Asian Banking & Finance (January to March 2015)

DISPLAY TO MARCH 31, 2015

asian banks’ digital drive OCBC nisp & Maybank on DIGITisation of trade finance

ASEAN BANKS’ L-WORD STRUGGLE

Mobile wallets

VS. Banks

CUSTODY REPORT: BOCHK on OTP CHANGEs

analysis Foreign banks still struggle to expand footing in China

first Why Asian banks are struggling with UHNWI’s

country report Rising interest rates a double edged sword for SG banks

analysis Tighter liquidity impedes ASEAN banks’ loan growth

PAge 31

PAge 06

PAge 21

PAge 23

C2 SINGAPORE BUSINESS REVIEW | JANUARY 2014

FROM THE EDITOR

Editorial Assistant

Joana Rizza Bagano

Editorial Assistant

Alex Wong

The number of Asia’s ultra rich almost doubled to 4.3 million in the past five years, and this rapid increase is causing a pertinent trend in the region’s wealth management sector.

More retail banks, such as Maybank and China Merchants Bank, are trying to capture this market by expanding their private banking centres. We talked to some bankers and analysts and sought to answer this question: How can retail banks better serve this growing market of ultra rich Asians?

Lovelyn Labrador accounts@charltonmediamail.com

Furthermore, we found out that eight out of ten ultra rich Asians expect their wealth management options to be completely digital in five years. Are the banks ready to address this heightening demand for digital products and services?

Publisher & EDITOR-IN-CHIEF ASSOCIATE PUBLISHER production editor Assistant Editor

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Can we help?

In this issue, we also sought to explore if mobile wallets are beginning to become a threat to Asian banks. It turns out that mobile wallets in itself is a positive development for banks, but the real threats are the pre-charged methods where transactions are entirely disconnected to the banks’ spectrum. Find out what the experts have to say in our report.

You will also find comprehensive sector reports on Trade Finance and Custody & Clearing. Banks looking to step up in the trade finance sector are urged to join the digital revolution since through digitization, banking clients on both sides of a trade receive an enhanced transaction experience.

Meanwhile, custodian banks remain mired in regulatory haze, not to mention compliance costs that are soaring to record levels.

Tim Charlton Asian Banking & Finance is available at the airport lounges or onboard the following airlines:

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MICA (P) 249/07/2011 No. 67

ASIAN BANKING AND FINANCE | MARCH 2015 1

CONTENTS

24

30

Analysis Foreign banks still struggle to expand footing amidst China’s regulatory woes

28

FIRST

FIRST

10 Are Asian banks ready to cater to

the digital demands of Asia’s ultra rich?

06 Major overhaul 07 Riding the interest rate tide 07 The Chartist: Elevated credit costs

to persist in 2015

08 China lifts more foreign bank restrictions

08 Asian banks now more

conservative in raising salaries

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 101 Cecil St. #17-09 Tong Eng Building Singapore 069533

2 ASIAN BANKING AND FINANCE | MARCH 2015

22 Tighter liquidity impedes ASEAN

12 Are mobile wallets a threat to 14 10 banks in Hong Kong with the most number of ATM locations

16 Krung Thai Bank gears up for a

banks’ loan growth consistency

COUNTRY REPORT

banks?

sector report Asian banks urged to join the nascent digital revolution

ANALYSIS

06 Why Asian banks are struggling with UHNWI’s

sector report Why custodian banks in Asia remain mired in regulatory haze

20 Why rising interest rates are a

double edged sword for Singapore banks

stellar 2015 as asset quality improves

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

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News from asianbankingandfinance.net Daily news from Asia most read

RETAIL BANKING

Indonesian government planning to inject capital in state-owned banks The Indonesian government’s plan to inject IDR9trn in capital for the country’s largest lender, Bank Mandiri, underscores the strong capitalisation in the banking sector.

According to Fitch Ratings, Indonesian banks’ moderate risk profiles are backed by comfortable loss-absorption cushions, and they are well positioned to withstand a reasonably high degree of asset quality stress.

RETAIL BANKING

RETAIL BANKING

Singapore banks lauded for strong funding franchise Tighter liquidity conditions, rising rate hike expectations and tougher regulations have highlighted the importance of funding for Singapore banks.

According to a research note from Barclays, Singapore banks have a strong funding franchise, benefiting from high household savings rates and their ability to tap cheap longterm stable wholesale funding given their strong credit ratings.

Aborted mega bank merger in Malaysia signals tougher times The cancellation of a proposed merger of CIMB Group, RHB Capital and Malaysia Building Society (MBSB) to form a mega bank underscores the inherent risks related to such a tie-up amid a weakening operating and economic environment.

According to a release from Fitch Ratings, as such, the decision to not proceed reflects prudence on the part of CIMB, which has a track record of expanding through acquisitions.

Understanding Asia’s multi-tiered mobile payments market

BY PIERRE LELIEVRE Mobile is fast becoming part of a long-term strategy for banks, financial institutions, and merchants with the rapid convergence of mobile devices, internet, and eCommerce.

It represents an opportunity for businesses to satisfy growing expectations of consumers.

What you need to know about Acquisition and Leveraged Finance in India

BY SANDEEP AGGARWAL Acquisition and Leveraged Finance, in a broad sense, involves debt being raised from banks (mostly) to fund an acquisition, based primarily on the financial strengths and creditworthiness of the target.

In commercial banking, this is a fairly sophisticated product.

most read commentary Asian financial crown within Singapore’s reach

BY RAJESH YOHANNAN China is keen to woo more foreign investors to its shores via a program dubbed the ShanghaiHong Kong Connect. It’s a potential game-changer for the world’s secondlargest economy as financial hubs across Southeast Asia increasingly duke it out for foreign exchange and commodities trading supremacy.

4 ASIAN BANKING AND FINANCE | MARCH 2015

FIRST are internal limitations. The banking environment is evolving, and so are its regulatory requirements. Lee points out that retail banks should develop frameworks that directly address those requirements, such as tougher KYC and AML procedures, and tax reporting such as FATCA.

major overhaul

China’s leaders in the financial arena are bracing themselves for what could be a tough two to three years of change. The country’s central government is moving to rebalance the slowing economy, with major reforms sweeping through the banking sector amid mounting loans. The value of non-performing loans in China’s banks jumped 36% year-on-year to RMB767 billion at the end of Q3 2014 – the sharpest rise in four years. The NPL build-up is expected to continue well into 2015.

Banking and Finance in China: The Outlook for 2015 is PwC’s latest survey of the sector and covers domestic and foreign banks, trusts, peer-to-peer (P2P) lenders and Internet finance and auto finance companies.

“The respondents to our survey accept that they are going through a period of significant risk and change,” says Matthew Phillips, PwC China and Hong Kong financial services leader.

Banks are also seeing net interest margins squeezed to around 2%. This is a common level in most mature markets and means that banks in China will have to be less reliant on deposits and lending.

“The survey reveals a range of views on the severity of the situation. Most feel that NPLs will rise and that the situation will be risky, but manageable. Most also highlighted the significant reserves the banks have built up and noted that these could cover several years’ new write-offs at current run rates,” adds Phillips.

The survey also details the effects of new entrants and products. While new players often directly challenge existing market participants, many of the banks surveyed said they saw more opportunities for cooperation than competition.

6 ASIAN BANKING AND FINANCE | MARCH 2015

Asians have become a lot richer

Why Asian banks are struggling with UHNWI’s

W

hen DBS acquired the Asian private banking business of Societe Generale in 2014, it magnified the latest trend in the industry: retail banks capturing the market for high net worth individuals (HNWIs) in Asia, which has almost doubled to 4.3 million in the past five years.

Some of the banks that have jumped on the bandwagon include Maybank (Malaysia), which has expanded its number of private banking centres, not only across Malaysia but also in other countries such as Cambodia, and China Merchant Banks (China), which opened its first banking centre in 2007 and has now about 20,000 wealthy clients.

Affluence in Asia increases Private wealth management service was ruled by built-for-purpose private banks 30 years ago. But according to Alvin Lee, managing director of Maybank Private Wealth, after more than a decade of a low interestrate environment resulting in ample liquidity, affluence in Asia has increased significantly.

Unlike their global counterparts, Asian retail banks with successful franchising are in an ideal position to offer private wealth management services because of their accessibility and the diverse pool of clientele. However, alongside these external possibilities

After more than a decade of a low interest-rate environment resulting in ample liquidity, affluence in Asia has increased significantly.

Human resource woes Hiring people with the right skill set to reach out to the new market has also become crucial. Retail banks need a team of relationship managers with knowledge of financial products and a certain level of seniority, according to management consultancy firm Roland Berger.

Product offering is another tricky area. Most Asian retail banks are not equipped with the same product manufacturing capabilities and access to offshore products that global players have. For Lee, retail banks’ customer value proposition should be clear and definite as they are catering only to a specific group of clients from their mass-affluent and mass-market segments. Otherwise, these banks will risk being crowded out by players who have been fixated on their segments and locations since day one.

Mark Smallwood, head of franchise development and strategic initiatives, APAC at Deutsche Asset & Wealth Management, believes that the best strategy is for retail banks to determine the client segments that match their capabilities and strive to be the authorities in these segments.

“The effective use of technology in this segment is going to be critical. It is also important that retail banks do not get sidetracked from their core business and the core client segment which they service,” he adds.

Asia Pacific HNWI population (millions)

Source: CapGemini and RBC Wealth Management, World Wealth Report 2014 Includes Japan and India

FIRST Net interest margins vs short-term interest rates

Source: Bloomberg, companies, Nomura research

Singapore’s banks are in a good position to make money when interest rates rise.

DBS MBFC branch self-service banking

Rising rates bring margin relief

M

aking money has been tough for the past couple of years for the hard working bankers in the Marina Bay Financial Centre. The decline in property sales has reduced the demand for mortgages and ultra low interest rates have made it difficult for banks to make much of a margin on their loans. Instead they have had to resort to lending to offshore companies, mainly in China, to fuel loan growth.

But relief may be on the way in 2015, when it’s expected that the US will raise interest rates.

The trick banks use to make money when interest rates rise is to

increase the interest rate they pay depositors more slowly than the one they charge borrowers. The last time this happened was between July 2003 and 2006, when lending rates rose by 2.87% but the deposit rate rose by only 0.02% and even fixed deposit rates rose just 0.19%.

