Asian Banking and Finance

DISPLAY TO JUNE 30, 2012

THE FEAR FATCA

UNCLE SAM WANTS ASIAN BANKS TO COMPLY, BUT CAN THEY?

SPARE A RUPEE? Indian banks’ outlook, dim

MOBILE REVOLUTION It’s high time for IT

HOW ARE YOU, VIETNAM? Banking system on-the-edge

RMB ON THE RISE The next trade currency

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FROM THE EDITOR Debt Crisis, FATCA, Mobile Revolution… what’s next, Asian banks?

PUBLISHER & EDITOR-IN-CHIEF Tim Charlton ASSISTANT EDITOR Jason Oliver ART DIRECTOR Jane Kristine Cruz EDITORIAL ASSISTANT Queenie Chan MEDIA ASSISTANT Daniela Gujilde EDITORIAL ASSISTANT Alex Wong ADVERTISING CONTACTS Laarni Salazar-Navida lanie@charltonmediamail.com Rochelle Romero rochelle@charltonmediamail.com

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Despite the fear of suffering the ripples of recession from the west, Asia seems to be in a stable, if not growing condition. China’s RMB is playing a bigger role in international trade and finance while Asian banks are stepping up amid the exodus of EU banks in the industry. Moreover, there is an eight-to-ten ratio of banks that are confidently optimistic for the rest of the year, while few flail owing to government fiscal positions.

There are, however, ominous threats that should be taken seriously. In this issue, Asian Banking and Finance delves deeper into the repercussions of the US –imposed FATCA policies on Asian banks. While it could make tax evasion extinct, it could also expose serious security and operational issues.

Talking about security, we sat with several banking executives and picked their minds on the inevitable mobile revolution and the security threats that lurk behind. While some frown on the idea of mimicking US and European IT transformation programs, others have already leveled the playing field for an all-out mobile banking metamorphosis. From the cloud down to the ATM booth, mobility is the talk of town.

So, what should the general sentiment be? I say, expectant.

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ASIAN BANKING AND FINANCE | JUNE 2012 3

CONTENTS

09

13

26

FATCA: BLESSING OR BURDEN TO ASIA?

FIRST 08 Temasek vs Khazahna 08 India’s banks struggle as economy softens

09 In Asian asset management, big is not beautiful

REGULAR 20 Sector Report 1: Business banking As European banks start to deleverage and restrict lending to Asia amid the sovereign debt crisis, fears of a credit crunch abound, but worries seem to be overdone.

22 Big Issue 1

24 Sector Report 2: Cash management

The internationalisation of RMB is providing banks with opportunities to enhance their cash management structures in the face of a USD liquidity shortage — but does a shortage really exist until now?

IN ASIAN ASSET MANAGEMENT, BIG IS NOT BEAUTIFUL

Strong Breakthrough WHY ARE CHINESE ENTERPRISES NET WITHDRAWING MONEY?

ANALYSIS 12 FATCA: Blessing or burden to Asia?

14 Deposit woes continue to haunt China’s banking sector

16 IT providers to reap benefits of

26 Big Issue 2 Why are Chinese enterprises net withdrawing money?

28 Sector Report 3: Custody and clearing

Asian banks work for a system that embeds sufficient functionality into their end-to-end infrastructure. How are they faring so far?

banking liberalization in Asia

OPINION 18 Private banking with Asia’s new rich

30 How foreign investments in

Indonesia continue to grow www.techcombank.com.vn

Does Vietnam’s banking system face a catastrophe?

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 06-09 E, Maxwell House 20 Maxwell Road Singapore 069113 4 ASIAN BANKING AND FINANCE | JUNE 2012

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

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ASIAN BANKING AND FINANCE | JUNE 2012 5

News from asianbankingandfinance.net

The best of asianbankingandfinance.net Asian banks turn optimistic for the rest of 2012 RETAIL BANKING

MOST READ

Banco de Oro posts record profit

BRANCH BANKING

HSBC Singapore aims an ambitious USS1 billion in profits HSBC Singapore is 60% on the way to achieving its profit target of US$1 billion by 2016.

CEO Alex Hungate says the branch posted a pre-tax profit of almost US$600 million by 2011, which is higher by 14% year-on-year.

RETAIL BANKING

BofA ramps up China expansion America’s second largest bank wants to be among the Big Boys in China’s banking industry.

Bank of America Corporation, also the world’s largest wealth management firm, intends to add up to five branches in the next three years, expand investment banking, and increase growth targets after doubling profits last year.

Singapore branch proves rumors of meager Asian revenues false

nient on-the-go access of banking services via mobile devices.

CIMB Niaga customers are now able to transfer funds, access loan statements and check account information via mobile devices. They can also pay utilities and other bills online through their mobile phones. Indonesia has 150 million

2011 hurrah: Philippines cheers for record-breaking trends

RETAIL BANKING

CIMB’s net profit up 15.1% to US$1.3b in 2011 CIMB Group Holdings Berhad of Malaysia reports a record net profit of US$1.3 billion for 2011, which is up by 15.1% year-on-year.

For 4Q11 alone, the

Group’s net profit of US$374 million was 12% higher than 3Q11 and 29.8% above its 4Q10 net profit of US$288 million. The FY11 net return on equity was also a record high at 16.4%, but below the Group’s fullyear target of 17%.

RETAIL BANKING

OCBC Bank launches iPad app for home loans

RETAIL BANKING

CIMB Niaga goes mobile Mobile banking has come to Indonesia’s fifth largest bank and third largest mobile provider.

PT Bank CIMB Niaga Tbk has launched a mobile banking services platform to enable more conve-

mobile phone users.

The Philippines’ largest bank in assets, loans and deposits reports record performance for 2011.

Banco de Oro Unibank, Inc. says its net profit grew to a record 10% to US$244 million in 2011 year-onyear. It also noted doubledigit growth in fee-based earnings and trading gains while outpacing industry loan growth. Return on equity stood at 11.7%.

OCBC rises “app” and about

6 ASIAN BANKING AND FINANCE | JUNE 2012

The Oversea-Chinese Banking Corporation Ltd has developed an application or app that makes it easier for customers to navigate complex loan requirements.

With this iPad app, OCBC Bank becomes the first financial institution in Singapore to make the home loan advisory experience more engaging and efficient. The app gives customers useful information about home purchases and financing processes as

required by MAS Notice 632A. RETAIL BANKING

HSBC confident of strong growth in 2012-13 Year one of a threeyear strategy that was set to see HSBC rise as the world’s leading international bank gallops off to a good start.

HSBC plc, the world’s second largest banking group, reported upbeat figures for 2011. It gained the traction required to achieve strong growth in 2012 but at a more moderate pace.

INVESTMENT BANKING

Investment banking M&As by Japanese banks and others rise to record heights Yes, you can definitely blame it on the strong yen.

The Japanese government has reported that

Japanese banks and other firms did a record number of mergers and acquisitions in 2011 as a result of funds made possible by the strong yen and government support.

LENDING AND CREDIT

Malaysian and Hong Kong banks to offer Islamic finance in China Malaysian bank Affin Holdings Berhad and Hong Kong-based Bank of East Asia Ltd (BEA) expect their Islamic or Shariah banking operations in China to become operational by the second half of the year.

access to client centres.

Maybank has launched its first regional “Diamanté Private Client” programme that aims to provide high net-worth (HNW) individuals with a seamless banking experience and a suite of personalised services across ASEAN. BRANCH BANKING

Vietnam tries fran-

tically to stave off banking industry collapse Faced by the impending disintegration of its banking industry, Vietnam goes for a drastic solution.

Vietnam will buy bad debt from banks under a plan approved by Prime Minister Nguyen Tan Dung to prevent a collapse of its banking system.

The Ministry of

Malaysia’s largest bank spreads love to their biggest benefactors

Finance will buy collateralised bad debts from commercial banks to strengthen their

WHOLESALE BANKING

Vietnam’s Maritime Bank still seeking right foreign partners Maritime Bank will appoint a foreigner as its general director this year.

This will make Maritime Bank the second joint stock commercial bank in Vietnam, after Techcombank, to have a foreign CEO. The move is designed to strengthen the bank.

RETAIL BANKING

Maybank continues to pamper the super-rich Malaysia’s largest bank now provides top tier individuals more personalised services with exclusive regional rewards, privileges and

balance sheets under a plan to overhaul the industry by 2015.

Going mobile, Indonesians will spend less time at the counters and more online ASIAN BANKING AND FINANCE | JUNE 2012 7

FIRST

FIRST to just get the public sector banks Tier-1 capital back up to 8% under the most optimistic of valuations.

And this is after the government tops up the system with a US$4 billion capital injection already announced for the 2011-12 fiscal year as well as the addition of about US$1 billion of equity capital from the Life Insurance Corporation of India.

TEMASEK VS KHAZAHNA Temasek Holdings has been the undisputed grand-daddy government owned holding company for banks in Asia. It owns a majority stake in DBS, 18% of Standard Chartered and a chunk of UBS, among others. But now it may be in for some competition as Malaysia’s government backed sovereign fund Khazahna surprised everyone when it quickly upped its stake in Malaysia’s CIMB from 1% to 29.9% in March.

The move caught analysts by surprise, and it may just be the beginning of a bigger plan for both CIMB and also Khazanna’s interest in the group.

Sources said the increase in ownership is part of Khazanah’s strategy of seeking new sources of growth. It could also be a prelude to a larger objective by the sovereign wealth fund that sees CIMB as a core competitive asset.

CIMB is included in Khazanah’s broader strategy of rebalancing its portfolio to conform with current market conditions.

CIMB Group claims to have the widest retail branch network in ASEAN. Khazanah managing director Tan Sri Azman Mokhtar said early this year that the longer term aim for Khazanah and its subsidiaries was to drive them to become regional champions. CIMB is the second largest bank in Malaysia after Maybank, and is on track for record profits this year as it looks at more acquisitions in Asia, the most recent being the RBS assets announced in March.

