CEO Conversations XIV: Terence Tai, Chairman; John Tsai, Vice Chairman, King’s Town Bank, Part II
Source: King’s Town Bank
If someone asked you what the top five banks in Taiwan are, which banks would you choose? We have a feeling that the ‘King’s Town Bank’ would not be one of the first to pop into your mind. Yet, the National Taiwan University Financial Research Center chose 5 banks when awarding its “Best Bank Award” for “Evaluation of Bank Competitiveness in 2019.” These were: King’s Town Bank, China Trust Commercial Bank, Cathay United Bank, E. Sun and Citibank (Taiwan).
King’s Town Bank is far behind the rest of the top five in terms of both asset size and name recognition. However, if you review the financial statements of King’s Town Bank, then you’ll quickly learn why it was selected as one of the island’s top banks. According to The Banker magazine’s annual ‘The Top 1000 World Banks 2020’ rankings, King’s Town Bank ranked 2nd in Taiwan for ROA in 2019 at 1.20% and ranked second in Taiwan in Capital To Risk Assets ratio at 12.63%.
King’s Town Bank Has Outpaced its Peers in Several Core Metrics
*Note: These averages are calculated from the publicly reported data of a collection of KTB’s most important local peers. Data Source: Central Bank, year-end 2019.
However, even if you are an avid investor in Taiwan Financials, one could be forgiven for not knowing this. King’s Town Bank keeps a low profile, while quietly redefining what it means to be a good bank. In CEO Conversations XIII: Terence Tai, Chairman; John Tsai, Vice Chairman, King’s Town Bank, Part I, we discussed how King’s Town Bank is different than its peers in terms of growth strategy and risk management. In this installment of CEO Conversations, we look at more ways in which the bank has successfully blazed its own trail.
Sustainable Thinking: Staying Focused on Long-Term Strategic Goals
Pursuing long-term, sustainable profits and growth is the goal of many companies. However, it is not easy to implement in practice and often conflicts with short-term goals. We ask John how senior management has cultivated a sustainable growth focus at King’s Town Bank. He answers, “At many banks, the structure of incentives is the primary force creating short-termism amongst employees – from the C-Suite all the way down to entry-level staff. It is very common for managers to set the coming year budget using the current year’s number as a benchmark, and then adding a certain percentage of growth on top of that. We feel this is an unhealthy practice that ignores the cyclical nature of most businesses, and which often pressures employees to take risks that they might otherwise avoid.”
As if to complete John’s thought, Terence adds, “Take loan growth for example, our goal is to do a little bit better than GDP growth over the long-term. If you think about it, even this is a somewhat aggressive target. For example, if GDP grows by 1%, do you think that overall loan growth will match that? Not necessarily. From a global perspective, non-banking finance options are growing faster than traditional bank financing.”
He continues, “If we consider wealth management, we see a different type of risk profile to manage when setting internal growth targets. When the stock market is hot, it may be easier to sell more mutual fund products, but blindly raising our target for fee income from mutual fund sales by a certain percentage each year is not a responsible way to serve our customers; and it will likely have harmful long-term effects on our wealth management business and on employee satisfaction.”
John adds, “As is the case with all banks, we are working hard to drive digital transformation within our portfolio of banking services. We launched Goyee, our digital banking account, last year. One option would have been to roll it out with great fanfare and an expensive marketing blitz to attract new accounts. Instead, we are not in a rush to grow the number of new digital accounts. We hope to provide functions and services that customers really need and implement them with a longer-term business development perspective in mind. In addition, we target existing customers first. Our goal is to develop new digital tools and utilize fintech to deepen our relationship with customers. For example, our customers really like our notification function on LINE. When the LINE function is set up, our customers will receive messages if there is a transaction in their account. This helps to increase customer stickiness.”
We then ask how King’s Town Bank’s long-term focus manifests itself in the management of its portfolio of assets and liabilities. John answers, “There is no an annual budget for the individual staff of the treasury department. Having an annual budget is a burden for an investing team. We prefer to let opportunities come to us. The key principle that guides our investment team is that we don’t invest in anything we don’t understand. We require our treasury department to conduct in-depth research on each holding, bonds and equities alike. Furthermore, we follow the issuers of debt instruments in the same way that we would follow a listed company – reviewing the company’s quarterly filings and results announcements and keeping up to date on industry developments. This attitude helped the bank avoid many pitfalls that have dogged the global banking industry. For example, we were not hurt during the global financial crisis, because our investment philosophy prevented us from investing in instruments such as collateralized debt obligations (CDOs) and credit default swaps (CDS). These instruments are backed by the securitized debt of a pool of issuers that often can run into the hundreds. It would have been impossible for our team to follow so many companies, so we did not invest in these structured products.”