Singapore’s banks are in a good position to make money when interest rates rise because 9 in 10 loans have interest rates which fluctuate as they are not fixed. Also, over half of deposits are in cheque and savings accounts, which, history has shown, generally do not see the deposit interest rates lifted.

Nomura analyst Jaj Singh Bal notes that in the last 20 years, there have been three periods of interest rate hikes, and in all these instances, the Singapore banks turned in a positive performance two to three quarters before the actual interest rate increase.

One thing Singaporean banks can’t bank on is growing their loan book.

After more than four years of growing loans in the double digits each month, November 2014 signalled a real drop, with loans increasing by just 9% and mortgages 6%, the lowest since July 2007.

Even China, which seemed to have an unquenchable thirst for Singaporebased loans, is showing signs of lessening demand.

According to Sharnie Wong, an analyst with Barclays Research, the Singapore banks are guiding for high single-digit loan growth rates for FY15, which is a marked slowdown from the 12% CAGR for the past three years in aggregate.

the chartist: Elevated credit costs to persist in 2015 While elevated credit costs are forecast to persist towards the end of 2015, Morgan Stanley analyst Nick Lord does not anticipate a further material deterioration in charges.

Within Indonesia, he sees a fall in YoY charges at Mandiri and BCA, but by contrast charges are expected to increase for BRI. “In the Philippines, we see a modestly higher charge in 2015e than 2014e, but the overall loan loss charge is expected to remain at subdued levels. For the Singapore and Malaysian banks, we expect charges will increase from low 2014e levels, although we do not see significant credit quality problems,” he adds.

Singapore and Malaysia credit costs

TIP bank credit costs

Source: Company Data, Morgan Stanley Research, e=Morgan Stanley Research estimates

Source: Company Data, Morgan Stanley Research, e=Morgan Stanley Research estimates

ASIAN BANKING AND FINANCE | MARCH 2015 7

FIRST

China lifts more foreign bank restrictions

PH banking system impresses analysts

I

f a foreign bank were to consider breaking into China this month, the proposal would be met with delight rather than disdain – a drastic turnaround following the recent dismantling of requirements imposed on foreign banks. In January 2015, the government lifted several regulations that once burdened foreign banks, in order to speed up renminbi internationalization and court banking sector investments.

Foreign invested banks – which include wholly foreign invested banks and Chinese-foreign jointly invested banks – are no longer required to allocate a minimum of RMB100 million working capital to their China branches. Nor are they required to set up a representative office prior to incorporation. Moreover, the prerequisites for foreign banks’ applications to carry out renminbi business have been relaxed.

The easing comes at a time when the financial markets in China are becoming increasingly complex and diverse, and the country is looking to leverage the expertise of foreign banks, says Patrick Hu, partner at Jones Day in Shanghai.

“We believe that these relaxed

China is opening up to foreign banks

requirements further reflect China’s efforts to proceed with the renminbi internationalization, and foreign banks are encouraged to participate in this process,” says Hu. The changes will create a more level playing field in China’s banking sector and will attract foreign investors that may have previously stayed away due to the partiality towards domestic banks, says Sun Hong, partner, Norton Rose Fulbright. “Foreigninvested banks will be in a better position to compete with domestic banks from a regulatory perspective,” says Hong, pointing out that foreigninvested banks will spend less capital to set up more branches.

Foreign invested banks are no longer required to allocate a minimum of RMB100 million working capital to their China branches.

survey

Asian banks now more conservative in raising salaries Financial services professionals can’t expect hefty pay increases this year as new research

by Mercer projects base salaries to increase by a measly 2.3 to 3.2%.

In the more mature economies, such as Singapore, Mercer research suggests that fixed pay increases are around 3.5-4%, which are lower than all-industry movements. In countries with high inflation, such as Vietnam and Indonesia, fixed pay movements are higher - around the 6-8% mark.

According to Shai Ganu, Executive Rewards Leader for Mercer ASEAN, “Financial services companies in the region seem to be exercising conservative fixed pay increase.”

Ganu adds that the days of guaranteed, inflation-based pay increases may be limited, with more and more companies linking salary increments to performance and market pay competitiveness.

8 ASIAN BANKING AND FINANCE | MARCH 2015

Source: 2014 SG Mercer Total Remuneration Survey

The Philippine banking sector is freeing analysts of any worry about bank-related liquidity with its recent position as the most liquid banking system in ASEAN. According to Morgan Stanley analyst Nick Lord, unlike other ASEAN banking systems, the Philippines’ ample liquidity makes it immune to the same constraints on loan growth faced by other ASEAN countries.

He adds that borrowers in the Philippines are also not as indebted as peers, and the GDP growth outlook is the best in ASEAN, with GDP growth of an average 6.3% forecast for 2015e-2016e.

“We anticipate that deposit growth will remain close to current levels of 11%, as it has traditionally been driven by interest rate levels, and we expect these will remain unchanged in 2015e. We also expect a modest decline in the current account balance in 2015e, which will keep deposit growth in check. This system deposit growth is forecast to be the second fastest in ASEAN after Indonesia,” adds Lord.

HSBC economist Frederic Neumann concurs and says, “We don’t really worry about bank-related liquidity in the Philippines as banks are in better shape from an LDR perspective.”

He notes that credit growth may stay strong in the Philippines in 2015.

“In addition to the BoJ, the country is also in the process of further opening up the financial sector to foreign banks.

On 17 November 2014, the Philippine government passed a law allowing foreign banks to operate in the country and to acquire up to 100% of a local lender (previously they could only buy up to 60%).”

FIRST

Are Asian banks ready to cater to the digital demands of Asia’s ultra rich?

E

ight out of ten high net worth individuals (HNWI) in Asia expect their wealth management options to be completely digital in five years, but will banks be able to meet their clients’ desires?

Most experts predict that, given banks are currently under-equipped technologically, front- and back-office investments will be necessary to accommodate the everincreasing population of HNWIs who enjoy personally managing their assets and investments. Exactly what merit does an advanced banking system have?

The integration of technology into a bank’s system is expected to pay dividends in regards to client acquisition and client retention. Alvin Lee, managing director of Maybank Private Wealth, notes that face-to-face meetings and telephone conversations are good ways for relationship managers (RM) to meet new clients; however young HNWIs are more likely to be present on digital platforms. An increased cyber-presence is necessary for banks to reach these individuals.

Adopting an advanced back-office system wherein historical and scenario data are instantaneously analyzed is also important for tech-savvy investors to gauge and make their investments on the spot. Giving clients the ability to monitor their portfolios and check product listings anywhere, anytime

is invaluable, especially for those worried about sudden trend shifts affecting their risk-to-return profile.

As the clients themselves are directly making their own transactions, bankers are freed up to pursue higher value targets. A secure online presence would not only be more cost-effective, but also see flow products being more profitable.

Challenges and limitations However, technology can only go so far in the banking industry. Mark Smallwood, head of Franchise Development and Strategic Initiatives, APAC at Deutsche Asset & Wealth Management, comments: “UHNW clients have complex solutions which require strong interpersonal relationships and communication.”

Nam Soon Liew, managing partner, Financial Services, ASEAN at Ernst & Young, agrees. “This [UHNWI/HNWI] segment is known for demanding highly customized service offerings [such as] complex cross-border tax and estate planning. These services will unlikely be totally enabled by technology and will still rely on the ‘human element’ and superior client service provided by dedicated RMs.” Nevertheless, an advanced technological backbone will be necessary for banks to be

Asia’s ultra rich prefer digital wealth as management A more proactive stance is required e-banking rises

the go-to financial institution for HNWIs. Other finance channels, such as traders and brokerages, are already taking advantage of automated investment solutions, asset allocations, and portfolio management, and getting as many as 80 million users in six months in the process, as is the case with Alibaba’s Yu’e Bao. With more than 51% of Asia’s population expected to be online in 2018, traditional banks need to adapt in order to remain competitive across all market segments.

Bank watch

Affin Bank Berhad opens its 106th branch

Affin Bank Berhad expanded its network to 106 branches nationwide with the recent opening of its new branch in Kota Damansara in Malaysia. Located at the ground floor of the Cascades building, in the heart of Kota Damansara, the new Affin Bank branch covered a total area of 4,119 square feet.

The new branch offers a range of products and services including all deposit accounts, mortgage, credit card and hire purchase sales and wealth management to cater the needs of the residents in the area. The Kota Damansara branch and other existing branches were given a new “look” and the interiors were refurbished.

Furthermore, the new branch is also dubbed to be one of the target locations in the Bank’s transformation path and this is a key milestone in the journey to growth and customer service improvement.

10 ASIAN BANKING AND FINANCE | MARCH 2015

Affin Bank Kota Damansara Opening Ceremony

Jen. Tan Sri Dato Seri Ismail Hj Omar, Chairman, Affin Bank Group

Dato’ Zulkiflee Abbas, MD and CEO, Affin Bank Group

Affin Bank’s Kota Damansara branch

special feature: investments

GAM’s Smouha talks subordinated debt

Asian Banking & Finance spoke with Jeremy Smouha, Senior Advisor at asset manager GAM, regarding his investment outlook for this year.

Jeremy Smouha Senior Advisor, GAM

W

ith dropping oil prices, Greek Austerity, decelerating Chinese growth, and the pandemic of youth unemployment, fears abound that the world of global finance is entering an increasingly unstable era. At the same time, the investment product suite is growing and the opportunities for wealth accumulation are increasing; creating an uneasy paradox. What is undeniable is that investors embark on a course of cautious progression across an uneven landscape.

“The Global Financial Crisis in 2008 is the cue point for many investors, but we like to step back a little,” Jeremy Smouha, Senior Advisor at asset manager GAM, muses when quizzed regarding his GDP outlook for 2015. A positive but considered veteran economist, Smouha is quick to add that taking a backward step is particularly important when viewing the lingering concerns from his own neck of the woods - Europe. “GDP growth is not an economic construct, it is a sociopolitical measure. Political policies colour the direction of GDP. Unemployment is too high in Europe. We all still have to achieve employment growth. Policy-makers will

change the rules to make sure that this happens. They will do whatever it takes to bring unemployment down, encourage employment, and keep interest rates down. Basically, if we aren’t experiencing a systemic crisis, then we are looking at a general improvement, but there is still a feeling of instability.”

As such argues Smouha, as governments find ways of recovering from crises and promoting economic growth, the global economy reverts to natural stability.