8 ASIAN BANKING AND FINANCE | JUNE 2012

Cash strapped India

India’s banks struggle as economy softens Brother, can you spare a Rupee?

A

perfect storm of a worsening economy, rising bad loans and a cash strapped government are conspiring to make the next two years particularly bad for Indian banks.

Standard and Poor’s reckons credit growth is likely to drop 16% to 17% in fiscal years 2012 and 2013 from some 23% in fiscal year 2011. They also expect net interest margins to remain tight in fiscal 2013 due to tougher competition exacerbated by low credit growth and higher interest rates than tax borrowers’ abilities to repay. An S&P analyst said the asset quality of Indian banks are likely to remain weak, or even deteriorate, due to the moderation in economic activity, high inflation and high interest rates.

The Indian government budget, announced in March this year, does not inspire a lot of confidence.

Moody’s warns that banks will get capital but remain depressed by the government’s worsening fiscal position. “The recapitalization of public-sector banks is a priority, a credit positive development in the current context of mounting pressure on banks’ asset quality and capital buffers.”

So how much will the banks get?

Just US$3.2 billion in 2013 — a drop in the ocean and only enough

credit growth is likely to drop 16% to 17% in fiscal years 2012 and 2013 from some 23% in fiscal year 2011

Working on a tight budget The problem with continually funding banks through the budget is that the money comes only once a year, which is why the Indian government now wants to set up a financial holding company whose purpose would be to raise funds and meet the equity capital requirements of public sector banks and financial institutions. “The concept has the merit of allowing public sector banks to receive equity capital when they need it rather than only at the end of the financial year as is currently the case. But we have been concerned about the timing of such equity injections, as there is always uncertainty as to how the committed funds will be disbursed among individual banks,” notes Moody’s.

“However, it is unclear how this vehicle would be funded and we therefore remain skeptical about the ultimate implication of this initiative.

There is a risk that this vehicle could be levered, possibly via bank loans, effectively resulting in round trip, fictional capital injections,” the firm adds.

The circularity of the bad debt problem is also of concern. Public banks are the largest creditors of the government and in India, public banks hold government securities to a level equivalent to at least 350% of their Tier-1 ratios. Time to ramp up those printing presses, then?

India: Key Performance Trends

Source: Fitch, RBI

In Asian asset management, big is not beautiful

T

he old shibboleth that funds must grow bigger to gain size and fresh funds, and hence profitability, has been well and truly slayed by the financial crisis. These days, management strategy is far more important to the durability and profitability of a fund than its sheer size. And because of this, many smaller funds are thriving whilst bigger ones are struggling to grow their asset bases, points out Matthew Baldwin, Managing Director Asia for Portia, a division of Thomson Reuters. “Asset management is considered the most consistently profitable business in financial services, but there has been extreme volatility in the degree to which individual firms capture profits,” he notes. Baldwin says that research indicates that top performing asset managers generate profit margins of approximately 45%, compared to margins of 5-7% for poorly performing firms. “And the operating environment is becoming more difficult for asset managers, as firms experience pricing pressure due to

increased competition and increasing operational costs driven by regulatory and technological change.”

High costs outpace growth Whilst fund sizes are generally smaller in Asia than elsewhere, they have been growing at high singledigit rates and are predicted to continue to increase. The problem for the asset managers is that even with strong market conditions, cost increases often outpace growth from market appreciation. Baldwin notes: “Over the past few years, many industry commentators suggested that obtaining scale was the key to performing well, but recent findings suggest that a firm’s choice of business model and operational discipline play a much larger role.” Baldwin estimates that M&A activity accounts for less than 10% of growth in assets under management for the industry, and that net new flows contribute twice as much to growth as market appreciation. “One common element I’ve observed among successful firms

Matt Baldwin

Top performing asset managers generate profit margins of approximately 45%

is that they specialize — meaning that more than 50% of their assets are focused on a single asset class or type. In Asia, firms typically specialize by offering regionally tailored product portfolios, and running regional operations to support their commercial endeavors,” he says.

This makes sense, adds Baldwin, because the region itself is outperforming, as savings rates outpace those in Western markets.

The US and European investors look to Asia for both better returns and increased diversification. Some industry commentators suggest that firms should plan for 50% of future growth to come from Asia alone indicating asset managers should be investing heavily in the region.

“I’ve observed substantial interest in alternatives and ETFs, and retirement markets have strong future prospects as wealth in Asia rapidly increases.

Alternatively, firms can pursue both regionalization and product specialization as strategies – but the key is to ensure investments in growth are focused and rationalized in order to generate meaningful returns.” Baldwin reckons firms in the region will grow organically by pursuing these strategies, and will turn into what McKinsey dubs “at-scale global specialists,” defined as firms with greater than US$300 billion in assets under management and over 65% of assets in a single asset class. But this is a vision for the region. In the meantime, many predict that specialized firms with approximately US$50 billion in assets and over 50% of assets in a single asset class or type will outperform.

Baldwin sees generalists of all types struggling to compete in complex, local markets across Asia. Many of the multi-boutique operating models are struggling to achieve organic growth, and large international firms who lack local expertise are failing to attract net new flows.

Global asset managers should learn a lesson from those firms who have successfully grown in Asia — to focus their commercial practices and their supporting operations to take advantage of the tremendous potential in Asia’s asset management markets.

ASIAN BANKING AND FINANCE | JUNE 2012 9

VOX POP

VOX POP

What are the interesting IT trends among Asian banks?

CEO & MD

GLOBAL HEAD

MANAGING DIRECTOR

REGIONAL DIRECTOR

Vishnu R. Dusad

Haragopal Mangipudi

Anuj Jain

Chua Lai Chwang

opportunities behind the log-in page. The goal is to engage new customers in a more effective way.

In comparison to other regions, we are currently seeing an enormous traction and intent for core banking renovation in the APAC region. Mobile banking and e-banking are witnessing a generic approach focusing on achieving inclusivity agenda entailing. This aims to bring in the unbanked and underbanked sections under the formal banking channel, with a multi-channel approach.

Social networking is being leveraged to serve customers better, particularly among the younger population.

This trend is not going to saturate business processes any time in the near future.

The focus will continue to be on devices, intelligent rules-based communication, and innovative processes or workflows using emerging channels.

It is expected that billions of devices will be interconnected to each other by 2020. ‘Machine-to-Machine’ communication, together with mobile devices, is expected to play a greater role in the future.

in self-service devices to improve customer service immediately and drive revenues. Seeking lower costs through innovative approaches and overcoming the legacy switches through open and flexible terminaldriving software that interface between the switch and the self-service network are now available.

Meanwhile, a traditional switch can drive an ATM adequately but perhaps it can also pose difficulties with new cash/cheque deposit systems, automated teller safes (ATS) and cash recycling, which are the new technologies that promise to improve operations in terms of controlling costs and boosting customer service.

In terms of payment switch replacement, issues abound at the operational migration of data and processes. Many banks are facing the task of having to entirely rewrite services and functionality to work on new switch systems. This is a result of how banks have customised their standard switch software applications over decades. This lack of standardisation creates further barriers to pursuing the implementation of a new switch given that any migration could cause

problems for mission critical services, ranging from debit to payment authorisation to security and self-service channels.

When it comes to cash services in the branch and at the self-service channels, cost reduction of as much as 20% can now be sought through improved inventory cash control. Banks are starting to consider how to apply this to cash in a more strategic method by analysing the cash flows in the branch at self-service channels and while in transportation through cash-in-transit (CIT) security companies.

The demise of cash has been lamented of late by various e-payment providers, but the fact is that cash in circulation has increased in mature and emerging markets. Its convenience and universality means it will remain a necessity for some time. It will force bank operations executives to devise new strategies to ensure that cash does not sit idle in branches, selfservice devices or vaults. In addition to cutting the cost of handling cash, there is also a new opportunity to earn interest on the idle cash piles with a cash cycle management solution.

Challenging times and stiffer regulatory requirements are forcing banks to explore latest technologies that would help them lower operational costs while seeking new revenue streams.

David Cassonnet Managing Director, Quartet FS Whilst it’s fair to say that banks in Asia have been less impacted by the financial crisis, they are nevertheless choosing to adopt IT transformation programmes similar to European and US firms. The objectives are simple: (1) Meet business imperatives for more timely and transparent risk information for business decisions within silos and across the bank; (2) Meet new regulatory requirements; (3) Get more business value from IT systems while adhering to budget restraints.

As a result, banks are shifting from a very slow, batch-based, static reporting infrastructure towards dynamic analytics and business monitoring platforms that can be easily extended for evolving commercial and regulatory needs. Traditional packaged software solutions and data architectures represent bottlenecks for operationalizing analytics such as VaR and CVA. Wong Heng Chew President, Fujitsu Asia In 2010 to 2011, we saw cloud computing garnering more interests and picking up momentum, with an acceleration in cloud adoption and increased investments in cloud computing as enterprises look to heighten their operational efficiency.

I believe that this pursuit of the cloud is likely to continue in the year ahead, albeit at a slower pace compared to previous years, largely due to the uncertain

MANAGING DIRECTOR

PRESIDENT

MANAGING DIRECTOR

David Cassonnet

Wong Heng Chew

Lee Boon Huat

economic environment. The priority for organisations, however, lies in learning to adapt to economic recoveries taking place in shorter cycles and ensuring that their infrastructure is scalable to be able to respond to these changes.

take hold. Real-time risk analytics will become a necessity, with the market’s best practices moving towards the incorporation of Credit Value Adjustment on a pre-deal basis. Firms will need to aggregate data from across asset classes and business silos as regulatory agencies shift the burden of reporting position limits and large trades from exchanges or clearing houses to firms.

Finally, firms will demand agility and adaptability from their technology, given the uncertainty about the exact details and timelines for the new rules.

than computers.

Banks have started leveraging this fact in a big way; It is in fact banks in the developing part of the world such as Asia Pacific and Africa that are making advances generations ahead of similar trends in the developed part of the world.