Adds Terence, “Many banks have large investing operations with a staff numbering in the hundreds. There are separate, siloed departments for investing in bonds, futures, equities, etc. It can lead to intra-departmental competition, and worse yet, the performance of these departments frequently cancel each other out. We prefer to keep things simple. We have less than 10 employees on our Treasury team, and they work as one unit.”
Note: Market Cap and Dividend Yield based on 31 December 2020 closing share price.
Taking a Long-term View on Asset and Liability Management
During the European debt crisis of 2009 to 2013, yields on the government debt of various EU member countries spiked as high as 10-30%. King’s Town Bank took advantage of the volatility to invest in EU debt and made handsome returns when yields reverted to mean levels. When global financial markets fluctuated sharply in March 2020, the bank added equity and fixed income positions. Therefore, many investors have the mistaken impression that King’s Town Bank’s Treasury Department has a market punter mentality and produces gains by putting an excessive amount of the bank’s capital at risk. We ask Terence, who has likely heard this objection a thousand times, if he agrees, and he patiently answers, “Although some people think that our entry into the market at such times of crisis is at best speculative, and at worst gambling, we instead rely on our investment discipline and the analysis of our treasury department. If we were gamblers, our long-term investment record would not be as stable as it has been."
John adds, "We wait for the emergence of systemic market risks, so that we can buy fundamentally sound securities at a discount, and then we mostly hold to maturity. We don’t have traders who specialize in short-term trading. Most of our treasury department’s time is spent on research. Our foreign bond holdings are a proxy for foreign currency lending. And we treat each position as if it was a loan or an outright equity position. We conduct in-depth research, and thoroughly review the bond prospectus. For equities, we have a concentrated portfolio of a limited number of companies, targeting blue chip managements with a strong track record and proven cashflow generation capability. We hold these positions for the long haul.” Thinking about the cold irony of how the market perceives King’s Town Bank, John sighs and says, “We disclose extensive information about our investment portfolio in our quarterly results presentation and openly answer questions about it during analyst meetings. As far as I know, not many of our peers do this. Unfortunately, it seems to have encouraged the investment community to pay too much attention to our investment activity. Even so, I plan to maintain a high level of disclosure. Over time, we hope that the market’s perception of our investment activities will gradually match the reality."
Investment discipline and a bias towards long-term investing pays off over the long-term, and often in unexpected ways. Take for example, King’s Town Bank’s policy towards overseas bond investing. To avoid currency mismatches and the need for hedging, King’s Town Bank’s foreign currency bonds are all US$-based. And it funds the bonds through a combination of its US$ bank deposits and US$ repo instruments. This policy has worked well in the current environment. Says Richard Hung, the Deputy Manager of the Financial Department at King’s Town Bank, "King’s Town Bank may be the only Taiwan-based bank that saw its net interest margin expand in the 3rd quarter of 2020. Falling interest rates have reduced our US$ funding costs, helping to support our net interest margin. Additionally, over the past several years, we have managed our bond portfolio to minimize re-investment risk. We closely track the bonds set to come due each year and look for market mispricing events in the 12 months prior to maturity. As a result, in the current ultra-low interest rate environment that has resulted in compression of bond yields, we have a very limited number of bonds coming due and little pressure to re-invest.”
Asset Quality is the First Priority
As the discussion turns to asset quality, Terence shares his thoughts, "If a bank does not have good asset quality, no matter how high the ROA is, it is just a mirage." John adds, "We care about growth in assets, as economies of scale are a competitive advantage in the banking industry. However, asset growth cannot be the first priority. When we discuss potential growth initiatives, we always ask at what cost that growth will come. We will not go forward with any business development plan that requires the bank to take on excessive risk. We are a very simple and transparent bank, and we have high requirements for capital allocation and risk control internally.”