“In terms of investment opportunities, subordinated debt doesn’t “like” crises, so it’s a good option now, due to high coupons and low duration, hybrid debt performs well in many environments. That being said, we aren’t out of the woods yet, so it is important to remain cautious. We are currently seeing a drop in Euro and the oil price plummet will have lagged positive effects.”

“Any bonds that give a good margin over LIBOR will remain attractive over a two-year view.”

Refreshingly pragmatic, Smouha, as an asset manager believes that in investment the means justify the end.

“Our goal is to develop a wide range of outcomes that makes money for clients rather than getting forecasts correct.”

The Cambridge-educated economist adds that while variable coupons tend to offer a very low yield, hybrid debt products are higher. In terms of particular industries, Smouha likes European, Hong Kong and Singaporean financial institutions, a group he defines broadly to include insurance companies.

“Spreads have widened enormously since the Global Financial Crisis in 2008.

Financial institutions are much safer than pre-crisis period, and the tier one debt is safer since Basel III. In terms of the Asian bond and floating rate note markets, I believe that Asian organisations that are investment grade, and again, particularly financial institutions, are very attractive and worth investing in.”

For Smouha, it’s clearly all about the banks (and their insurance brethren) over the next 24 months.

“Going back to my point about employment, we expect that while there is low inflation, central banks will delay raising rates until growth is well entrenched. Any bonds that give a good margin over LIBOR will remain attractive over a two-year view. When looking at a bond investment, you need a wide-angle lens to factor in accrued income over 12 months. Money is not made overnight, but money is made nonetheless.”

Smouha’s take home message directs investors to consider the swag of opportunities at the investment grade level, where security and yield-potential can coincide. “My take away is that the subordinated debt of the investment grade companies gives you safety and high income. To put it another way” concludes Smouha, “this class of debt provides bond investors high income and safety, as well as low sensitivity to rising interest rates.”

Challenges and pitfall exist, however, if that is kept in mind, so do opportunities for those that are savvy.

ASIAN BANKING AND FINANCE | MARCH 2015 11

FIRST NUMBERS Recruitment trends in banking across Greater China based on the findings of the 2015 Greater China Salary & Employment Outlook.

IN ADDITION TO LARGE COMMERCIAL AND INVESTMENT BANKS, MODERATE GROWTH IS EXPECTED ACROSS SMALLER AND MID TIER PLAYERS. Employers remain divided when it comes to employment activity in 2015...

4%

INCREASE

48%

INCREASE

Mobile wallets vs credit cards: Who wins?

Are mobile wallets a threat to banks?

W

hen Chinese third-party payment platform Alipay Wallet nearly doubled its user base from 100 million to an impressive 190 million users from January to October last year, many interpreted this as proof that traditional banking’s iron grip on commerce was slipping. No longer just a novel way of paying for goods and services, mobile wallets are becoming a force to be reckoned with as far as payment methods are concerned. But even as an emerging, aggressive rival to banking, mobile wallets are not exactly a bane to the sector, analysts say.

“We see the increasing use of mobile wallets as a positive development for banks, as it eases the customer experience in making payments as an alternative to cash,” notes Roy Heong, head of e-Business at OCBC Bank (Malaysia) Berhad. Management consultancy Roland Berger says significant volumes of mobile payments (eg, over 80% in the United States) are still linked to bank accounts, and thus operate as an additional distribution channel for banks’ cash management transactions – hence competing directly with debit/credit cards.

“So, the real threat for banks appear to be the pre-charged methods where transactions are entirely disconnected to the banks’ spectrum [and] deposit and transaction revenues are taken 12 ASIAN BANKING AND FINANCE | MARCH 2015

away,” says the firm.

Banks, however, must seize this chance to offer better services to their customers should they even have the slightest chance of engaging the highly popular mobile wallets. “Mobile wallets, in that respect, would not be a threat, but rather banks should view it as an opportunity to use big data to build customized value propositions to consumers, using the wallet as a delivery channel,” Heong adds.

Mobile wallets still have a long way to go in usurping the credit card as the preferred mode of non-cash payment. “All in all, credit cards and mobile payments are probably likely to coexist, for at least a few years still,” Roland Berger says. Deep connections to other business segments allow credit cards to sustain their firm foothold in the industry. “Mobile wallets are unlikely to be a threat to the credit card market for now. The card market is well-entrenched – with merchants, credit card companies and banks in a tightly interwoven network,” says Nam Soon Liew, managing partner, Financial Services, ASEAN at Ernst & Young.

At best, mobile wallets are expected to cater to a niche market, such as tech-savvy consumers who apply it for smaller purchases such as restaurant bills and movie tickets, while credit cards will continue to dominate the consumer field.

48%

Remain the same

BUT ARE LARGELY POSITIVE ABOUT AWARDING BONUSES.

86%

7%

7%

YES

NO

UNSURE

WITH THE MOST COMMON RANGE FOR BONUSES BEING...

1%-5% 6%-10%

7% 15%

11%-15%

22%

16%-20% 21%-30% 31%-40% ABOVE 40%

The real threat for banks appear to be the pre-charged methods where transactions are entirely disconnected to the banks’ spectrum.

21% 13% 6% 16%

EMPLOYERS WILL ALSO BE ON THE LOOKOUT FOR PROFESSIONALS WITH THE FOLLOWING SKILLS:

STRATEGIC ORIENTATION ANALYTIC FINANCE FINANCIAL PLANNING RELATIONSHIP MANAGEMENT Source: Michael Page

FIRST Dual Currency ATM Card and The Cirrus / Maestro ATM Card.

6 Citibank – 88 ATM locations With 88 ATM locations in Hong Kong Citibank places on the 6th spot. Aside from being able to purchase at any Visa merchant and earn up to 1% cash rebate, Citibank ATM cardholders get an Instant SMS alerts for each transaction of HK$500 or more.

Furthermore, Citibank offers a new Citibank ATM card which bills itself as more than just an ATM card. It boasts of its new chip technology that makes ATM transactions safer.

10 banks in Hong Kong with the most number of ATM locations

A

sian Banking and Finance put together a list of banks with the most number of automated teller machine locations. This list counts the number of places or locations of the ATM, not the actual number of machines.

This list only features the largest banks included in the rankings published last year in ABF’s sister publication, Hong Kong Business. While the number of ATM locations frequently changes, the following figures were provided by the banks as at September 2014, while the others were obtained from the company’s website.

1 HSBC Hong Kong – 700 ATM locations HSBC Hong Kong tops this list of largest banks with the highest number of ATM locations. HSBC’s customers can withdraw cash from its 700 ATM locations in Hong Kong. HSBC also has 78 RMD or HKB ATM locations within the city.

Aside from the bank’s ATM machines all over Hong Kong, HSBC also offers cash deposit machines, multi-function machines, cheque deposit machines, and passbook update machines as part of its express banking services – “making your life easier”.

2 Bank of China (Hong Kong) – 380 ATM locations Making it to the second spot, Bank of China (Hong Kong) boasts 380 ATM locations all over the city. BOCHK affirms that they upgrade their banking services and facilities continuously to enhance their customer 14 ASIAN BANKING AND FINANCE | MARCH 2015

experience. As stated on its website, BOCHK has more than 200 cash deposit machines, 200 cheque deposit machines and 542 ATMs in Hong Kong.

3 Bank of East Asia – 221 ATM locations With 221 ATM locations, Bank of East Asia customers can access their ATM services through BEA ATM card or any ATM card linked to JETCO locally, and internationally with VISA Plus, Cirrus and China UnionPay. BEA cardholders can obtain cash, transfer funds, and make account balance enquiries at any ATM displaying the JETCO symbol in Hong Kong, China, and Macau.

4 Hang Seng Bank – 220 ATM locations With 220 ATM locations, Hang Seng Bank comes in fourth. With Hang Seng Bank, customers can manage up to three Hang Seng Accounts on one card and transfer up to the available balance of these accounts.

Customers’ cash withdrawal daily limit is up to HKD20,000; they can transfer up to HKD999,000 for accounts that are linked to the same account card.

Standard Chartered Bank – 193 ATM locations In the fifth spot, Standard Chartered Bank has 193 ATM locations. Standard Chartered Bank offers 3 types of ATM cards to suit their customers’ unique needs, and allow them to manage up to 3 Standard Chartered accounts on one card, namely The UnionPay Single Currency ATM Card, The UnionPay 5

7 Industrial and Commercial Bank of China (Asia) – 76 ATM locations Industrial and Commercial Bank of China (ICBC) Asia grabs the seventh spot with 76 ATM locations. Over 59 machines of the bank supports instant cash deposits along with the brand new integrated function of settling credit card payment during cash deposits.

8 Shanghai Commercial Bank – 50 ATM locations With 50 ATM locations, Shanghai Commercial Bank hails at the 8th spot.

Shanghai Commercial Bank offers two types of ATM cards, UnionPay HKD Shacom Card and UnionPay Dual Currency Shacom card. UnionPay HKD Shacom Card holders can withdraw local currency and inquire balance at UnionPay and/or JETCO ATMs.

China CITIC Bank International – 48 ATM locations With 48 ATM locations in Hong Kong, China CITIC Bank International finds itself at the 9th spot. According to the bank’s website, in line with strengthening their security controls on their ATM services, they are implementing the Hong Kong Monetary Authority’s recommendation of using chip-based technology on all ATM cards.

9

Dah Sing Bank – 46 ATM locations Dah Sing Bank lands at the 10 spot with 46 ATM locations in Hong Kong. With Dah Sing Card, cardholders can withdraw cash and perform various banking transactions at Dah Sing / JETCO / Automated Teller Machines (ATMs) in Hong Kong, all provinces in China, SouthEast Asia, 24 hours a day.

Cardholders’ maximum purchasing amount per day is up to HK$20,000.

10

FIRST The Analysts’ call

What will drive KTB’s growth in ‘15?

Krung Thai Bank gears up for a stellar 2015 as asset quality improves

K

rung Thai Bank (KTB) may have suffered a 4% drop in earnings last year, but analysts believe the stateowned Thai bank has plenty to smile about in 2015: non-performing loans are becoming healthier, resulting in improved asset quality, and the bank is poised to beat competitors in attracting loans from smaller businesses and the retail sector.

KTB has managed to lower gross non-performing loans (NPLs) through

ticularly in the SME market, a position that will help it sustain its net interest margin and increase fee income this year.

Techahusdin believes KTB could generate loan growth higher than the sector average, thanks to its government loan exposure and the completed transformation program for SME and retail which could improve the loan-approval system.