Lee Boon Huat Asia-Pacific Managing Director, Misys This year, there is a mobile revolution taking place.

More and more banking services can be delivered to customers, both corporate and individuals, via mobile platforms. Banks give emphasis on promoting and servicing through social media. Banks are building efficiency via the hubbing strategy and private clouds.

Core banking modernization is being pursued more aggressively to streamline technologies, systems, interfaces.

The need to optimize collateral and leverage every margin offset opportunity will become more pressing as the new capital charges

10 ASIAN BANKING AND FINANCE | JUNE 2012

Vishnu R. Dusad Spokesperson, CEO & MD, Nucleus Software One of the most interesting trends is mobility. Computers have proliferated in literally every walk of human life over the last three decades. Thanks to substantially lower costs and higher degree of handling convenience, mobile devices are going to become far more integral in our lives

Haragopal Mangipudi Infosys Global Head, Finacle Financial Service providers have slowly been extending their presence in digital space, not just to distribute, but also to interact with their customers. Core banking has been on the rise in the APAC region since 2007, and continues to grow with new players entering the market. There is a great growth opportunity for mobile banking in the APAC region. It has been growing at a rapid pace, transforming banking habits. Half of the consumers agree that mobile services has become an important banking channel.

Many banks have improved their websites to target new customers and explore

Anuj Jain Software Innovations Managing Director, Bosch Asia Pacific It is interesting to know the new number of new channels, and more importantly, their usage that have surfaced in the past few years. Now, mobile devices are not only used as lifestyle gadgets, but also to execute critical transactions such as purchasing and fund transfer. All these have led to a paradigm shift in ways people conceptualize business solutions. But maybe what we see now is just the tip of the iceberg.

Chua Lai Chwang Regional Director, Wincor Nixdorf Asia Pacific In Asia Pacific, EMV compliance, that is designed to combat fraud and process transactions regardless of geographic boundaries, has spurred many banks to rethink their self-service terminal network strategy.

Some are over-reliant on legacy switch technology which creates difficulties when a bank wants to add and deliver, more personalised customer service through self-service devices.

The cost of adding new functionality has grown costly because of dated switch systems and ATMs. However, with the push to EMV compliance, banks are considering ways to invest

ASIAN BANKING AND FINANCE | JUNE 2012 11

INSIGHT: RETAIL BANKING

FATCA: Blessing or burden to Asia?

As the US pushes for stricter regulations to avoid tax evasion, Asian banks are forced to follow implementation and remediation requirements by 2015. Question is, are they ready? Roxanne Uy investigates.

T

he US Treasury Department and International Revenue Service recently released the proposed regulations and implementation requirements for the Foreign Account Tax Compliance Act or FATCA. Under the new regulations, foreign financial institutions (FFI) will have to report to the IRS every year regarding the offshore accounts and investments held by U.S. taxpayers.

Now, this could be good for the US as the regulations seek to prevent tax evasion by keeping close watch to the taxpayers’ offshore accounts.

In fact, the Joint Committee on Taxation estimates that $8.5 billion worth of evaded taxes can be prevented over the next ten years through the FATCA. But on the flip side, this brings financial concerns, operational burdens, and data privacy dilemmas to FFIs, including Asian banks.

PwC Hong Kong risk & controls 12 ASIAN BANKING AND FINANCE | JUNE 2012

“$8.5 billion worth of evaded taxes can be prevented over the next ten years through the FATCA”

solutions partner Timothy Clough warns that Asian institutions that fail to comply with FATCA will potentially be subject to a new 30% US withholding tax on withholdable payments. “In addition, account-holders who don’t provide the institution with FATCA-required documentation would be deemed recalcitrant. The institution may then be obligated to deduct a 30% withholding tax on certain payments credited to their accounts or otherwise close the account,” he adds.

Facts on FATCA In order to enter into a contract with the IRS, which is a key requirement under the FATCA rules, financial institutions must agree to perform certain due diligence procedures on their existing customer data, explains Clough. “These due diligence procedures are designed to identify

INSIGHT: RETAIL BANKING indicators of US status within the data and records maintained by financial institutions. In effect, the US taxing authorities are requiring foreign financial institutions to prove the negative (i.e. they have no customers with US status) by undertaking specified procedures. They want to ensure that their onboarding controls are sufficiently robust to identify customers with US status going forward,” he reveals.

Charles Kinsley, principal for tax and FATCA team head at KPMG, notes that the due diligence procedures for the identification of accounts have been modified.

Previously, additional scrutiny, including a physical paper search, was required for accounts that previously fell within the broad definition of ‘private banking’.

“Not only is this definition being removed, but the additional scrutiny is based solely on a USD1 million dollar threshold,” he says. According to Jim Calvin, global tax managing director, asset management at Deloitte, for accounts with a balance of more than USD1 million, FFIs will have to do paper searches that would be limited to documentation, current account files, and certain correspondence. “FFIs would also be required to question any relationship managers associated with these accounts to confirm that they don’t have any knowledge that the client is a US person. Searches are not required for accounts of less than $50,000, or for certain insurance contracts or entity accounts of less than $250,000,” he adds.

FATCA’s effectivity date is on January 1, 2013, but the Treasury and IRS have provided much needed transition relief in the new regulations. According to Calvin, the most important transition relief gives banks until June 30, 2013 to implement new account onboarding safeguards and then sign an agreement with the IRS. The rules also give banks two years after signing their agreement to remediate preexisting accounts. “Reporting is phased in and must be completed by 2016. Withholding on USsourced amounts begins in 2014,

while the controversial foreign passthru payment withholding regime is pushed back to 2017.

There are several reasons for the foreign passthru payment delay with one being the hope that near universal compliance with FATCA may allow the Treasury and IRS to radically simplify the foreign passthru payment requirements,” adds Calvin.

Impact on Asian banks Calvin warns that all banks will have to make a significant and immediate commitment in highly specialised resources from now until 2015, as most of what is required must be completed by June 30 of that year. Furthermore, very major aspects must be completed as soon as June 30, 2013. “Undoubtedly, for an Asian bank or any bank for that matter, locating and retaining such highly specialised teams of people for this period of time will be the most significant challenge to successful execution,” he notes.

Asian banks will have to brace for financial concerns, operational burden, and data privacy dilemmas brought about by FATCA. Clough adds that the FATCA places a significant regulatory burden on Asian and other foreign financial services institutions to identify their potential customers who are subject to US tax obligations.

Moreover, Asian banks need to provide details relating to those customers to the IRS. “Specifically, in order to comply with FATCA, Asian institutions will likely be required to enhance their customer onboarding and ‘know your

customer’ procedures so as to ensure they identify and categorise US persons who wish to open an account with the institution.

Furthermore, FATCA will require Asian institutions to use enhanced due diligence procedures to search their existing customer data Jim Calvin to identify US persons. Where potential US persons are identified, the institution can generally be expected to reach out to those customers to confirm whether they have US status or not,” he points out.

Ernst & Young’s Asia-Pacific Charles Kinsley financial services tax team leader Rowan Macdonald also reckons that it is important for the Asian banks to undertake a statistical review of their existing client data.

This is to determine how the new thresholds will affect their effort & investment in compliance to FATCA. “A detailed review and Timothy Clough understanding of the new rules for deemed compliance status could mean that the local banks in Asia would seek to be compliant in a much simpler way,” he says.

Intergovernmental reporting Data privacy laws will continue to be a challenge until there is more clarity around the intergovernmental approach to reporting under FATCA that the six European nations have started looking at, says Macdonald. This could well exacerbate some of the uncertainties in the market place and further impact the time to compliance. Kinsley expects that there are a number of countries in Asia that would be interested in pursuing this approach, too.

Rowan Macdonald

“Not only is there a benefit to banks operating in their country to reduce their FATCA compliance burden; the approach also urges the US to provide reciprocal reporting,” he says.

According to Clough, the US is now working with Britain, France, Germany, Spain and Italy on ways to report information on US account holders through their own government agencies, rather than directly to the US government.

This is generally welcomed as it could eliminate privacy concerns in reporting information directly to the IRS. It may also eliminate legal conflicts in the case of withholding.

Calvin warns though that intergovernmental agreements do not and will not create exemptions for banks. “Instead, the agreements will only modify reporting of accounts to an ‘up and over’ arrangement rather than requiring reporting directly over to the IRS. Thus, these agreements should not cause banks in Asia to delay the start of their projects,” he adds.

Call to action Clough notes that the FATCA regulations are not yet final and comments can still be submitted to the US authorities until April 30, 2012. But since the regulations were already released, Calvin believes there is no longer any reason to delay detailed scoping and implementation. Asian banks are therefore advised to begin the process of determining the scope of projects immediately so that they can begin to execute on these projects. Global, regional and multi-national Asian banks should expect to be subject to almost all the major requirements of FATCA. The major challenge will be the very tight deadlines combined with the need for highly specialised resources. “Finding the right types of people to interpret and operationalise these rules, managing and executing the projects on time, and having access to credible and experienced US tax advisors who can properly train people, will be extremely difficult. The search for these types of people and teams should begin now before the market is depleted,” he stresses.

ASIAN BANKING AND FINANCE | JUNE 2012 13

ANALYSIS: RETAIL BANKINGS

Deposit woes continue to haunt China’s banking sector Funding and liquidity to dominate China’s banking sector in 2012.

Roxanne Uy reports.

F

itch analyst Charlene Chu notes that today’s banking system is different from the pre-crisis banking system. In the past, the banks always had this very large amount of excess deposit on hand and they always had a lot of resources that could literally be mobilised overnight into lending. But given today’s tight funding and liquidity, banks do not have the same ability to mobilise resources into credit as they had in the past.

Chu reckons that deposit strains are intensifying and the banks are struggling to balance the rising forbearance burdens with pressure to lend in support of growth. “The year will reveal just how vital plentiful liquidity has been to the stability of the Chinese banking system, and how difficult things can become when that abundance is absent.