A True ‘One Bank’ Culture
It requires vision, a disciplined exercise of patience and proper execution to focus on long-term value creation while sidestepping the temptation to be distracted by short-term considerations. But, there is one aspect of King’s Town Bank’s management culture that is perhaps even more special. Terence, John and the senior executive team have created a culture under which bank staff pursue the greatest long-term interests of the bank together. This culture is deeply rooted within King’s Town Bank’s team of more than 900 employees. John explains, “King’s Town Bank management culture places a high value on maximizing the interests of the bank as a whole, not that of one particular department or that of one particular person.”
Within many large companies, it is common to see new products or departments competing with existing products and departments. Or when a new business is launched, there may be conflicts of interest that prevent the front office from getting the support needed from the back office. Says John, “We have worked hard to create a “one bank” culture. Our annual budget process and departmental/individual performance evaluations are based on team accomplishments rather than on the efforts of each individual person. This ‘bias’ is a good starting point, as individual staff and various departments become more willing to cooperate and share resources.”
King’s Town Bank set up an employee stock ownership trust plan in 2010. The program is a hybrid savings, long-term investment and incentive plan. Employees are able to deduct a fixed amount of their monthly salary towards investment in King’s Town Bank stock. In addition, enhanced investment bonuses can be gained based on a given employees’ performance evaluation in the previous year. When employees retire or leave, they are able to enjoy the wealth created by the cumulative shareholder value creation and re-invested cash dividend payouts that have occurred during their tenure at the bank. All employees who have worked at the bank for more than one year are eligible, and participation rates run near 100%.
Managing with Compassion and Empathy
King’s Town Bank has an employee rotation program that we have rarely seen anywhere else. Employees are given the opportunity to work in departments that are not immediately related to their experience and/or expertise. For example, a treasury department employee could be transferred to the international department. It is also possible to move from the front office to back office, such as from corporate lending to HR management. Terence explains, "One way that we break down barriers between departments is to allow employees to gain a first-hand appreciation of the goals and KPIs of their colleagues in other departments. If Taipei-based colleague stays in their comfort zone in northern Taiwan, it is difficult for them to get a flavor of the local nature of our branch business down south and they may have no idea about how the back office in our Tainan headquarters operates. However, I think empathy is very important. Every additional ‘ounce’ of empathy that our employees have creates a bonus for this bank."
Terence thinks for a while and adds, "We established this rotation program not only to enhance operational efficiency, but also with an eye to each employee’s personal and professional development. In our professional life, we all need not only a salary, but also a stable and happy working environment. Therefore, we think about our staff’s lives not only on the job, but also after work. This is why we transfer employees from the Taipei office to our Tainan headquarters in small groups, rather than as individuals. They are able to dine out together, sing karaoke after work, etc. At the same time, we also have to think about when and how to transfer our staff back to Taipei. I need to be responsible for them.”
King’s Town Bank Hopes to Get Involved in Things that Make Our Society Become Better
King’s Town Bank is currently the only bank in Taiwan that offers Western Union Money Transfer service. We originally wondered why the bank would want to keep this business, as the costs of keeping it have been increasing due to the daunting increase in anti-money laundering legislation and related paperwork over the past twenty years. In fact, many larger banks have chosen to close down this business. Since the business is inherently built on scale – the more transactions the better – it seemed unlikely to us that King’s Town Bank would have an inherent advantage in this business. So, we ask what management’s considerations in keeping the business are. John answers, "In recent years, scamming operations have frequently tried to use Western Union as a tool for their fraudulent schemes. But, the regulatory requirements for this business are actually very strict. We are required to contact customers to ask questions to confirm the details of the documentation. As a result, the costs are very high for us and there is a definite element of regulatory risk. But many customers, such as foreign workers and new migrants rely heavily on this service; and now we are the only bank in Taiwan that offers it. We plan to continue to do this business, as we believe in the societal importance of the service it provides. We also take the related anti-fraud responsibilities that come with providing this service very seriously. Since we are on ‘the front line’ so to speak, we cooperate closely with the authorities to assist in preventing the money transfer scams. In 2019, we intercepted 113 fraud cases with a total potential value of nearly NT$15 million. We also work to improve and create innovations on top of Western Union’s basic services. We think that Western Union still has advantages in terms of convenience, price and timeliness; and it is also a profitable business that delivers value to our shareholders."
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.
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