SME and retail loans could balloon to 60% of KTB’s loan book in the next three years, up from the current 54%.

In 2015, KTB will target 6-7% loan growth based on a 3.9KTB has managed to raise its NPL 4.5% gross domestic product growth this year, and a 10-12% coverage ratio significantly to 127% in growth target for small SME 2014 from 112% the year before. and retail loans, says Techahusdin. KTB’s corporate and debt restructuring and write-off meamid-size SME loans, in contrast, are sures – in the fourth quarter NPLs stood expected to grow at a slower 5% pace. at THB56.1 billion, or 2.4% of total “We think the growth pattern could be loans, with asset quality improving 17% similar to 2014, where 1H14 loan growth from the previous quarter, says Jesada came mainly from SMEs, retail and Techahusdin, analyst at Maybank. project finance, while 4Q14 was boosted Techahusdin credits the significant by government lending,” says Narumol improvement in asset quality on effective Charnchanavivat, analyst at Nomura.

NPL management. To keep in line with Focusing on the SME and retail sectors its large-sized peers and given an unwill likely drive KTB’s earnings growth in changed credit cost at 72bp in 2014, KTB 2015, according to most analyst forecasts. has managed to raise its NPL coverage The strong lending outlook and improving ratio significantly to 127% in 2014 from asset quality could also serve as long-term 112% the year before, says Thananchai catalysts to KTB’s share price, says Jittanoon.

Jittanoon, analyst at UOB Kay Hian.

Charnchanavivat cautions, however, that Another bright spot for KTB in 2015 is the bank will need to allot extra provisions as its strength as a loans growth leader, parit focuses on providing loans to SMEs. 16 ASIAN BANKING AND FINANCE | MARCH 2015

Narumol Charnchanavivat – Nomura We think the growth pattern could be similar to 2014, where 1H14 loan growth came mainly from SMEs, retail and project finance, while 4Q14 was boosted by government lending.

The bank expects loan drawdown from infrastructure-related project finance may continue into 2015.

The overhaul of the credit approval process is another catalyst that could help to speed-up loan underwriting for the bank. Apart from representing an infra-proxy among Thai banks, earnings growth drivers for KTB could also come from the SME and retail sectors.

Jesada Techahusdin – Maybank We forecast 8% loan growth and 10% fee income growth this year.

We think the bank could generate loan growth higher than the sector average, thanks to its government loan exposure and the completed transformation program for SME and retail, which could improve the loanapproval system.

Key growth drivers for fee income are loan related fees, bancassurance and credit card fees. KTB’s asset quality has improved significantly on effective NPL management. We forecast NIM will improve this year as KTB has enough liquidity.

Thananchai Jittanoon – UOB Kay Hian Loan-to-deposit ratio eased notably to 88% at the end-2014. This should ease pressure on funding mobilization this year, providing room for NIM to expand. Factoring in 2014 numbers, we have moderately revised our 2015-16F earnings forecast by 6% and 4% respectively. Strong lending outlook and improving asset quality could serve as long-term catalysts for its share price.

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FINANCIAL INSIGHT: investment banking

Unstable market conditions will stymie M&A momentum

US rate rise feared to clip capital raisings in SG and HK

Asia’s top financial hubs saw exceptional growth in IPOs and M&As, but a looming cloud of volatility could slow down activity this year.

I

f investment banking gurus were to distill their forecast for the region in 2015, it would be: Sunny with a chance for showers. The generally bright outlook comes from Asia’s strong performance in 2014 during which IPO proceeds and M&As saw significant surges in Hong Kong and Singapore, respectively.

Hong Kong’s IPO proceeds grew 42% to $29.5 billion in 2014 with catalysts looking to drive further growth in 2015, while Singapore M&A has ballooned to US$96.9 billion. However, these stellar numbers could be overshadowed by heightened market uncertainty and market shake-ups, given an expected rise in US interest rates later this year.

The SEHK has been on a roll, rebounding to IPO activity levels it has not seen in almost half a 18 ASIAN BANKING AND FINANCE | MARCH 2015

IPOs in Hong Kong’s stock exchange raised $29.5 billion, a 42% growth in proceeds over a year ago.

decade. IPOs in Hong Kong’s stock exchange raised $29.5 billion, a 42% growth in proceeds over a year ago alongside a 6.9% increase in number of new listings.

This is the highest annual period since 2010 when IPOs issued a total of $57.5 billion in proceeds, driven by at least eight IPOs above $1-billion listed in HK for 2014, says Elaine Tan, senior analyst, deals intelligence at Thomson Reuters.

Hopes are high that this growth pace will continue through to 2015, especially as the recently opened Shanghai-HK Stock Connect attracts more investor interest and entices issuers to launch cross-border IPOs in the region and, says Tan. Overall Singapore M&A reached US$96.9 billion in

2014, up 131.5% from 2013, setting a new annual record after surpassing the previous record of US$70.4 billion in 2007. Tan says Singapore companies grew increasingly active with their overseas M&A activity, spurred on by a flush of available funds and pursuit of growth outside of Singapore in an attempt to diversify.

Acquisitions by Singapore’s state investment firms, GIC and Temasek Holdings, drove outbound M&A volume to US$46.4 billion in 2014, a 181.5% growth in deal value from 2013, the highest-ever annual period for the city-state’s overseas acquisitions.

Meanwhile, Singapore firms and global investment banks hoping to ramp up overseas acquisitions and bond offerings, both of which flourished in 2014, are advised to temper their rosy outlooks in 2015. An anticipated increase in US interest rates later in the year should clip capital raising efforts and slow down activity.

“In 2015 there is an expectation of higher market volatility, connected with anticipated

FINANCIAL INSIGHT: investment banking US interest rate rises later in the year,” says Nick Gardiner, head of capital markets, Boston Consulting Group of Singapore and the greater Asia Pacific region. “This could cause challenges for firms hoping to raise capital in both the equity and debt markets if ‘emerging markets’ are hit by significant outflows, or the macroeconomic slowdown, particularly in China, intensifies,” he adds.

Gardiner says firms may try to time their transactions to beat the US rate rise, which will lead to increased crowding risk for new issues in early 2015. In the Asia Pacific region, Chinese securities firms and provincial banks seeking to raise capital in Hong Kong will be the most vulnerable to this risk given exposures to Chinese property developers, but Singapore should also feel the pinch.

Singapore mergers & acquisitions rallied in 2014 more than doubling to US$96.9 billion from the previous year on the back of an attractive funding environment and a push from firms to strengthen their growth with overseas ventures, but the former catalyst should cool if US interest rates climb in latter 2015.

Tan says the Singapore rally in M&A activity and deal sizes mirrored the global comeback of jumbo transactions as dealmakers took advantage of low interest rates and the abundance of cash.

Singapore and the rest of the Asia Pacific region seized the opportunity. In fact, the Asia Pacific region’s M&A activity posted its strongest-ever annual period with deal value increasing by 56% to US847.7 billion from 2013.

The China connection Chinese banks and securities firms have been making bold moves up the investment banking rankings in Asia (ex Japan). While the top three investment banks in the region were Goldman, UBS and Morgan Stanley - the same three leaders as in 2013 - Chinese

banks and securities firms now comprise eight of the top twenty in the league table, with CITIC just missing a spot in the top five.

Investment banks will also continue to find it hard to secure large enough margins compared to established Western markets, says Gardiner, so what seems like a mighty resurgence in HK IPOs might not translate to robust profits.

“Asian deals typically involve a larger number of advisors splitting a lower-margin fee pool, so the economics of many deals are challenging for the banks involved. We expect to see the global investment banks becoming increasingly selective in their business model in Asia, playing to specific industry and product expertise, and continued aggressive competition from Asian regional banks bent on seizing market share,” he adds.

No slowing down Despite the reservations of investment banks, it will be hard to convince bullish issuers and investors to put on the brakes in 2015 given the acceleration seen in 2014. Tan says a flurry of Chinese companies completed their IPOs in HK in 2014 and accounted for 82.4% of the IPO proceeds in the city’s stock markets, worth at least $24.3 billion.

Singapore can thank the reforms in Chinese stateowned enterprises for feeding the fiery resurgence of jumbo M&A deals in the region, says Tan. One particularly outsized transaction in 2014 was CITIC Pacific’s acquisition of the main assets of its state-owned parent, CITIC Group, for US$42.2 billion. Another notable jumbo transaction was Sinopec’s stake sale in its retail unit to investors worth US$17.5 billion.

Looking forward, Tan says China’s venture into SOE mixedownership reform may well continue to be a major source of potential deal activity, although there is a question on whether

Elaine Tan

Nick Gardiner

the technology and real estate sectors can sustain their strong performances in what will be a more perilous 2015.

In line with Asia Pacific’s M&A growth, acquisition-related loans also ballooned by 24% to $49.7 billion in 2014, the highest annual period since 2008 when loans reached $52 billion.

Tan also attributes the low interest rate environment that prevailed in 2014 as the main driver for this record-breaking volume for Asia Pacific bond offerings.

Potential bright spots Should investment banks find disappointment in the HK IPO market, they can turn to the flourishing M&A market as another engine for growth.

Overall M&A activity involving HK companies soared and reached an all time high worth $176.2 billion, a 92.4% increase from 2013, says Tan. Another bright spot for banks to consider, at least based on recent growth, is the HKD-denominated bonds which raised more than HK$90 billion in 2014, the highest annual period for HKDdenominated bonds since 2012.

Windows of opportunity for the Singapore market have also opened. 2015 will likely see lower benchmark rates in the Singapore dollar bond market, which will provide a provide a favorable condition for new issues, says Tan. Although she warns that this could be dampened by investors’ expectation on SGD’s depreciation against the US currency.

Any Pacific Asia Involvement Announced M&A - Annual Volume

Source: Thomson Reuters

ASIAN BANKING AND FINANCE | MARCH 2015 19

Country report: Singapore

Singapore banks’ topline looking unexciting

Why rising interest rates are a double edged sword for Singapore banks

It can boost earnings and return on equity, but it can also dampen prospects for robust loan growth.

A

s the industry enters the year faced with a rising interest rate environment, a weak property market, and a slowing Chinese economy, the growth prospects for Singaporean banks’ top line are looking unexciting. Given these conditions, there is little reason to believe that the year will usher a new era of earnings growth.