Fitch expects banks to require large funding support to meet credit and forbearance needs, as well as their own growing obligations,” she adds.

“In terms of equity financing, I know we’ve got some banks who request for that. And I think this is something we’ve always highlighted 14 ASIAN BANKING AND FINANCE | JUNE 2012

“The share of European bank lending to total credit in Asia is around 20%”

over the years—that there is constant downward pressures on capital ratios in China because earnings, despite being strong, are still not keeping pace with the of growth of the system. Some banks will definitely have to raise some equity,” says Chu. Funding assistance required Ms Chu also warns that required reserve ratio (RRR) cuts will happen

periodically over the course of the year, but they are actually not a signal of loosening. “It’s a signal of simply giving the banks the resources they need to extend the credit that we all expect they’re going to extend.

I know the market is not really interpreting it this way but that is the reality. The triple R will be reduced simply so that the banks will have money on hand and do what the government is expecting them to do on the credit side,” she adds.

According to a Fitch report, Chinese banks possess an estimated CNY21trn in capacity to extend new loans, roll over existing loans, and provide forbearance. Some may think this is enough, but Fitch warns that this can be exhausted quickly as CNY22trn in existing loans will be coming due in 2012 – some of which will require forbearance and others will be re-extended to good existing borrowers (every CNY1 not received from, or re-extended to, existing borrowers means CNY1 less in new credit). For this reason, substantial funding assistance will be required.

“Fitch forecasts CNY4trn in liquidity assistance in 2012 via a combination of reserve requirement reductions, central bank reverse repos and auctions of MOF deposits. Reserve requirement relief may not always take the form of blanket, system-wide RRR cuts, but rather targeted releases to banks in need. In this context, the nominal balance of deposit reserves at the central bank could be a more useful indicator in signalling policy than the RRR ratio,” says Chu.

China: Key Performance Trends Capital ratiosratios Capital (%) 12 10 8 6 4 2 0

Total CAR Tangible equity/assets

Tier 1 CAR

2006 2007 2008 2009 2010 2011E 2012F 2006-07 data excludes Agricultural Bank of China Source: Fitch, banks

ASIAN BANKING AND FINANCE | JUNE 2012 15

ANALYSIS: TECH TRENDS IN ASIAN BANKS

ANALYSIS: TECH TRENDS IN ASIAN BANKS their big competitors,” Araneta adds, stating that information technology justly requires heavy spending.

Focus on risk management and security Araneta further explains that risk management will receive much attention in terms of IT spending as banks realise that they should invest smarter. Their goal should be to limit the impact of and exposure to the troubles in the US and Europe while minimising their spending, he adds.

IDC forecasts that spending on risk management will account for 15% of IT budgets. Araneta sees that operational spending will get traction while alternative sources in IT delivery receive a push. “Whether it be outsourcing, cloud computing or credit bureaus, there’s a push towards a collective type of spending. Banks, working together, will reduce license fees or IT spending in general. Obviously, there will also be a push towards more capex versus opex type of conversation,” he explains.

IT providers to reap benefits of banking liberalisation in Asia Burgeoning of Asian banks leads to increase in IT spend. Krisana Gallezo reports.

B

anking liberalisation across Asia will see new bank entrants in the region, and that will be a boon for technology providers, says IDC Financial Insights Asia Pacific associate consulting and research director Michael Araneta. “These new banks will drive new IT spending with much of that going into teller platforms and branch rollouts,” he says.

Asian banks burgeon in 2012 Araneta infers that Asian banking fundamentals are still quite strong and will churn out profits and revenues accordingly, thereby encouraging more players to enter 16 ASIAN BANKING AND FINANCE | JUNE 2012

“Banks are going to grow even further in 2012. There will be liberalisation of the industry across the region and that means more new players can come into the market and new types of banks will be launched”

the market. “Banks are going to grow even further in 2012. The main implication of that would be liberalisation of the industry across the region. That means more new players can come into the market and new types of banks will be launched,” he surmises.

Araneta predicts significant growth of banks by numbers in absolute terms in China, Hong Kong and India, while new types of players will come in countries like Australia and Malaysia.

7% increase on IT spend The influx of new banks will also beef up alternative channels, like mobile banking, Araneta

adds. “Some of these new players are already relying on e-mobile platforms to grow their bases as quickly as possible.” Araneta reveals that IDC is forecasting an average of 7% growth in IT spending for the region. Though there had been no official data on IT spending among Asian banks in the past, Araneta says that the forecasted figure might actually be lower than what had been foreseen in the past two years.

“We believe that the mid-sized banks or the tier two institutions will probably grow their spending a lot more than usual because they see that this is a great opportunity for them to gain market share from

2012 IT trend: Information mobility So, what would be the IT trends of Asian banks in 2012? Ernst & Young advisory partner Gerry Chng notes that over the years,

there has been an increased emphasis on information mobility.

Companies are exchanging more information with both upstream and downstream partners, as well as enabling employees to access information using their personal devices.

As a result, the current information security landscape, which uses a perimeter defense paradigm, is no longer effective at keeping information safe, says Chng. Organisations need to re-evaluate the risks of making information available outside the traditional boundaries. With this development, Chng says that Asian banks are ensuring that risk management down to third-party partners is consistent with their internal policies. This is usually performed through third-party assessments that evaluate risks to information that are shared with these partners.

There is also growing interest in information protection that is different from the conventional paradigm of establishing digital fortresses through perimeter defenses. The new “defense wall” is a combination of data leakage protection solutions which reduces the amount of information required to be shared.

It also ensures that employees are aware of the risks associated with

“In 2012, there will be focus on third-party risk assessments, expanded data protection capabilities, and mobile computing provisions using personal devices”

Michael Araneta

Gerry Chng

increased access to information.

Comparative study How are these technological developments compared with those in 2011? According to Chng, banks are becoming more aware of the importance of re-evaluating IT security initiatives. Rather than jumping into a technical solution, organisations are evaluating the threat to information first. “This signifies a growing maturity within the organisations. Their focus is now on managing the risks associated with making information accessible to interested parties,” he says.

In 2012, Chng predicts that the focus will be on third-party risk assessments; expanded data protection capabilities to protect storage, processing, and transmission of information; and mobile computing provisions using personal devices like smart phones and tablets in a secure manner.

“There will be a convergence of these three initiatives, resulting in an enhanced protection system.”

Chng continues that this can be achieved through a combination of policy changes and technological implementations that will enable a sand-boxed environment when employees access corporate data through their own devices.

Top Ten Strategic IT Initiatives in Asia/Pacific Banks in 2012 1

Risk Analytics

2

New Themes of Customer Centricity

3

Business Process Reengineering and Core Banking

4

Compliance

5

Mobile Everywhere

6

Trade Services and Transaction Banking

7

Innovation in Retail Payments

8

Alternative IT Delivery

9

IT Governance

10

IT Security and Fraud Management

source: IDC Financial Insights Asia/Pacific

ASIAN BANKING AND FINANCE | JUNE 2012 17

OPINION

SHAYNE NELSON

Private banking with Asia’s new rich

BY SHAYNE NELSON Global Head of High Value Client Coverage and CEO of Standard Chartered Private Bank

A

s Asia emerges as the world’s largest wealth region, the one question foremost on the minds of all private bankers should be this: what does a typical Asian client look like?

In Standard Chartered Private Bank – with more than two-thirds of our assets under management originating from Asia – we are seeing a new generation of Asian clients who stand out very clearly from those in other regions of the world.

Our relationships with these clients are different.

Their expectations and outlook are different, hence they need different things from us.

Much of this comes down to demographics. Asia’s high net-worth individuals (HNWIs) – people with USD1 million or more in investable assets – are younger than their western counterparts. 41% of Asia-Pacific’s HNWIs are 45 or under versus a global average of 17 per cent, according to Capgemini and Merrill Lynch. Another important difference is that a greater proportion of Asian HNWIs (63% in the case of our clients) are business owners, mostly first or second generation. They have earned their money the hard way, and are more reluctant to let others manage it, meaning that the private banking model applied for decades in the West may not work for them. Instead, many Asian clients prefer a much more hands-on approach, talking to their bank more often and looking for a faster turnover within their portfolios.

Asian HNWIs also tend to be more ambitious – obvious perhaps given the higher returns they will have seen in the past couple of years. We see the same trend among Asia’s entrepreneurs, the region’s future rich. Asian wealth creators tend to be more driven and focused on achieving their professional goals. They are also more interested in buying luxuries such as cars, watches, jewellery and works of art.

All this naturally affects what Asia’s swelling band of millionaires needs from private banks. So what should banks do to serve them?

For starters, clients who are entrepreneurs typically have much of their wealth tied up in the business.

On the one hand, they need finance for the business to grow and prosper, while on the other they need to separate out and protect their personal wealth.

A private banker who only offers them investment opportunities with a similar risk and reward profile to their own business, won’t add much value.

As I see it, there is a real opportunity now for private banks to engage and evolve together with their clients in Asia, developing a new, differentiated business model that works for clients here, helping them to grow and protect their wealth.

There is a need for private banks that understand 18 ASIAN BANKING AND FINANCE | JUNE 2012

the local Asian environment, but have the global reach to help Asian clients balance their portfolios with investments outside their domestic markets – into other Asian and emerging markets and high-yielding pockets of the West. Private banks that can cater for greater risk appetites with exclusive opportunities, such as IPOs, private equity and single-manager hedge funds. Private banks that can draw on corporate and SME banking expertise to serve Asian entrepreneur clients holistically – meeting the needs of both the business and the owner. Private banks which acknowledge that the rules of engagement are different in Asia, and develop more relevant ways of serving younger and more entrepreneurial HNWIs. Standard Chartered included – have begun to offer business strategy courses to these future millionaires.

While this trend is set to continue, powered

by Asia’s high saving rates, increased domestic consumption and younger demographics, market conditions remain tight.

Many private banks operating in Asia are experiencing higher cost, lower revenues and a decrease in return on assets, compounded by strong competition and regulatory changes in many countries.

