2020 closing share price.
Pursuing Sustainable Growth While Carefully Calculating the Costs
When trying to attract deposits, King’s Town Bank approaches the issue from the point of view of business sustainability and stability. For example, when launching NT$ or US$ interest rate programs for depositors, King’s Town Bank avoids limited time high interest rate offers to new customers. Terence explains, “We hope to increase our core deposits. We don’t intend to attract new clients with high interest rates, as they will frequently leave right after the rates return to normal. We aim to provide interest rates which may not be the highest but are attractive enough to entice customers to stay with us. In addition, we consider each potential depositor carefully. We have had Taiwan-based, Tier 1 Global companies offer to start keeping large amounts of cash at our bank. However, we will turn down such business if we feel the large-scale cash inflows and outflows will destabilize our funding and liquidity positions. We will only take on customers of a suitable size. And, all the time, we must consider questions such as, ‘What kind of growth do we want, and what kind of price are we willing to pay for that growth?’ It is an iterative process – propose, consider, decide. Then, do it all over again when the next project comes along.”
In the capital markets, you are only as good as your most recent stock performance, or your most recent quarter’s earnings, so despite King’s Town Bank’s outstanding past stock price performance, it is natural to wonder if the bank will be able to continue delivering such outstanding results. We ask Terence Tai’s thoughts on this, and he responds thoughtfully, “If I make a mess of things, I may find that I am no longer needed at King’s Town Bank. So, the first thing is that I need to remain useful for and relevant to this bank. So, every day I try to look at myself as a third-party shareholder might. As a shareholder myself, I find this to be a very demanding measuring stick.”
If you would like to arrange a meeting with King’s Town Bank’s Chairman Terence Tai and Vice Chairman John Tsai, please contact yvonne.huang@qtumic.com