On the other hand, the threats are likely to be moderate, as factors such as capital levels and asset quality seem to be adequate and manageable. Thus, 2015 will likely be no more than a test of the banks’ ability to navigate an already stable environment.

Positive and negative effects of rising interest rates Toward the end of 2014, short term interest rates spiked, signalling that short term rates have quite possibly bottomed from their depressed state, which began around late-2008.

20 ASIAN BANKING AND FINANCE | MARCH 2015

Singapore banks are able to reprice liabilities much less quickly than assets in response to changes in market rates.

“In just two days, the three-month and six-month SGD SIBOR have surged by an average 15 basis points, breaching levels not seen since April 2010. The three-month SOR, another benchmark rate, has surged at a faster 35 basis points since December 17 2014,” notes Ng Wee Siang, analyst at Maybank Kim Eng. Ng believes that short term rates are set to increase further moving forward, as rising short term rates reflect market expectations of further hikes in the future.

Rising interest rates have both positive and negative implications for Singapore’s banking sector. On the positive side, rising short term rates are likely to benefit the banks’ net interest margins, and therefore boost earnings and return on equity. This is the most compelling benefit of rising short term interest rates.

According to Jaj Singh, analyst at Nomura, 70% of banks’ interest yielding assets have short term maturities (less than 90 days). Moreover, around

85-90% of loans are floating, with short term rates as the benchmark.

In contrast, banks’ liabilities are far less sensitive to changes in short term market rates.

Ng notes that Singapore banks are able to reprice liabilities much less quickly than assets in response to changes in market rates.

On the downside, rising short term rates have several negative implications which are reason enough to remain cautious. Firstly, rising short term rates may put pressure on the repayment ability of households and other borrowers. At the time of writing, however, there is little reason to believe that this pressure point is likely to be realized. Although household leverage (as measured by household debt-to-income ratio) has risen steadily to 2.3X in 2013 from a low of around 1.9X in 2008; this is still comfortably below the pre-crisis peaks of around 2.6X. According to Ng, hikes in short

Country report: SINGAPORE term rates are really a cause for concern only if the hike is as sudden as, say, a rapid three percentage-point increase in three-month SIBOR rates from their end-2014 levels. However, Ng expects the hike to be moderately paced, giving borrowers’ repayment ability enough time to adjust.

Repayments from small and medium enterprise (SME) borrowers are also at risk of deteriorating recoverability given the rise in short term rates. Ng notes that SME businesses are less diversified and have smaller balance sheets, making it harder for them to keep up with an upswing in rates.

At worst, unsecured SME loans only comprise 21% of total outstanding SME loans anyway, so the threat of deteriorating asset quality on the SME loans side is moderate.

Rising rates could dampen prospects for new loan growth Another potentially negative effect of rising rates is the increasing possibility that higher rates may dampen prospects for robust new loan growth moving forward. In recent history, domestically sourced loans have already slowed in their growth, as Ng points out. In November 2014, for example, aggregate industry loans grew 7.5% year-on-year, the slowest since April 2010.

Ng notes that the main drivers of loan growth deceleration were business loans, which comprise 61.3% of aggregate industry loans. Consumer loan growth has also slowed to 4.9% year-on-year in November – the slowest rate of growth seen in the last 7.5 years. This was driven by slowing loan growth in all consumer subsectors, with some even recording contractions. Car loans and share financing, for instance, declined 19.4% and 13.9% year-on-year.

The only bright spot among the loan subsectors is the Building and Construction sector. “Among the larger business loan subsectors, Building and Construction loans were the only outlier with stronger momentum in recent months. Growth could hover at 10% in 2015,” says Ng. “The moderation in credit growth is likely to continue, in light of the more modest economic growth, a cooling property market, and rising interest rates,” notes Elaine Koh, analyst at Fitch Ratings. Indeed, slowing

loan growth seems to be an inevitable result of Singapore’s greater economic maturity. However, as far as 2015 is concerned, the beginning of a rising interest rate environment seems to be a positive development for the sector, all things considered.

“A mild deceleration in loan growth may indeed be positive by reining in the build-up of loan concentration in riskier market segments and easing pressures on bank funding and capital,” notes Koh. Nevertheless, decelerating loan growth may spell a more flattish top line for the sector in the coming years Singapore banks’ capital-raising needs at bay On the credit side, threats to asset quality, and therefore possible defaults, are fairly supported by adequate capital and liquidity levels if the worst comes to the worst. This means that, should any of the risks discussed above be partly realized, banks have adequate room to serve as buffer.

Fitch Ratings’ estimate of a fully implemented common equity Tier 1 capital ratio of around 12% is notably high relative to most of the highly rated banks worldwide. Moreover, funding and liquidity profiles are expected to remain healthy. This is supported by “the banks’ established domestic franchises and disciplined approach to deposit funding,” says Koh. Thus, any delays or defaults in loan repayments should be adequately offset by retail cash deposits held by the banks.

As far as liquidity is concerned, the main focus for the year will likely be foreign currency deposits. This is in light of the new liquidity rules under Basel III, which will be introduced during the year.

Nevertheless, given that banks’ capital adequacy ratios are comfortably above minimum required levels, and liquidity is ample supported by the banks’ deposit funding, equity investors can breathe a sigh of relief as the need to raise further equity capital is not compelling in the near future.

Strong regulatory environment to further cushion threats Aside from adequate capital and liquidity levels across the industry, a strong and stable regulatory environment is also expected to sup-

Unsecured SME loans only comprise 21% of total outstanding SME loans, so the threat of deteriorating asset quality on the SME loans side is moderate.

port banks’ risk management needs on multiple fronts. This simplifies matters for the banking sector even more, as far as risk management is concerned, as it implies that any factors beyond the control of individual banks can be dealt with through strong regulatory backing.

Firstly, a deterioration in credit quality or the ability of borrowers (especially households) to repay debts amidst rising interest rates will likely be buffered by targeted regulatory policies focused on certain borrower segments.

“Credit quality should hold up, backed by banks’ safety nets and macro-prudential measures targeting the consumer sector,” notes Ng. From a more macro perspective, any broad based threats should have a low risk of being realized, also thanks to a strong regulatory environment. “A significant and prolonged economic downturn or property market correction, causing severe asset quality deterioration and potential capital impairment, would be negative. However, Fitch believes that the risk of this is relatively low in light of government’s track record of timely countercyclical action,” notes Koh of Fitch Ratings.

Household debt-to-income ratio Edging higher but still comfortable

Source: MAS

3M/6M SGD SIBOR

At levels not seen since Apr 2010

Source: Bloomberg

ASIAN BANKING AND FINANCE | MARCH 2015 21

ANALYSIS: liquidity in asean

Credit growth and overall demand feared to slow

Tighter liquidity impedes ASEAN banks’ loan growth consistency

Following years of easy liquidity, loan-to-deposit ratios in ASEAN are some of the highest in the region and across emerging markets. How concerned should we be?

I

t’s difficult to talk about growth in Asia without mentioning the L-word. The region has delivered a strong rebound since the Global Financial Crisis, propelled by leverage. This, in turn, was fanned by extremely loose monetary conditions in the West and plenty of excess liquidity locally. Banks in Asia mostly held excess deposits that they could turn into loans once funding costs tumbled. This helped to sustain demand, even as exports to Western markets fizzled. The story, of course, is by now familiar.

What’s less well understood, however, is that bank liquidity in many parts of ASEAN is getting tighter.

This raises two immediate challenges.

First, it means that credit growth and, therefore, demand overall could slow.

Second, it renders local financial systems more vulnerable to volatility in global markets and a sudden rise in 22 ASIAN BANKING AND FINANCE | MARCH 2015

“As excess deposits shrink, banks are left with two choices: they can slow lending or borrow from wholesale markets to top up their funding.”

funding costs, for example, prompted

by Federal Reserve rate hikes.

At issue, here, is the rise in loanto-deposit ratios (LDRs). In much of ASEAN, as elsewhere in the region, banks primarily fund lending with deposits. Their growth, however, has slowed of late. As excess deposits shrink, banks are left with two choices: they can slow lending or borrow from wholesale markets to top up their funding. The former inevitably harms GDP growth, the latter leaves banks more exposed to swings in financial conditions. Lending in emerging markets is especially sensitive to financial market volatility.

This is even more so when banks rely on wholesale or interbank sources to fund credit growth.

Shallow capital and interbank markets can quickly restrict access to affordable funds when volatility climbs.

In addition, unless directly offset by

the central bank, balance of payment positions have a bigger impact on local liquidity than in advanced economies, with capital outflows or current account deficits, for example, draining aggregate liquidity from the local financial system. This also explains why the coexistence of high LDRs and current account deficits is usually less of a challenge in developed markets, Australia being a key example. Lastly, many years of low US interest rates brought substantial foreign portfolio flows, abetting the creation of excess liquidity. We are now starting to see signs of the flip side of this equation across certain markets in ASEAN, such as Malaysia, where outflows are partly contributing to tightening interbank liquidity and a depreciating currency.

Why do LDRs matter?

LDRs are, therefore, a good measure

ANALYSIS: liquidity in asean “It is relevant enough for us to keep an eye on LDRs in Asia as a measure of the credit growth capacity of the banking sector and its vulnerability to financial volatility.”

Foreign currency LDRs highest in Thailand and Singapore

of banks’ robustness and their capacity to extend loans. A low LDR signifies that a bank has excess deposits to deploy, and because deposits are a relatively cheap and stable funding source, loan growth is easier to sustain. In this report, we look at aggregate LDRs for entire banking systems. While this may obscure differences between individual lenders, it still tells us whether a given banking system has excess deposits or is in short supply.

Generally, LDRs follow a common cycle over time. At the start, they are relatively low. Gradually, as credit growth accelerates, they tend to rise.

Note that when a bank extends loans, a part of the proceeds are ultimately recycled back into banks as deposits, ready to be lent out again.

However, the process isn’t exactly water-tight: there is some leakage inthe sense that not the entire loan amount returns to banks as deposits – some money ends up elsewhere, funding transactions in the wider economy. This means that credit will rise faster than deposits over time. As mentioned, when LDRs rise above 100, a bank can turn to wholesale or interbank markets to top up its funds.

But this is risky and drives up the cost of funding (and of loans, all else equal). As a result, bank lending slows or at least becomes more sensitive to potential shocks (like financial market volatility). Finally, if (or, rather, when) a recession ensues, credit sharply contracts and risk-averse firms and households raise their deposits. This brings the LDR back down and the

cycle can begin anew To be sure, this is a simplified model of what occurs in the real world; however, it is relevant enough for us to keep an eye on LDRs in Asia as a measure of the credit growth capacity of the banking sector and its vulnerability to financial volatility.