This difficult environment calls for private banks to take steps to improve their profitability – carefully choosing which clients and markets to cover, while looking inwards to improve efficiency and control costs. But above all it represents a great opportunity to get up close and personal with Asian HNWIs, growing with them and rethinking the private banking model to meet their needs on every step of their journey.

What should private banks dangle as a comeon?

ASIAN BANKING AND FINANCE | JUNE 2012 19

SECTOR REPORT: BUSINESS BANKING

SECTOR REPORT: BUSINESS BANKING

Business bankers are confident of Asian growth even as Europe threatens As European banks start to deleverage and restrict lending to Asia amid the sovereign debt crisis, fears of a credit crunch abound - but are these worries overdone? Find out as Roxanne Uy reports.

T

he sovereign debt crisis in Europe has started to trickle do wn in Asia and now business bankers are concerned about liquidity shocks and direct exposure to EU debt. But Noel Quinn, group general manager and regional head of commercial banking at HSBC, notes that though there has been weak demand from Europe over the last few months that has led to an export slowdown in Asia, he does not see any evidence at this stage of a liquidity crunch such as we saw in 2008/2009 impacting trade finance.

“What we are seeing in terms of trade activity is an adjustment in orders from some buyers in Europe and the US, not a halt in activity,” he adds.

Credit issues, however, still pose certain threats to Asian businesses as Asia’s recent growth has become credit intensive. There is the possibility of a disruption in the flow of credit, which in turn could affect local consumption and investment.

“European banks lend about three times as much as US banks, a ratio that has held steady over time. Also, 20 ASIAN BANKING AND FINANCE | JUNE 2012

“The share of European bank lending to total credit in Asia is around 20%”

total lending by European banks have reached US$1.5 trillion, about 20% higher than in mid-2008. According to the Bank for International Settlements, the share of European bank lending to total credit in Asia is around 20%,” notes Quinn.

Threats of a credit crunch So with Europe undergoing a debt crisis and the looming possibility of credit flow disruption, will Asia be threatened by a credit crunch soon? Ismael Pili, head of financials research at Macquarie Securities believes it is unlikely to happen in Asia.

Indeed, European banks are deleveraging and some are likely withdrawing lending. “However we think that the vacuum will be filled. The US banks, such as Citigroup, as well as other local banks are stepping in, while HSBC sees it as a market share opportunity,” he adds.

Quinn sees some early evidence of European institutions tempering their appetite for certain types of lending, such as syndicated deals that may be rolling over and to a certain

extent, trade finance. “We believe that Asia’s financial systems are fundamentally strong and local financial institutions have adequate liquidity and capital to offset the withdrawal

by European banks and mitigate the risk of lending costs spiraling out of control,” he adds.

Pili also reckons that typical concerns are direct exposure to EU debt, especially for developed markets of Singapore and Hong Kong but he believes the amount is extremely small. “The maximum, and I underscore maximum, exposure is with Singapore banks equivalent to 6.5% of total assets and HK banks at 6.2% of total assets, and I wouldn’t say this is a worry,” he adds.

What to expect in 2012 So amid these uncertainties in the global market conditions, what does 2012 hold for Asia? Pili warns that Asian growth will be affected by the degree that Europe and the US slows but Asia will do its part to foster growth. “China is looking to be more accommodative, Indonesia has ag-

gressively cut its benchmark rates to a historical low of 6.25%, and Singapore has postured towards loosening with their currency stance. We see scope for other countries to follow suit. We think central bankers’ focus is growth; inflation was last year’s story,” he adds.

According to Eric Tham, managing director and head of group commercial banking at UOB, global market volatility and uncertainty is expected to persist in 2012 but the global trend of economy gravity shifting to Asia presents growth opportunities in and across the region. “In 2010, Asia accounted for 29% of the more than US$1.2 trillion Foreign Direct Investment (FDI) invested globally. Based on the momentum of growth over the past four years alone, FDI in Asia is expected to reach US$760 billion by 2013, which accounts for 40% of the world’s total FDI,” he adds.

But while Asia has proven to be resilient and is expected to continue to deliver respectable levels of GDP growth, the region is not immune to the impact of prolonged uncertainty in the developed world, Quinn notes.

“However we believe that intraregional trade and robust domestic demand will provide a buffer against the global slowdown and unlike the West, Asia has the capability to implement stimulus policies in case of a sharper than expected slowdown,” he notes.

A tenfold surge in regional trade flows If there is anything positive that the demand slowdown from Europe and the US brings, it may be that it will cause capital flows within and across Asia to increase tenfold. Quinn notes that one of the most important developments in Asia is the growth of intra-regional trade, which now accounts for almost half of all trade in Asia. “With the slowdown in trade between Asia and traditional partners in Europe and the US, trade activity within and across Asia has strengthened. For example, we’ve seen significant growth in trade China and Bangladesh, Sri Lanka, Vietnam and India as well. This has helped cushion the impact of weak demand from the West, providing new markets and opportunities for Asian businesses,” he adds.

Trade prospects in Asia may just get some additional boost as trade between emerging markets, alongside capital flows, is expected to increase tenfold by 2050. “For example, trade between Asia and Brazil is expected to grow from US$96bn in 2010 to US$206bn by 2025 (163% increase), with much of this trade being in soya.

Demand for electronics components and food commodities from Asia into Latin America is also expected to increase as is Asian demand for soya, meats and maize, which are currently imported chiefly from USA and Brazil,” Quinn explains.

He also notes that the latest HSBC Trade Confidence Index points to a steady level of confidence among exporters and importers in Asia.

Despite expected headwinds as a result of global economic uncertainty, half of all traders across Asia expect to maintain the same level of trade finance while 40% expect to increase their financing requirement levels. “According to the survey, Greater China continues to be the most promising region of growth for importers and exporters in Asia and intra-regional trade remains the main driver of trade,” he adds.

Pili regards banks that have greater regional ties or presence to be better positioned for the regionalization of trade flows and interconnectivity will be a key consideration for bank customers. “We’ve also seen how tight liquidity in a system can spill over to the rest of the region. For example, mainland corporates or mainland related businesses that have difficulties in funding are turning to banks in HK, Singapore, Taiwan, and possibly even Indonesia. There’s been a

“FDI in Asia is expected to reach US$760 billion by 2013, which accounts for 40% of the world’s total FDI”

Noel Quinn

Eric Tham

Ismael Pili

pickup in trade finance, while foreign currency liquidity has fallen. For example, Singapore has seen its banking sector’s foreign currency LDR rise to 124% in 3Q11, up from 100% a year ago, while in HK, banks are citing tight HK$ liquidity conditions,” Pili adds.

The bankers’ outlook Since trade finance boomed amid some tight foreign currency liquidity, Quinn forecasts that Asian businesses will continue to be a key engine of growth for the region – generating income, jobs and growth opportunities for Asia’s fast-growing economies.

Asian businesses are evolving to become increasingly international – they are doing more cross-border trade, investing overseas or expanding outside their home markets. “As trade and capital flows shift to emerging markets such as Asia, businesses have the opportunity to grow within and across the region – as reflected by the continued growth in intra-regional trade and investments. Riding on these trends, Asian businesses will continue to require international trade finance, financing options, investment advice and efficient transaction banking platforms,” he adds.

Likewise, Pili reckons that the developing markets have attractive structural stories that should allow decent growth for the sector over the next several years. “Strong domestic demand will help prop up growth, as private consumption and an investment cycle kick in. Indonesia, for example, has an extremely low loan penetration rate, as reflected by a loan to GDP of 28%, while we still see retail lending as largely untapped,” he adds.

ASIAN BANKING AND FINANCE | JUNE 2012 21

BIG ISSUE positive developments. First, the government has stated its intention through Resolution 11 to bring about economic stability and contain inflation pressures. Second, some major banks have been receiving fresh capital, which together with the entry of foreign investors, help to improve banks’ balance sheets and management quality. Third, the banking sector’s consolidation and restructuring help reduce the insolvency threat of smaller (mostly vulnerable) banks to the broader banking sector and could promote financial stability. It is therefore important that these efforts are maintained to help avert a banking sector catastrophe.

Does Vietnam’s banking system face a catastrophe?

With reports of rapidly increasing non-performing loans and government plans for restructuring, does a major catastrophe loom for Vietnam’s banking industry? Find out as Roxanne Uy reports.

W

ill Vietnam see worse days ahead? Following news on the looming collapse in banking systems due to surging non-performing loans and bank restructuring plans spearheaded by the government, we ask, is this businessas-usual or a major-catastrophe-inthe-making? Analysts from Moody’s, BBVA, Deloitte and Fitch share their insights.

BBVA: Alicia Garcia Herrero, Chief Economist for Emerging Markets Vietnam’s banking system obviously needs to go through systemic restructuring after having served as the financing arm of a planned economy for so many years.

After a cautious attempt to reform the banking system, right after China started its own bank restructuring, the Vietnamese authorities interrupted their strategy due to the global 22 ASIAN BANKING AND FINANCE | JUNE 2012

“It is not so much the risk of a catastrophe that is pushing the authorities to react. It’s the sense of worsening conditions which makes prompt action a better one”

financial crisis, which dried up investors’ appetite for Vietnamese banks.

Four years after, Vietnam is confronted with an even more difficult external environment and a more urgent need to reform the banking system. It is not so much the risk of a catastrophe that is pushing the authorities to react but rather the sense of ever worsening conditions which makes a prompt action a better one.

Fitch Ratings: Alfred Chan, Director, Financial institutions The challenging operating environment in Vietnam has already weakened the banking sector, and the situation is likely to continue into 2012.

Asset quality has deteriorated, and liquidity in the banking sector remains very tight - a trend not seen in other neighboring banking systems.

