FinanceAsia: How long have you been in Hong Kong?
Georges Legros: The bank started here in 1935. I moved here in 1984. So I have been here for 17 years.
And you've been in this building since when?
Since 1982 -- we built it. When we moved here, the only building that you can see now was that beige Cable & Wireless one, and the China Resources building.
So you have been here a long time. However, the perception held externally is that Fortis is very new.
Fortis is full of contrasts. Fortis is new. It was created in 1990. But all the components of Fortis are very, very old. The insurance company, which used to be AG Insurance in Belgium, they just celebrated their 175th birthday. And Generale Bank, another component, was founded 180 years ago, even before Belgium existed. So you could say Fortis is new, but it is also very old, with solid traditions. On the other side, it is young and nimble, doing all kinds of new things. The same thing here; I say that we opened here in 1935, but we were in China before that. We opened our Shanghai office under the name Banque Sino-Belge in 1902. These are still the Chinese characters we use for the Chinese name.
What is the bank's name in Chinese?
We have two. We have a name for Fortis (fu-tong), but we also kept the old Sino-Belgian bank name, for our retail bank. Our new name -- the one we created for Fortis Group -- means 'wealth going through' in Chinese.
Did you hire a special consultant to find this new name?
No, we do it ourselves. We consulted our staff in Hong Kong, on the Mainland and in Taiwan. There were heated discussions about the name.
Are you expanding in Hong Kong?
Yes. We have embarked on an expansion in the consumer banking side. We are repositioning our branch network. We are opening new branches, closing some, relocating some. When Caine Road opens, we will have 28 branches. Hong Kong is a very dynamic place, so you can never stand still. Also, we want to improve the channels with which we speak to customers; one of these is the branches. We want our branches to be more cosy, more friendly, oriented to more advice and counseling rather than transactions. I was at a new branch recently in Shatin. It's in a very busy shopping centre. Just across the corridor, you have one of the major banks in town. Looking at the two, the contrast was so striking. In our branch, people sit around a table, talk among themselves about the stock market, and in a corner you have a room with people talking to our consultants about their investment aims. The whole thing looks almost like the square in a small town in Europe, where people come and go and discuss. Then you go across the corridor and see 50 people queuing just for transactions. We want to be different. We want to have more of a relationship, rather than be transaction-driven.
A number of bank CEOs have said this is the toughest banking environment for 20 years in Hong Kong. Why do you wish to expand in Hong Kong in these conditions?
I agree with this statement, that it is very tough at the moment. Some of the business school people would tell you it's a new paradigm. Before the Asian crisis, banks in Hong Kong were extremely profitable, probably among the most profitable in the world. Then you had deregulation, the crisis, and very low loan demand. But there is a lot of liquidity. This means that banks have become extremely competitive. Take the example of mortgage loans. Before the crisis, the standard rate was prime plus one and three quarters, and now most banks are offering prime minus two and a half, so you have a difference of 4%. That means that housing loans -- the most profitable, straightforward product before the crisis -- is basically now not profitable. And with credit cards, this place is overbanked, and some banks are already reducing rates and giving away gimmicks. This competition is moving into the commercial banking field, where customers expect bigger facilities and lower interest rates.
So why are you expanding?
Well, if you want to survive in a market like this, you have to have sufficient size. So we must grow. The choice is 'get out or expand'. For most banks, business as usual is not a solution.
So are you looking to acquire?
We are looking at all kinds of things. We are looking at acquisitions; at partnerships; and internal growth. But it is not that easy. There are many small banks, so you would expect consolidation. But the consolidation process is still a bit slow. Banks are still profitable -- although I would expect that profitability to decline -- and they are well capitalized, and some are run by families who feel that there might be better times. Some institutions are more or less for sale, but the problem is that the present shareholders have very high price expectations and have not factored in that the business is very difficult and the value of a bank is going down.
Has the DBS acquisition of Dao Heng made things more difficult because people have higher expectations? [It bought Dao Heng at 3.3 times book.]
Yes. For DBS it was a strategic move, as the leading Asian bank outside Japan. It makes sense for DBS to have a strong base in Hong Kong. And when you have that strategy and cash, maybe you pay a bit more although their share price has suffered. In the long term, they've done the right thing.
But the board of Fortis would not sanction a deal at 3.3 times book in Hong Kong?
Absolutely not. We are in a different situation. We might be prepared to pay that price for something closer to home, although it is a very high price. But for us here in Hong Kong, the strategic decision is different. However, we are interested in developing in Asia, and are diversifying out of Europe. On a long-term basis, we see potential here. We are now the largest bank in Belgium and Luxembourg, and have achieved what we want to achieve in Benelux.
Has the bank allocated funds towards M&A opportunities in Asia?
It is under review. That's why I can't be specific. But the general principle of growing in Asia is agreed. How to do it, and where is still under discussion.
In Malaysia, you provide insurance products to MayBank. Is that a model you want to replicate elsewhere?
We have several models. There is the one used for MayBank, which is similar to what we did in Spain with the largest savings bank. The other model is the one we have in Belgium, where we own the bank and we sell insurance products on an integrated basis through the bank.
Isn't bancassurance a tough model in Asia due to regulations?
It depends a lot on the regulations in each country. In Hong Kong it is possible, and will become possible in Taiwan with the new holding company regulations. That's the reason why we are looking at various models.
Bank analysts talk about financial institutions now in terms of distributors and manufacturers of products. You are both?
Exactly. In our Belgian model -- which is working amazingly well -- you go to the bank and you are offered the whole range of banking and insurance and investment products, and it's all in the same computer. So you go to see the investment adviser and they will look into their database and say, maybe you need life insurance. The growth of our market share in Belgium since we took over Generale Bank made us the number one insurance company in Belgium, even bigger than our original insurance company which was selling through agents.
In Asia, will Fortis make more money from selling insurance or banking?
We don't have very much in the way of insurance in Asia. We established an office in Singapore for the insurance business. We have a small team there looking for opportunities, especially bancassurance. The only deal they have done so far is with MayBank. It takes quite a lot of time to find the right partners and put the right structure in place. So, in insurance we are not very strong in Asia. But it is clear that we want to develop bancassurance in Asia, rather than starting a network of insurance agents or even buying an insurance company.
Does that imply you buy banks?
We have the two models. In Malaysia we set up an agreement.
Would bancassurance be an interesting model in Korea and Taiwan?
Yes, it would be interesting. But, it depends on how things evolve and what the opportunities are. In some places we could have a bancassurance agreement and maybe take a strategic stake in the bank itself.
So you don't think buying 100% is essential?
It really depends on the circumstances and the history in a particular place, and the regulatory environment.
Some buyers want control. You don't have that underlying philosophy?
It has been a great subject of discussion within the group. You could say that we are still thinking about it.
Of all the Asian markets, are Korea and Taiwan the two you are most excited by?
I would say Greater China. In view of our history in Hong Kong, we are still keen on Hong Kong and view it as a stepping-stone for China post-WTO. Taiwan is also interesting because you have a sizeable population with a high standard of living and savings. The new holding company law will allow banks and insurance companies to work together.
You must be getting a lot of phone calls from investment bankers?
Definitely. We are talking with a lot of people, including investment bankers.
When will the strategic review be finished?
Probably at the end of the year.
So you probably won't make any acquisitions till next year?
I would imagine it would be at the end of this year or next year. But again, it depends on the opportunities. When Fortis was formed in 1990, the total market cap was E2 billion. Today it is E45 billion. The growth of the group is absolutely extraordinary.