It all boils down to funding When we talk about liquidity in ASEAN, it is natural to think back to the role that currency mismatches played in the Asian Financial Crisis, caused in part by short-term bank lending in USD. Since then, the situation on the ground has changed substantially, and the core banks are known to prudently manage their FX exposure, thanks, in part, to robust central bank oversight. However, foreign currency LDRs are creeping up in some countries, and are the highest in Thailand and Singapore, followed by Indonesia, where the foreign currency LDR is a tad below the domestic currency measure.

Data on foreign currency LDRs are a bit harder to come across. We have system-wide data from Singapore, Indonesia, Thailand and Malaysia, and data from Moody’s only covering the banks in their coverage universe – thereby a proxy for the largest and generally strongest banks. In Thailand and Vietnam, Moody’s data show high ratios, while in Singapore and Indonesia we see higher readings based on systemic calculations.

Taking a step back, we must think about the implications of foreign currency LDRs. First, they contribute

to the high local currency loan-todeposit ratios. While banks have been attracting foreign currency deposits to try and organically fund their foreign currency loans, a portion of these foreign currency deposits may otherwise have ended up in local currency deposits. This is a development that the Monetary Authority of Singapore has identified as a reason driving overall LDRs higher in the city state.

Moreover, higher foreign LDRs imply that the gap has to be met by other sources: hard currency bonds, direct overseas foreign borrowing, or short term market funds, among others.

In any case, the liabilities are usually hedged by banks and USD funding conditions have been quite favourable recently. ASEAN banks’ USD bond issuance and borrowings have surged 70% from 2009 to 2013. Rating agencies look closely at the foreign funding mix in assessing creditworthiness, and a higher degree of diversification away from market funds and toward longer-dated paper is positive.

However, while banks may have largely improved their exchange rate risk, there are signs that some corporates have left some currency exposure unhedged. For example, during the protests in Thailand earlier this year, one reported a FX translation loss due to an unhedged position of USD2bn of foreign currency debt used for an acquisition. While banks tend to lend USD to firms with USD revenues to use as a partial hedge, it is unclear how many firms are fully hedged, especially since certain some derivative markets are quite shallow across ASEAN, resulting in expensive hedging costs. By Frederic Neumann, economist, HSBC Global Research

Credit-to-GDP in ASEAN approaching historical highs

Source: CEIC, HSBC

ASIAN BANKING AND FINANCE | MARCH 2015 23

SECTOR REPORT 1: Trade finance

Demand for digitization of trade finance rises

Asian banks urged to join the nascent digital revolution

Asian banks are becoming digitization pioneers to capture millions of dollars in new revenue streams but is it better to sit on the sidelines for now?

W

hen Maybank introduced its new online portal TradeConnex, it generated time and manpower savings for its trade finance customers, including a prominent palm oil player in East Malaysia and its counterpart in China. Maybank represents one of the emboldened Asian banks that are riding the digitization wave with gusto, taking the first-mover advantage, even as other banking leaders express caution in taking on the risks of early adoption.

Asian banks would do well to embrace the nascent digital revolution sooner than later and develop corresponding products and platforms, says John Wong Tze Yow, group head, transaction banking at Maybank. Trade flows are becoming more voluminous and complex, which is what gave birth to bank payment obligation (BPO), an 24 ASIAN BANKING AND FINANCE | MARCH 2015

“Through digitization, banking clients on both sides of a trade receive an enhanced transaction experience.”

alternative mode of trade settlement.

“Apart from promoting a more efficient way of doing trade, BPO has also enabled banks to look into restoring a vital financing tool for exporters, especially in emerging markets where pre-shipment financing was lost in transition in the shift from letter of credit to open account trade,” says Yow. Through digitization, Yow says banking clients on both sides of a trade receive an enhanced transaction experience. Suppliers receive their accounts receivable and funding faster, and benefit from expedited collection from buyers. Meanwhile, buyers find it easier to reconcile and streamline their payables.

These benefits have driven the demand for digitization of trade finance among large corporates in the commodity space, says Hari Janakiraman, head of Global Production

Management, Trade & Supply Chain Operations at ANZ. These corporates take advantage of cost optimization through process efficiencies and working capital improvement through early realization of payments.

“As an increased number of companies expands into new regions around the globe, the need for trade finance mechanisms that offer a host of benefits is intensifying,” says Yow. “Open account and technology driven supply chain finance (SCF) are fast becoming the order of the day.”

Yow cites data from SWIFT that open account trading currently represents 85% of global trade transactions, reducing the role of traditional trade finance such as letters of credit and documentary collections to about 15%.

Faster, easier and less costly, open account trading is becoming a more convincing choice for buyers and sellers, and is one of many ways digitization is transforming trade finance.

“The take up of SCF programmes is on the rise globally as companies realize big benefits both in terms of cash flows and key supplier stability, and banks providing solutions on both payables and receivables side – to create an end-to-end SCF solution,” says

SECTOR REPORT 1: Trade finance preferred instrument for the nearest future. “The main advantage of post-financing for the customer is to purchase commodities abroad without paying for them at the moment of purchase, having grace for payment, and reducing costs of transaction, as in this case interest rate lower than in the case of direct crediting,” she adds.

These limitations of digitization and prevailing advantages of traditional trading finance instruments make it harder to get transaction parties on board with digitization initiatives. “Digitization of trade finance has been talked about for quite a few years now but the progress has been very slow, and this has made banks cautious in making investments,” says Janakiraman. “We still have a long way to go before everyone is on board. Therefore we do not expect customers to change their trading pattern to e-commerce in the near term,” he adds.

How can digitization succeed?

Yow. He adds that initiatives from APEC 2015 should only accelerate SCF take-up, with APEC looking at a 10% increase in regional supply chain performance and aiming at it becoming 25% easier to do business in the region by the end of 2015.

“These objectives resonate with the need for an efficient and robust supply chain by local businesses as well as foreign multinational corporations operating in Asia. SCF Supply chain financing is one such solution.”

Technology and collaboration Digitization can only succeed if banks harness two critical resources: technology and collaboration. Technology has become sophisticated enough for banks to reach customers on a global scale, and trade finance is no exception, according to a spokesperson from OCBC NISP. Trade finance departments can tap into current technology to centralize operations globally, to meet customer expectations for efficient, fast, accurate and convenient trade services.

However, technology is only half of the equation. For this technology to transform into a harmonious system that drives up customer value, banks must collaborate with corporates, banking networks and technology service providers.

Yow says digital collaboration, when done well, can give birth to impressive platforms. He notes that some platforms are equipped with comprehensive and consolidated transactional reports, online account management and customer service features, all in a single platform to enhance user experience. This brings tremendous value to both suppliers

and buyers, and will be a platform that trade finance customers will gladly pay for. This increases customer satisfaction and loyalty, bringing banks more recurring business over time. Successful digital executions allow banks to both decrease costs and increase profits.

When to go ‘all in’?

Trade finance leaders agree that digitization is the future of the sector.

Trade transactions will only increase and become more complex, especially with factors such as the APEC 2015 looking to relieve restrictions and regulations, according to Kasikornbank. But despite all the hype around digitization, it might be better for banks to bide their time when it comes to digitization.

A spokesperson from Kasikornbank says the digitization of trade finance will not experience a significant shift in the near future as companies are still executing their transactions through remittance and letter of credit. But on the long term horizon, it would be more compelling for banks to digitize as their customers look to simplify and minimize the cost of their transactions.

Newer tools introduced by digitization may also find it hard to replace classic trade finance tools such as letter of credit, bank guarantee and documentary collection, the latter group serving to eliminate the risks companies may bear while purchasing and selling commodities abroad, says Chinara Alybaeva, chief specialist at Optima Bank’s global transaction banking department.

In fact, Alybaeva foresees letter of credit with post-financing as the

Chinara Alybaeva

Hari Janakiraman

Jan Bellens

John Wong

Digital compatibility Janakiraman says that unlike other sectors, trade finance transactions involve multiple parties such as shipping companies, chambers of commerce, insurance companies, customs authorities, and inspection companies. “To completely digitize trade finance, all these intermediaries must also move to electronic documentation and channels.”

This issue of digital compatibility with trade parties is palpable in Asia with much of trade commerce documentation still conducted via paper, says Jan Bellens, global emerging markets leader for banking & capital markets at EY. “For example, bills of lading, shipping and custom documents all require authentication by stamps and signatories upon physical delivery at point of acceptance. This factor limits the ability of digitization to completely transform trade transactions and finance.”

And while the trade industry has indeed made significant strides in digitization, Bellens believes global acceptance will take time. “Until the trade industry is able to achieve global acceptance of both digital signature and supporting trade document formats, paper will continue to be the primary method of documentation.”

ASIAN BANKING AND FINANCE | MARCH 2015 25

CO-PUBLISHED CORPORATE PROFILE

Thailand’s property market goes overseas with Sansiri and Asia Bankers Club Going beyond brick and mortar is going to the greatest possible lengths.

The Base Park East

C

onsistently boasting of a unique philosophy in providing not just homes but a lifestyle, Thailand property developer Sansiri is marking another milestone in its 30 years of providing quality real estate services.

The company is riding on the wave of Thailand’s promising property outlook and has just recently strengthened its partnership with Asia Bankers Club in targeting retail investors for foreign property investments in the country.

Thailand’s property market has rapidly gained traction in recent years despite a slight hiccup in early 2014 due to political instability in the country. Sansiri believes that Thailand’s property market will continue to grow in the next two years, alongside growth in the market for Central Bangkok condominiums and a healthy growth in the rental market due to constantly increasing demand, not to mention a constant surge in tourist arrivals to the country.

Sansiri forecasts that the real estate market in the ASEAN region will heat up 26 ASIAN BANKING AND FINANCE | MARCH 2015

further and that any property investments made today, particularly in Thailand where property prices are relatively low, will prove to be sound investment decisions.

Lifestyle check Regarded as Thailand’s leading property company among expats and foreign investors, Sansiri has grown from a single project 30 years ago to around 110 simultaneous projects at the present.

Sansiri CEO Apichart Chutrakul says that the company is now on a roll in 13 provinces across Thailand, with a 1,500-strong labour force which does not yet include an even bigger servicing team.