Nonetheless, these challenges may be partly counterbalanced by several

Deloitte Consulting: Mohit Mehrotra, Regional Head of Financial Services, Strategy & Operations, says, “Vietnam’s banking system is facing high NPL. In light of these broader challenges, the move by central bank to liberalize and restructure the banking system is a leading indicator of a tough situation. Short-term small and mid-sized banks are actively seeking ways to improve their valuations in anticipation of consolidation in the sector. The medium and long term banks will be driven by gradual measures to strengthen the banking system. The primary challenge will stem from bad debt due to massive loan growth in the last few years.

Official records indicate NPL of nearly 3% while the same statistics by non-local agencies estimates it to be a much higher number. Similarly, the high demand for short term deposit versus a long term loan book creates a natural need for liquidity. While key reforms will focus on banking system restructuring, capital position improvement, and privitization of state-owned banks, the effectiveness of such measures will be driven by how soon and how well they take effect.

Moody’s: Karolyn Seet, Credit Analyst for Vietnamese banks As indicated by our negative outlook on the Vietnamese banking system as well as on the sovereign debt of the country, the operating environment is challenging for banks. Domestic macroeconomic imbalances exacerbate the risks to banks’ asset quality at a time when profitability and capital buffers are already low.

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ASIAN BANKING AND FINANCE | JUNE 2012 23

SECTOR REPORT: CASH MANAGEMENT

SECTOR REPORT: CASH MANAGEMENT resources accordingly. This has created some great opportunities for the Asian banks, and margins are increasing in tandem,” he adds.

Citi’s Saxena concurs as he notes that while terms have definitely tightened in the last couple of months, Asian banks are stepping up and taking part of the slack. “When you look at trade finance, ultimately you’re financing a client’s working capital.

And while the natural currency does tend to finance cross-border trade in US dollars, some Asian banks can also meet the requirements through their local currency financing. There are some sectors where the pinch feels a little bit more. But I think as a whole, I don’t believe that there is any problem of large proportions. Yes, it is an issue, but I think there is capacity being made available,” he says.

RMB set to beat USD as the main currency for cross-border trade

The internationalisation of RMB is providing banks with opportunities to enhance their cash management structures in the face of a USD liquidity shortage — but does a shortage really exist until now? Find out as Roxanne Uy investigates.

T

he Asian banking industry has been facing the challenges of USD liquidity shortage for quite some time, and the cash management sector is one of the most badly hurt. But bankers seem to be optimistic as they believe the crisis is soon to be over. You may ask, “How is it so?”

According to Ravi Saxena, Citigroup’s managing director and Asia Pacific trade head of global transaction services, the US liquidity shortage is a recent phenomenon that became acute around early Q4 and he believes that liquidity is actually coming back into the system. “Obviously when liquidity is tight, customers benefit; they are long on cash because they get better yields. But on the flip side, they also pay more on their borrowing. When liquidity is tight, banks need to pay a little bit more on the liability side and that would have some ramifications on the cash management business. However there is 24 ASIAN BANKING AND FINANCE | JUNE 2012

“...with the internationalisation of RMB, corporates are increasingly looking to redenominate their cross-border trade flows into and out of China into RMB”

also the natural hedge provided by the Trade business,” he adds. DBS’ global transaction services head of sales Ken Stratton is also optimistic on the issue of liquidity. He notes that though some banks are encountering challenges accessing USD customer balances to meet their USD-based trade finance funding needs, the USD liquidity shortage is not really hurting many banks’ cash business as much. “Despite all of the issues around the fluctuating USD, and even with the significant increase in RMB trade flows, the dollar still represents the main currency in which international trade is denominated,” he stresses.

But John Laurens, HSBC’s head of global payments and cash management, believes that despite the USD being the principal currency for cross border trade, the RMB is now playing a big role in international trade and finance. And with the internationalisation of RMB, corporates are in-

creasingly looking to re-denominate their cross-border trade flows into and out of China into RMB. “This is providing them with opportunities to enhance their offshore regional cash management structures to include their RMB positions, or to use the emerging offshore RMB bond and debt markets in Hong Kong for funding,” he adds.

Asian banks take up the slack But regardless of currency, trade finance in Asia still promises to be a haven of greater opportunities for the banks. With reports of many European banks exiting trade finance, Asian banks are stepping up and are taking up the slack.

DBS’ Stratton recognizes that a number of European banks are re-looking their trade portfolios and their trade sales resources based in Asia. “Feedback is that they are focusing on their core clients, and directing funding and relevant trade

Cash and trade integration As the banking industry gets more and more interrelated and internationalised, Asian banks will definitely have to strive for better cash and trade product sets. And most of the banks see the integration of cash and trade as the key for greater efficiency and better service. HSBC’s Laurens acknowledges that clients are looking for greater advisory support from banks to improve their financial processes. And whilst the delivery of traditional payments and collection services, whether through trade or cash product sets from banks, remains important, clients are looking for service enhancements beyond the normal movement of cash. Laurens also shares that HSBC is increasingly being asked by these clients to provide similar payments, collections and financing services to their customers or suppliers to further enhance the integration process within the supply chain. “This trend is in line with an overall shift in the value proposition of Transaction Banks.

To be effective in today’s world, their orientation needs to move to the integration of cash, trade, foreign exchange and short term credit to meet the corporates’ need for working capital management and the effective harnessing and management of their liquidity,” he says.

Citi has also integrated its cash and trade business for almost 5 years now.

According to Saxena, they were able to better manage their balance sheet

through integration. “If you just take one business, let’s say cash, it generates liabilities. And then consequently these liabilities need to be deployed to really earn the returns, and that is the trade part of the equation. In terms of just optimizing the balance sheet and managing it, it is very helpful that you have the businesses together to support clients,” he adds. The integration also results in further synergies in payments and payables financing in terms of integrating with the clients and workflow management.

So how many banks have actually been successful at integrating cash and trade? DBS’ Stratton reckons that great momentum has been made on delivery channels, and many now offer consolidated cash and trade offering, with single sign on capabilities and data threading. “On the sales front, there has been some success, but there is still a long way to go. Sales people are getting much more comfortable asking questions to unearth opportunities outside their main area of expertise. But once the opportunity becomes more complex, they are still looking to the subject matter expert to iron out the deal,” he says.

Managing balance sheets Apart from better products and services from banks, investment in Asia is also dependent upon the companies’ ability to show profit margins and potential growth. Asian companies therefore face the increasing need to manage their balance

“Investment in Asia is also dependent upon the companies’ ability to show profit margins and potential growth”

Ken Stratton

John Laurens

Ravi Saxena

sheets directly. HSBC’s Laurens notes that the growth and profitability story amongst Asian markets is driving increased focus and investment into the region. Although the uncertainties in 2012 may result in a slowdown, given the rising power of the Asian economies, the longer term trend is growth.

“As the financial centre of gravity for many companies moves from West to East, the need to increase management control and visibility in the region increases. Corporates are either establishing regional management and financial centres in Asia, as critical mass makes these economically viable, or are building out existing regional HQ/ treasury centres,” he explains.

Citi’s Saxena also shares that clients are increasingly recognizing the benefits of decentralizing some financing decisions. Post-2008, there was a fair degree of pressure in terms of capital and liquidity. You could technically raise financing here in Asia cheaper than in other markets. “So my view is that while the capital centres of the world are widely interconnected, there are still certain pockets where you can get benefits in terms of competitive financing , and this can be leveraged by clients. If you are a global organization, you can leverage that to your advantage. That is a competitive advantage that we, at Citi, can offer our clients, given our global network in over 100 countries and in 17 markets in Asia,” he says.

ASIAN BANKING AND FINANCE | JUNE 2012 25

BIG ISSUE

Why are Chinese enterprises net withdrawing money?

Could they be keeping their money elsewhere, perhaps in CNY accounts in Hong Kong? Reports from Roxanne Uy.

Based on recent reports, Chinese enterprises are net withdrawing money from their bank accounts which seems unusual — they used to have more deposits before. Does this mean they are making less profits, or are they keeping their money elsewhere, like in CNY accounts in Hong Kong?

Maybe they are expanding super fast and need the money for working capital that’s why they couldn’t get trade finance for their inventories?

Fitch Ratings: Charlene Chu, Senior Director The decline in enterprise deposits is often attributed to the migration of corporate savings into wealth management offerings. Although certainly a contributor, the fact that a large portion of WMPs are brought on-balance-sheet at quarter-end to boost loan/deposit ratios suggests that quarterly enterprise deposit data may be less distorted than perceived.

A common complaint from banks and borrowers in 2011 is that overly tight monetary policy has tied up too much liquidity, leading to a credit 26 ASIAN BANKING AND FINANCE | JUNE 2012

“... tight monetary policy has tied up too much liquidity, leading to a credit crunch”

crunch in some parts of the economy.

In many respects, this is true. The 600bp rise in deposit reserve requirements (RRR) since 2009 to 21% for major banks has indeed locked up CNY4.4trn in cash that would be free if the RRR remained 15.5%. Yet, more than 60% of this drain has been offset by a contraction in central bank sterilisation bills, resulting in a net withdrawal of just CNY1.7trn by

end-September 2011.

In fact, an examination of the combined amount of Chinese banks required reserves and holdings of central bank bills shows that the average 15.9% share of banking sector assets tied up in liquidity management operations in 2011 is lower than the 16.2% average from Q108 to Q311, and is well below the peak of 17.7% in H109.

Nevertheless, although fewer overall funds are currently tied up with the central bank, a much larger share — 85% compared with 50%-60% pre-2010 — is coming from required reserves rather than purchases of central bank bills. This is critical because bill holdings can be sold if a bank is facing liquidity strains and in need of cash. In contrast, deposit reserves are 100% illiquid and cannot be drawn down, unless a bank can demonstrate a decline in its deposit base.

Deloitte Consulting: Mohit Mehrotra, Regional Head of Financial Services, Strategy & Operations Real return on short term bank deposits is in negative territory due to rising inflation in China. In such a scenario, there is limited motivation for enterprises to keep money in bank deposits. This situation has increased adoption of sophisticated treasury products that allow investors to get considerably higher returns and enable banks to better manage their liability books. Any change in regulations to deal with this situation will also pose unique challenges for banks in managing their off balance sheet.

