When DBS decided to acquire Hong KongÆs Dao Heng Bank, it is certain that Dao HengÆs Mandatory Provident Fund scheme business was not the prize. The bank is a middling player in the crowded and costly MPF market, and is better known for strengths in customer relations management and other skills. Besides, DBS Asset Management has its own minor MPF business in the form of the joint venture with Kwong On Bank.

Nonetheless, the merger creates a sticky situation for the firm's asset management ambitions. DBS Asset Management is aggressively trying to build its franchise, as its Kwong On JV attests. But so is Dao Heng, which has a joint venture with Friends, Ivory & Sime of Edinburgh, Scotland, which has given a local bank a sophisticated, international asset management offering. George Chan, director of Dao Heng Asset Management, said last year that MPF was seen as the anchor behind launching Dao HengÆs fund management business.

Now both Chan and Ricky Kwong, senior marketing manager at DBS Kwong On, say it is far too early for either group to know what will become of their respective MPF businesses or asset management relationships. For the time being, both will continue to operate as separate businesses.

The Hong Kong authorities are keeping a close eye on the announced merger. ôWe understand that it will take some time for the consummation of the deal,ö says Raymond Tam, executive director at the Mandatory Provident Fund Scheme Association (MPFA).ááHe notes that any structural changes to the Dao Heng MPF schemeáwould require MPFA consent, which is based on the AuthorityÆs satisfaction that scheme members will not be adversely affected and that all legal requirements are complied with.

ôIn any case,ö Tam adds, ôemployers and self-employed persons are entitled to choose their MPF schemes under the current arrangements. Those participating in the scheme may opt to remain in it, or may elect to have their accrued benefits transferred to other registered schemes.ö

For now this represents the first public merger of two MPF master trust schemes. But George Chan believes they will continue for some time, to give them a chance to see how the businesses develop; MPF has only been launched this year.

Some observers believe it doesnÆt matter if one scheme consumes the other because theyÆre both rather small, and will require at least four or five years just to break even. The savings of merging them will be marginal. But by making a small player into a bigger (but still small) player, the combined entity may face the temptation to keep going, seeing a sustainable business size within reach; a likely illusion.

Chan has noted, however, that small players have other reasons to stick with MPF even if it is a loss-maker. It is a defensive move to keep customers, can help banks cross-sell other products and can be an anchor for launching an asset management operation. Then there is the matter of face. It is likely, therefore, that other MPF players will consolidate, at least their administration, well before these two midgets do so.