Central to Sansiri is its philosophy of providing not just brick and mortar houses, but of providing a unique lifestyle and brand experience.

“In the province, whether it’s Bangkok, or off-country like Phuket or Chiang Mai, we do everything in terms of real estate and beyond,” says Chutrakul.

Central to Sansiri is its business philosophy of providing not just brick and mortar houses, but of providing a unique lifestyle and brand experience.

“We have our own blend of coffee, blend of tea, water, music. We have our own lounge which nobody has done,” adds Chutrakul, referring to two Sansiri lounges present in Siam Paragon and Phuket. The Sansiri lounge is easily accessible to any Sansiri patron who longs to unwind or simply have a cup of tea after a long day’s work. The lounge at Siam Paragon, in particular, has its own library with an exhaustive collection of art, design and lifestyle books.

“We are more than a fully integrated real estate company which is a little bit different than hard and fast and very dry real estate companies which you can see around the world,” Chutrakul says.

Sansiri homes are known to be carefully

CO-PUBLISHED CORPORATE PROFILE designed spaces, customised in detail depending on the buyer’s lifestyle and preferences. Sansiri also offers after-sales services and Sansiri Family privileges to ensure the perfect living experience for all residents.

If Sansiri has any secret recipe to success, it would be this philosophy of providing a lifestyle to its clients.

Chutrakul maintains that this mission of going beyond brick and mortar has allowed the company to grow very fast and rake more-than-expected profits.

Enter Asia Bankers Club Sansiri’s growing business has been attracting swarms of foreign investors due to its unique take on real estate.

While the property developer is at it, the Hong Kong-based Asia Bankers Club is affirming the opportunity as enthusiastically.

Asia Bankers Club is an investment club for banking and finance executives, primarily offering a wide range of investment products such as foreign properties, wines, art pieces, classic cars, antiques, jewelry, and collectibles only to its members and their guests which consist of professional investors and executives from the finance and corporate industries.

ABC’s newly formed subsidiary, Golden Emperor Properties, aims to provide foreigners with good investment opportunities in Thailand properties.

The company has formed a strategic partnership with Sansiri, the leading property developer in Thailand, to introduce the developer’s latest projects to the Hong Kong public.

Terence Chan, sales director and partner of Golden Emperor, says that they are focused on educating Hong Kong investors on Thailand properties through regular seminars, exhibitions, and investment trips. “We are a relatively new company, and we have heard good feedback so far,” Chan says.

The ease of doing real estate in Thailand is very attractive to foreign buyers due to the fact that foreigners have the same privilege in property buying as the Thai buyers. Unlike in other countries where properties are sold on a leasehold basis, most of the condos in Thailand are freehold and command non annual property tax unless rented out.

“We are one of the leading real estate companies who can deal better with our

foreign clients. We have capable staff in terms of language, business. We are the only company fully integrated in terms of settling in; we have our own concierge.

You can buy the condo, sell it out, rent it out, we can do it all for you,” offers Chutrakul.

As a testament to Sansiri’s trusted brand, sales achieved from foreign buyers alone during the first eight months of 2014 closed at 585 million baht, up 460% from the same period last year. In fact, total sales from the past has reached more than 8,500 million baht.

The consistent rise in value of Sansiri properties is due to the brand excellence

ABC’s newly formed subsidiary, Golden Emperor Properties, aims to provide foreigners with good investment opportunities in Thailand properties.

that it has upheld over the years.

The consistent rise in value of Sansiri properties are due to the trustworthiness of the brand, the location, the design excellence, outstanding after-sales service and effective property management.

The company is making good use of this reputation in bringing the Sansiri brand to even more Thailand-based expats and foreign investors, particularly in the UK, Russia, Australia, Europe and Scandinavia, Japan, China, Singapore, Taiwan and Hong Kong as well as the ASEAN region.

CONTACT www.sansiri.com +66(0)2 201 3999 internationalbuyers@sansiri.com www.goldenemperor.com +852 3998 3001 contact@goldenemperor.com www.asiabankersclub.com +852 3998 3001 contact@asiabankersclub.com

The Base Park East

Apichart Chutrakul, CEO

Quattro

ASIAN BANKING AND FINANCE | MARCH 2015 27

SECTOR REPORT 2: custody & clearing

Uncertainty is the toughest part of OTC regulation

Why custodian banks in Asia remain mired in regulatory haze

Asian banks feel constrained to harness the clearing and custody market’s high-growth potential.

T

he outlook might be bright for Asian custodian banks as the region sees a rise in affluent individuals looking to trade and invest, but prevailing regulatory uncertainty is driving up compliance costs and triggering bouts of second-guessing.

Asian custodian banks have to grapple with hard decisions – from choosing the best clearing platform to the most suitable business model for their specific suite of operations. As if these choices are not difficult enough to make, banks need to be wary of shifting regulations that can put them on the back pedal.

Over-the-counter (OTC) clearing regulations, for example, are far from being set in stone.

“The toughest part of OTC regulations is the element of uncertainty related to the fact that the landscape is still being finalised,” says Edward Chan, deputy general manager and head of financial markets manage28 ASIAN BANKING AND FINANCE | MARCH 2015

OTC central clearing in Asia is still in the developing stage, so banks in the region can play a bigger role in shaping a more accommodating environment for clearing solutions in the region.

ment at Bank of China (Hong Kong).

“As some regulatory issues remain to be clarified at this stage, banks have to engage in long and costly process of consulting different counsels to make sure that the regulatory requirements are met,” he says.

Another key issue confounding banks is market fragmentation. Chan says in Asia alone, apart from Hong Kong, other clearing initiatives are also being undertaken by Shanghai, Japan, Singapore, India, Korea and Australia.

With OTC central clearing platforms competing to be the preferred choice of banks, this makes it harder to select the appropriate clearing house, says Chan. Banks now need to consider a multitude of factors such as the set-up costs and geographic advantage offered by different clearing houses, as well as whether a clearing house operates on an agency basis or a principal-to-principal basis as part

of their risk analysis.

“The region may be increasingly open but different regulatory regimes and their rules are still far from being harmonised,” says Fanny Wong, deputy general manager and head of custody, global transaction banking at Bank of China (Hong Kong).

“Compliance costs have long become a headache for banks, likewise for the need to balance risk-based return versus capital costs and liquidity,” she adds.

Developing stage Analysts acknowledge that Asia is experiencing growing pains in what is seen as a promising but still pubescent market for custody and clearing services. But this risk can be seen as an opportunity for to help shape the rules of this emerging market.

“OTC central clearing in Asia is still in the developing stage, so banks in the region can play a bigger role

SECTOR REPORT 2: custody & clearing in shaping a more accommodating environment for clearing solutions in the region,” says Wong.

She says stakeholders and policymakers can start educating the market players and end-users about these impending changes, which are likely to impact their obligations, costing, daily operations or even investment strategies.

It will not be in the best interest of banks to become passive participants in this regard. Influencing the regulatory environment can help ease compliance requirements for banks, and make the rules more favorable for them. Every advantage will count as Asia becomes a nexus for trading and investment.

“Opportunities in Asia are vast as it represents one of the world’s fastest growing markets,” says John Wong Tze Yow, group head, transaction banking at Maybank.

He points to PwC estimates that assets under management (AuM) in the Asia-Pacific region will rise to $16.2 trillion by 2020, from a 2012 total of $7.7 trillion, driven by the increase of mass affluent and high-net-worthindividuals in the region.

Also, according to The Boston Consulting Group’s Global Wealth 2013 report, Asia-Pacific will surpass North America as the world’s largest wealth region by 2017. China is said to be a key driver of this growth with a projected gain in wealth of 104% by 2017 that would place it as the world’s second wealthiest country, ahead of Japan, notes Yow. The same report predicts that India’s wealth will jump by 127 percent. The AUM for mutual funds in the region is expected to grow at

a compound annual growth rate of 12% over the next five years, reaching US$503 billion in 2018 from $286 billion as of year-end 2013.

Given this projected explosion of Asian wealth, it is not surprising that custodian banks are sharpening their claws to prepare for the cutthroat competition for clearing and custody clients.

Custodian bank competitiveness What will it take to stand out as a custodian bank in Asia? “The litmus test for competitiveness is whether one can continue to deliver its core competencies plus value-added business information while remaining nimble to customize services for clients in a risk-contained manner, says Wong.

Wong adds that custodians must start embracing the latest technology and to keep abreast of the development of mobile banking, as these areas could become sources of competitive advantage.

Transparency is also emerging as a key differentiator among custodian banks as clients become more hungry for information to drive their decisions.

“For years, custodians continue to face increasing challenge arising from the need for enhanced tax transparency and regulatory controls,” says Wong.

Yow agrees with the need for transparency, citing it as a competitive advantage for custodian banks.

Banks need to help their clients better understand the increasingly complex operations so they can make better decisions: From how things settle, how accounts are opened and how assets are actually held within the

What will it take to stand out as a custodian bank in Asia?

local market. “With current regulatory changes, clients want to have a clear understanding of the risk, cost and operational implications of these changes,” says Yow. Emerging business models Asian banks looking to break away from the pack and turn in record profits will have to keep abreast not only of changes in the regulatory environment but also the emergence of viable business models.

“Global and regional swaps regulation has implications for Asian banks, and we see several emerging OTC Fanny Wong business models for Asian banks,” says Jan Bellens, global emerging markets leader for banking & capital markets at EY. “We are seeing a changing structural landscape for Asia-Pacific OTC. Regulatory reform and significant macro factors are forcing a consolidaJan Bellens tion in the market,” he adds. “his will be the end of embedded optionality in bank’s business models for all but the largest players who can afford covering the entire gamut of products and services.”

Bellens foresees the market moving away from the traditional ‘central’ John Wong booking model to a ‘regional hub’ booking approach that alters the systemic risk within each jurisdiction across Asia-Pacific – an offshoot from the growing extra-territorial outreach of US and European OTC derivative reforms.

Specifically for the OTC derivatives market in Asia-Pacific, Bellens says there are three emerging business models: Inter-dealing clearing, domestic client clearing and global client clearing.

For inter-dealer clearing, Bellens says the main determinant of whether a bank wants to join a clearing house as a direct member is the extent of that bank’s market making activities in the products available on the clearing house.