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SECTOR REPORT: CUSTODY AND CLEARING

SECTOR REPORT: CUSTODY AND CLEARING corporate actions platform across Asian markets in 2011 and a new settlements and reporting system will be rolled out in 2012. “As we cover 30 markets across Asia, Africa and the Middle East, the challenge of having a system that embeds sufficient functionality to cover different market rules and market infrastructure is very real and we have built incredible knowledge and experience of how to address this over the past 10 years.

On top of this, volumes can flex between markets and it is essential to have platforms that make shifting workload between local centres and central hubs as seamless as possible,” he adds.

Bankers probe for more efficient custody & clearing platforms Asian banks are challenged to have a system that embeds sufficient functionality into their end-to-end infrastructure. How are they faring so far? Roxanne Uy reports.

A

s the financial industry faces unprecedented change, issues on implementation and multi-country management arise.

The challenge for banks therefore, is to provide efficient products and services that cater to the changing needs of clients. Custodians are also forced to evaluate their existing product and market portfolio, review commercial feasibility, and if required, start exiting low margin products and non-performing locations.

The challenge for custodians According to Ian Banks, head of HSBC securities services in Asia, the clients’ needs are changing as a result of the new regulatory frameworks as well as cost pressure coming from, to some extent, the increased market volatility and economic uncertainty.

He reckons that offshoring or outsourcing “post execution” processes (e.g. broker dealer), to allow a focus on one’s core competencies, is becoming a trend. “What clients want 28 ASIAN BANKING AND FINANCE | JUNE 2012

“The challenge is to keep the overall infrastructure and technology platform streamlined, scalable and operationally cost-efficient”

from their custodians is for them go beyond being just a ‘processing agent’ and become a partner or consultant with wider expertise and deeper ties.

Custodians will have to continuously invest in their systems and platforms to generate operational efficiency and scalability, integrate product and service delivery components, and traverse the value chain from an end to end securities services perspective,” he adds. Banks have to make sure their platforms cater to specific requirements of various sectors.

Investment spend and technology architecture for securities services providers will be driven by the need to build more efficient linkages between global custody and and sub custody, and integration of global custody with markets and prime broker solutions.

In terms of handling multicountries, the local requirements and regulations definitely impact the way banks actualize multi-market implementations. Banks notes that

the operational platforms will have to cater much more for all the different local requirements, again posing challenges to keep the overall infrastructure and technology platform streamlined, scalable and operationally cost efficient. “Service providers, like HSBC, constantly review their operational processes as well as technology platforms to ensure evolution of end to end infrastructure. Changes as a result of such reviews are driven by two distinct forces. One is the client-driven change due to buying behaviours or requirements, whilst the other is driven by the mandatory regulatory changes. With increased scrutiny of budgets across the industry, scale will be a vital element of meeting these changing requirements,” he adds.

Standard Chartered has also been implementing changes to their portfolio. According to Giles Elliott, global head of product management, investors & intermediaries, they implemented a new state of the art

Tax and regulatory pressures in 2012 On top of the growing need to provide more efficient platforms, banks in Asia will also have to brace for a depth of regulatory change and evolution of tax regimes this year.

Elliott warns that a key issue would be the depth of regulatory change in general across the securities industry.

Also, clients face more regulation which drives demands for increased regulatory reporting as well as changes in contractual conditions.

“Custodian providers are facing equal pressures and will need to carefully review how they absorb new increases in responsibility within existing commercial frameworks. Positively, Asia and Africa are increasing in interest both locally and from the West – and we expect to see continued flow and growth into the key markets in these regions,” he says.

The evolution of tax regimes in both developed and emerging markets will also be a concern. For instance, the US just recently released the proposed regulations for the Foreign Account Tax Compliance Act or FATCA. This will definitely hit Asian banks as they will have to brace for financial concerns, operational burdens, and data privacy dilemmas.

HSBC’s Banks notes that legislations like FATCA, that withhold tax regime changes in emerging markets, require large scale change programs across multiple products and client sectors.

especially in payments. Increased pricing pressure, cost complexities, and western regulatory initiatives may have custodians worried.

HSBC’s Banks sees regulatory change as either a challenge or catalyst to help steer the ever changing and complicated world the financial markets are presenting. He also worries that custodians face challenges around cost that are not only evident in core custodial service offerings, but also in value-added or peripheral services such as cash management and securities lending. “This landscape consists of the correlation between increased pricing pressure and costs, and to some extent, the additional element of new ‘western’ regulatory initiatives like MiFID, SEC, ERISA, AIFM and Dodd Frank. Asia will face its own regulatory scrutiny but will not be passed over by the far reaching initiatives coming into affect in today’s cross border global business,” he says.

But regulations are not all negative, reckons Banks. A positive outcome could be an enhanced common approach and a degree of consolidation.

This could surely be a good platform to drive efficiency, improve economies of scale, and reduce cost of offering. Then again, “Is this consolidation actually redressing the core issue of risk and tackling …transparency effectively, or is it in fact simply moving or converging liquidity risk and, possibly, credit issues elsewhere?” he asks.

Banks adds that, “Cash payments

“banks in Asia will also have to brace for a depth of regulatory change and evolution of tax regimes this year”

Giles Elliott

Ian Banks

will not be immune to what we see on the securities markets, with exchange having to take place sooner and not later than next day. Regulation and technological advances in the payments space is also gaining momentum.”

Moving from OTC to exchange traded As the banking industry continues to be more internationalised and Asian banks feel the need to link up with US and EU, improvements definitely have to be made. A question then arises — is moving from OTC to exchange traded for derivatives something that Asia will have to face to comply with International Rules or will Asia be largely exempted? Elliott notes that the plans for OTC derivatives clearing in Asia are still evolving, and the clarity on whether these will mirror the US or European model is still unclear. However, the impact will be significant for existing and new entrants to this market. Not all players will be able to afford the capital charges for extensive memberships in different markets, so there will be increased demand for agents that can provide Third party clearing services here. “On top of this efficient use of liquidity and collateral solutions — as derivatives become more transactional — we expect the buying criteria to elevate other factors. This will put custodians and cash operating banks in an interesting new area in these services,” he adds.

Complexities from US and EU regulations These regulations definitely throw new complexities to Asian banks, ASIAN BANKING AND FINANCE | JUNE 2012 29

OPINION

ROBERT ANDRIESSEN How foreign investments in Indonesia continue to grow

BY ROBERT ANDRIESSEN Managing Partner, PT Andriessen Consulting

B

KPM (Indonesia Investment Coordination Board) expects foreign investments to grow to USD 19.2 billion in 2012 from USD 18.7 billion.

This concurs with the recent upgrade of Fitch and Moody’s in Indonesia to investment grade level which is received with much applause.

Indonesia is back on this level after 14 years and the expectation is that S&P will follow suit later this year. The International world has acknowledged the reformations Indonesia has made. This is a remarkable effort given that, on other parts of the world, it is raining downgrades.

Foreign investors have seen this reformation back in their investments. Currently foreign investors own about 43% of the Indonesian stocks and 32% of the Indonesian government bonds. These figures are among the highest foreign interests in Asian markets.

Awkward detail is that the foreign positions are concentrated in the top 15 highest liquid stocks.

Another impact of the booming economy is growing interest of foreign banks in Indonesia.

Although last year Bank Indonesia suggested limiting foreign ownership in banks to less than 50%. Earlier this month, Bank Indonesia mentioned that it would not implement a shareholder cap for banks.

This is good news especially for Malaysian banks like CIMB and Maybank that have already large stakes in their joint ventures.

These clear the path for smaller banks like RHB that wants to buy Bank Mestika Dharma. Other banks like ANZ have increased its stake in the JV with Panin Bank from 85% to 99% in the past weeks, and HSBC bought Bank Ekonomi.

So far the financial industry and investments in the energy sector have been the main beneficiaries for foreign investments, but other sectors like consumer goods are seeing increased interest. This comes with the acknowledgement that the middle income segment in Indonesia is growing fast.

More and more Indonesians have increased spending power which exceeds the basic primary needs. Companies, like the Korean supermarket store Lotte, are expanding not only organically. Lotte has taken up Makro to speed up the expansion. It expects to invest over USD6 billion in Indonesia over the coming 30 ASIAN BANKING AND FINANCE | JUNE 2012

CALL FOR NOMINATIONS LIST OF CATEGORIES years.

FMCG companies like Unilever, Proctor & Gamble and Nestle poured more money in Indonesia to grab a bigger market share in the fourth most populous country in the world.

Automotive industry is another industry which is booming in Indonesia. Not only does new car sales in Indonesia increase, 2012 also marks a milestone where car sales are expected to reach one million. Due to massive flooding in Thailand, many car producers are moving their plants to Indonesia. Volkswagen, Mitsubishi, Toyota, BMW, General Motors and Nissan have made some initial investments recently and expect to expand further. In total, the car industry committed more than USD2 billion in 2011 for Indonesia.

The GDP of Indonesia was 6.5% for 2011 and 6.7% was forcasted for 2012. The expectation is that in the coming years, Indonesia will continue to grow around these figures despite some looming threats — the government plans to reduce the subsidized price on petrol in April which can spark the inflation to 7%.

In early 2014, the national elections will be held. The general thought is that the political and economic democracy of the last years, which helped Indonesia get back into investment grade level, will remain regardless of which president is at the helm of the country.

More money for Indonesia?

Cash Management Trade Finance Project Finance Technology and Operations Foreign Exchange

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ASIAN BANKING AND FINANCE | JUNE 2012 31

FEATURE: BANKING SOLUTIONS way for banks to own and run their ATM fleet (in-house management).

He adds outsourcing as another option to take advantage of the cost savings benefit of ATM Managed Service (end-to-end ATM service).

From selling ad spaces on ATM machines, to replacing employees with smart software, banks are bent on scrimping on cost and churning more revenue.

ATM makers hope to squeeze cash out of system New software even promises better truck delivery routes.

A

s ATMs become more than just cash dispensers, vendors are constantly developing their ATM channels in order to cater to the customer’s ever changing needs.

In recent years, one of the most pressing concerns for ATM vendors is to minimize operation costs and maximize ATM revenue.

Ricardos Khoury, Wincor Nixdorf ’s Regional Vice President and Head of Banking Division in Asia Pacific, says that the most drastic measure to lower ATM operation costs is a software that promises better cash management.

He adds that majority of an ATM’s Total Cost of Ownership (TCO) over its lifecycle is the cost of cash, which by itself can be classified in different areas: the cost of owning the cash, the insurance cost, and the replenishment cost incurred through service providers like CIT companies or the company’s own dedicated staff.

Smart Software “Cash management software 32 ASIAN BANKING AND FINANCE | JUNE 2012

“By automating the entire process, the bank would require less staff to manage the fleet while achieving a much higher efficiency.

Impact on cost would immediately be visible”

will minimize the cash stock inside of ATMs, main vaults and cash centers as well as related insurance costs. It will also optimize the truck routes and reduce the number of CIT trips required to replenish ATMs and keep them in operation. Another measure to reduce cost of ATM operation is proper monitoring, fault prevention, and incident management software. By automating the entire process, the bank would require less staff to manage the fleet while achieving a much higher efficiency. Impact on cost would immediately be visible,” Khoury explains.

Khoury adds that proper monitoring and proper cash management have a direct impact on maximizing revenue. “Available ATMs with sufficient cash generate more transactions, more customer satisfaction, and more revenue. Transactions such as bill payments, phone top ups and cash convenience remittances initiated through third parties (via mobile

or internet) are examples of what customers are willing to pay for.

These will generate revenue for the bank and improve the TCO of owning and operating an ATM network.”

Other revenue-optimizing tricks Another way of maximizing revenue is through third party advertisements on ATMs. Idle times during ATM transactions are rich opportunities to flash short campaigns and cross selling initiatives, notes Khoury.

“However, the golden rule here is not to extend the transaction time in a channel plagued by long queues and waiting time.

Therefore, a professional software tool like PC/E Direct Marketing is required to manage and deploy the content of the different campaigns across highly distributed networks.”

According to Peter Poon, Executive Director of ATMIA in Asia, an open tender bid to get the best buy is the most cost-efficient

A different perspective Ben Thorpe, Talaris’ Managing Director in Asia Pacific, offers a different perspective, saying that Asia Pacific markets are at very varying stages of maturity and whilst the ATM is a generic tool, how they are used can vary from country to country.

In China, the use of cash recycling is far more widely spread than in almost any other country.

“This has presumably been adopted in an effort to reduce future operational costs as the ATM fleet expands rapidly and cash recycling becomes either permitted or more accepted by customers,” Thorpe notes.

In some cases, fees for ATM transactions have become more acceptable, but the idea of free banking remains the norm elsewhere. “Generally, banks are trying to move higher cost transactions to self-service channels — from the teller counter for example to a self-service device.

But many are also are aware that the ATM is not as personal as a banker, and it does not really provide the same opportunities for cross and up selling or lead generation,” Thorpe says.

Personalization works ATM vendors are also constantly working on improving the customer experience across different service touch points.

Khoury cites personalization and understanding of customer needs and requirements as the most effective means of improving the customer experience.

“Customers will be impressed and will appreciate the customer service if the bank gets straight to the point, addressing their needs in the simplest way possible. For that to work, the bank needs to have proper customer profiling processes and tools which will capture the customer data and transform it into a form of intelligence that can be deployed

For customers, personalising their ATM interface sounds as good as customizing their own McDonald combo meal.

cross channels.”

Khoury continues that one of the key functions customers appreciate is the ability to personalize the ATM menu to suit individual preferences. “Customers can choose, on the ATM itself or through Internet Banking, how their ATM menu should look like and, voila! Like magic, they get what they want. That’s customer experience.”

For Hensley, it is essential that the user interface for the ATM application is graphically compelling and easy to use. “In order to accomplish this, it is very important that the best graphics and media technologies are available so that the bank is not limited in the style it uses to convey its image.”

Hensley also notes that personalising the user interface is one key differentiator for banks wanting to use their ATMs as a competitive advantage.

Single Customer View According to Poon, one effective solution in providing consistent customer experience is through a single customer view enabled by back end (host) application service integration leveraging technology such as SOA. He cites Microsoft’s Banking Integration Factory as a typical SOA implementation.

The Banking Integration Factory creates user interfaces that can be accessed via a Web browser; Windows-based desktop, notebook or Tablet PCs; mobile devices; or

“Microsoft’s Banking Integration Factory creates user interfaces that can be accessed via a web browser; Windowsbased desktop notebook or Tablet PCs; mobile devices; or the Microsoft Office system”

the Microsoft Office system.

Poon says it will prove useful in core business banking processes.

“Branch tellers will be able to provide customers with service quickly, efficiently and accurately, accepting deposits and cashing checks, issuing non-traditional financial instruments, and answering customers’ account inquiries.”

He adds that branch sellers will be able to provide customers with multiple sales and service offerings — such as opening new accounts, managing forms, completing loan applications, offering account products and services, and sharing product information — through immediate access to customer information.

“Online banking will also enable remote customer self-service via the Internet, processing transactions, electronic bill presentment and payments, electronic statements, money transfers and account inquiries,” notes Poon.

Machine VS Man From Thorpe’s perspective, self-service is an important element in customer service, but is not the only touch point. “The branch remains critical and is often overlooked, yet successful banks in the region have shown that investing in the branch infrastructure and branch staff can have considerable returns, both financially and in terms of customer satisfaction. The branch ASIAN BANKING AND FINANCE | JUNE 2012 33

FEATURE: BANKING SOLUTIONS is still where the majority of bank selling goes on, and where relationships are really developed.

Self-service may be the bait or the hook, but the branches are where real engagement still takes place. The channels have to work together to present a total experience for the customer, but the human touch remains critical. Assisted self-service, for example, seems to be taking hold as an idea, if not as a reality. Here, the staff and customers interact around devices, thus reducing costs and transaction time, but more personal banker-to-customer engagement still happens at the same time,” he reveals.

Developing better channels ATM vendors are also developing the ATM channel’s capabilities to better cater to customers’ needs.

Khoury says that cash deposit and cheque deposit in bulk on ATMs are the best options for many consumers and SME owners who do not wish to take the money back home with them when they close their shops. “They can even start earning interest on the money they deposit online. Enhanced security features on ATMs are also appreciated by the customers.

It’s always good to know that your data is protected when you use the ATM, especially with the increasing number of fraud and card skimming incidences. Nice and simple interfaces with clear menus and touch screens can also play an important role in enhancing customer experience,” he adds.

According to Hensley, the emerging technologies that have the greatest potential to improve the customer ATM experience are improved user security and the incorporation of customer CRM data into the user experience.

“Improved security may include biometric devices to positively identify the customer and greatly reduce or eliminate fraud at the ATM. The use of CRM data allows the customer experience to be customized to meet the customer’s preferences and needs. For example, banks can mine the CRM data to learn which transactions they do most frequently, the 34 ASIAN BANKING AND FINANCE | JUNE 2012

amounts they typically withdraw, the language they speak and so forth without having to ask. Then the transaction flow can be tailored to meet the customer’s individual needs as required.”

For Poon, the Video Teller Machine or Remote Teller incorporating self-service terminal (such as ATM and Cash Recycler) is a key hardware element that provides banking customers with a personalised transaction service.

It combines cash as offered by traditional ATM channels and financial consultation services via video conferencing technology.

Thorpe mentions cash recycling as an emerging trend in the market. “Cash recycling is clearly a trend, but one that comes with a significant degree of complexity from market to market, be that from a legal-cum-regulatory, risk, denominational or customer experience perspective.”

However, he says that the issue for smarter ATMs are still up for debate. “Smarter ATMs – multifunctional systems – again seem to be up for debate, but different countries have realised that there is no silver bullet here.

Customers can be driven to rarely having contact with the bank if there’s too much self-service, and just as likely to bank with someone else if there’s no loyalty. Equally, queuing at peak times can also be a major disappointment.”

Real-time information Banks also face difficult challenges in trying to deliver the ATM channel objectives across their organizations.

Hensley says that from a historical point of view, banks don’t have a real-time view of what is actually going on in their ATM network. “With today’s systems, the ATMs can immediately update ATM network monitoring and management servers with critical data that can be used to maximize ATM availability. These systems also reduce operational costs since they can be used to remotely take action to fix a problem with the ATM (e.g. by resetteing a device).

There wouldn’t be a need to dispatch a technician to the site, which is very costly. Being able

“Self-service may be the bait or the hook, but the branches are where real engagement still takes place”

to manage costs associated with running an ATM network and maximizing ATM availability are two main points of frustration for financial institutions.”

ATM networks are very complex with many suppliers and stakeholders, he added. “Multivendor ATM software can help reduce this complexity – and the frustration associated with it – by simplifying the environment. With multi-vendor ATM software, there is one single application running in all of the ATMs regardless of manufacturer.”

Challenges Poon cites a number of key challenges faced in maintaining an ATM infrastructure. First is the limited number or lack of onsite IT personnel. Second is the lack of a holistic view of calculating the operating cost of an ATM fleet. It is difficult to come up with a realistic ROI of an ATM channel; and outsourcing is costly and poses security risks. Third is Centralized Management for heterogeneous ATM environment or lack of unified ATM management/monitoring tool. Last is infrastructure downtime, which leads to transactional and financial losses.

According to Thorpe, cost control, fleet efficiency, and system uptime management are just a few of the problems banks have to face in dealing with the ATM channel.

He adds that finding and working with the right partners to provide service and support is always going to be an issue.

Really smart ATMs combine personalized self-service and personal banker-to-client engagement.

ASIAN BANKING AND FINANCE | JUNE 2012 35

36 ASIAN BANKING AND FINANCE | JUNE 2012