Global and But Bellens cautions that the regional swaps domestic client clearing market is regulation has estimated to be small, both on relative implications for Asian banks, and and absolute basis. Global client clearing is an option as well but there is we see several almost no demand for client clearing emerging OTC business models in Asia-Pacific central counterparties for Asian banks. from Europe or the US. Edward Chan

ASIAN BANKING AND FINANCE | MARCH 2015 29

ANALYSIS: Foreign banks in china

Most foreign banks find the market challenging

Foreign banks still struggle to expand footing amidst China’s regulatory woes Non-Chinese entities hoping to share in the country’s success face a long list of barriers to conquer.

F

oreign banks are represented by over 400 different financial institutions in mainland China. This figure includes locally-incorporated foreign banks, branches, and subsidiaries. Foreign banks are present in 69 cities and 27 provinces in China. In 2013, these banks had total assets of RMB2.56 trillion and after tax profits of RMB14.03 billion.

However, growth in the total assets of the foreign banks slowed to 7.66% in 2013 from 10.66% in 2012.

Foreign banks have made great efforts to build their presence in China. Based on China Banking Regulatory Commission (CBRC) Annual Report 2013, 42 foreign banks have established locally- incorporated units since 2007, and there are now 92 foreign bank branches. These banks hope to benefit from new opportunities inside China as a result of domestic financial reforms, but also increasingly, from opportunities that arise as Chinese corporates expand internationally across their global networks.

It is unlikely that many new foreign banking entities will enter the mainland China market over the next five years, with the exception of Taiwanese banks and banks from other parts of Asia.

There has been significant discussions over the last few years on the market share of foreign financial institu30 ASIAN BANKING AND FINANCE | MARCH 2015

At the end of 2013, foreign banks’ market share was just 1.73%, which was below the market share of 1.84% in 2004.

tions in China. Both foreign banks and foreign insurance companies have found it difficult to expand their respective market shares. If total assets are used as the metric, then the foreign banks have clearly failed to gain traction within the expanding Chinese banking industry.

At the end of 2013, foreign banks’ market share was just 1.73%, which was below the market share of 1.84% in 2004. However, market share in terms of total assets does not tell the whole story. Several participants mentioned that if onshore and offshore assets are included, the market share of foreign banks is around 4.9%. It also suggested that foreign banks’ share of the derivatives market is much higher, at around one-third.

Most, if not all foreign bank entrants, have found the market challenging. As a result, most have adopted niche strategies focusing on areas where they have a particular expertise or competitive advantage.

For example, Spanish banks have attempted to leverage their strong position in Latin America, Japanese and Korean banks have serviced the needs of their home country corporates, and Australian and Canadian banks have tapped their resource sector skills and connections.

Some foreign banks have attempted to cover both retail and wholesale banking while others have focused on very narrow market segments.

ANALYSIS: Foreign banks in china It is fair to say that at this stage of these foreign banks’ evolution and development in the world’s second largest economy, they would have hoped to have achieved more.

Drivers of change Against this background, it is important to consider the different drivers of change in the China marketplace.

Participants in this survey readily identified a number of fundamental drivers that have the potential to change the financial market radically, and open new markets for foreign banks.

The financial reform agenda, which picked-up momentum after the Third Plenum in November 2013, promises to herald a new era and launch a raft of opportunities for foreign banks. This includes further interest rate liberalization, increased RMB internationalization, and the establishment of the Shanghai Free Trade Zone.

In addition to regulatory reform, there is also the e-finance revolution and the new financial environment resulting from the digitalization of financial services.

The e-finance revolution is driving changes in consumer behavior and also, being impacted by such changes.

Mobile banking and the power of social media are already creating new opportunities as well as threats for foreign banks that have entered the retail banking arena.

The difficulties of limited physical distribution channels may be offset by the opportunity afforded by online and mobile banking. Strong global brands, state of the art technology, innovative, well-designed products, and excellent service may win the attention and interest of younger, upwardly mobile financial consumers.

Number of foreign banks expected in SFTZ in three years

Source: Ernst & Young

The growth in bank assets, 2008 to 2013

Urban credit cooperatives, rural credit cooperatives (RCCs), non-bank financial instititions, new-type rural financial institutions, and the postal savings bank (PSB) have been omitted.

Source: CBRC Annual Reports 2007-2013

At least 20 foreign banks have shareholdings in domestic banks, and are subject to the 20% investment ceiling.

The slowdown in China’s economy may also persuade its regulators to adopt a more lenient approach towards foreign banks. At least 20 foreign banks have shareholdings in domestic banks, and are subject to the 20% investment ceiling. While this report concludes that foreign banks’ interest in investing in domestic banks has receded, an economic downturn might provide an impetus for government to change the current restrictions which could revive foreign banks’ interest.

Less restrictive ownership regulations, under which a foreign bank was permitted to acquire more than a 50% shareholding in a mid-sized bank, might attract interest from foreign banks that have, to date, struggled to grow their branch networks. Domestic policy may also need to be amended if Chinese banks accelerate their acquisitions of foreign financial institutions in offshore markets.

As Chinese banks service their clients in international markets, they will want to grow in size and scope. Acquisitions of banks overseas will facilitate this process.

Demands for reciprocal treatment will inevitably follow.

This report finds that while the underlying drivers are in place, it is not clear when change is likely tooccur or what its scope might be.

Challenges Current challenges facing foreign banks can be sub-divided into three categories: regulatory challenges, market growth challenges, and operational challenges.

The most difficult regulatory challenge identified by survey participants in 2014, was access to the bond market followed by the myriad of rules and regulations, and capital and liquidity constraints. As China’s economy evolves, the foreign banks believe it is critical that the capital markets open up and that the foreign banks participate more fully in the bond market.

Rules and regulations continue to frustrate foreign banks. A large foreign bank, with a retail presence, commented that it now provides more than 6,000 different regulatory reports. Additionally, capital and liquidity constraints also impede the foreign banks’ efforts to expand.

The three most important market growth challenges were attracting and retaining retail customers, margin compression, and competition from domestic banks.

The retail-oriented foreign banks must find new ways to cement their relationships with clients. Domestic banks are formidable competitors. In March 2014, regulators approved the set-up of five new privately-owned banks.

The entrance of new and innovative privately-owned banks will increase the level of competition. Three foreign banks now have proprietary credit cards, but mobile banking and payments may leapfrog traditional service offerings.

The perennial operational challenge of recruiting and retaining personnel remains important. Although this year’s report finds increased levels of staff retention and a slowdown in salary growth, many domestic banks offer attractive packages to foreign bank personnel.

The legal environment and good governance in client companies are also challenging. Participants cited the ASIAN BANKING AND FINANCE | MARCH 2015 31

ANALYSIS: Foreign banks in china market shock resulting from the Qingdao commodity fraud, which reportedly caused 25 international and local lenders to lose up to US$4.5 billion, as a result of traders reusing copper collateral many times.

According to participants, the top five regulatory issues in 2014 are removing the foreign debt quota, removing the foreign guarantee quota, insufficient coordination by regulators (for example, People’s Bank of China (PBOC), CBRC, and State Administration of Foreign Exchange (SAFE) all have roles in the emerging SFTZ), access to bond underwriting on the same basis as domestic banks, and removal of the withholding tax on offshore funding.

Despite the more stable interest rate environment in 2014, foreign banks still expressed concern about liquidity management.

Deposit and liquidity One of the key stepping stones in the liberalization of deposit rates is the introduction of a deposit insurance scheme. In late 2013, the Economist predicted it would be launched within months. The foreign banks believe it will not happen until 2015 and this view was supported by a PBOC announcement on 30 November 2014. Such a move is seen as a precursor to deposit rate liberalization in the short term, it will probably cause increased volatility and market uncertainty.

In general, foreign banks surveyed do not believe a deposit insurance scheme will have a direct impact on their business. However, it is expected to suppress margins further, and will be most directly felt by retail banks.

Despite the more stable interest rate environment in 2014, foreign banks still expressed concern about liquidity management. Eighteen banks hold serious concerns. Closely related to liquidity concerns are funding sources. Thirty banks provided a breakdown of their funding sources for 2014 and 2017, and revealed a heavy dependence on the parent bank’s funding and corporate deposits. The opening-up of the capital market envisaged in the financial reform process would greatly improve access to funding and ameliorate liquidity concerns.

Mobile banking Financial services in China are already impacted by the rapid growth in mobile banking. The domestic banks have been subjected to new mobile banking entrants, such as Alipay and WeChat. Alipay is the market leader but Tencent’s social networking app, WeChat, may, in the medium term, be the more formidable competitor. It has the ability to act as an intermediary between customers and merchants.

As a result, traditional domestic banks may in time be relegated to the back-end of the transaction process.

Back-end payments will continue to be provided by credit and debit cards offered by the domestic banks.

Presently, three foreign banks offer proprietary bank cards. Before the entrance of players such as Alipay and WeChat, they may have viewed the credit card or debit card as a key component in building their retail brand.

New payment innovations in the mobile space will make this process more challenging.

The disruptive forces already developing in retail banking will have an impact on retail-oriented foreign banks.

This report discusses the liberalization of deposit rates in 32 ASIAN BANKING AND FINANCE | MARCH 2015

the banking market, but most participants address this change in the context of corporate banking. Demand deposits in the domestic banks are already under threat by innovators such as Alibaba’s internal money market fund, Yu’ E Bao. Deposit rate liberalization will cause further disruption, when it occurs. In September 2014, Alibaba’s financial unit was reported to be in talks with the Hong Kong Monetary Authority (HKMA) regarding a Hong Kong version of its Yu’ E Bao money market fund. Yu’ E Bao accumulated assets of RMB574 billion (US$94 billion) in the first year of operation to June 2014.

Yu’ E Bao is managed by Tianhong Asset Management. Tencent’s WeChat app permits users to transfer money into a fund managed by the mutual fund giant, China Asset Management. Although it is still early days, foreign banks do not appear to have addressed the fast moving changes in the mobile banking space. Only nine participants commented on a question relating to how they planned to introduce e-finance, mobile banking, and data analysis initiatives.

Performance and growth Although profitability for the foreign banks dipped in 2013, survey responses projecting forward to 2017 were positive. Twenty banks expect performance to increase slightly while 18 banks expect a significant improvement. Participants looking back over the last 12 months reported that the three areas experiencing strongest revenue growth were trade finance, corporate lending, and treasury. The retail banking environment is challenging.

Over the last year, growth in mortgages and credit cards has been difficult, although personal loans appear to be performing well. Thirty-four banks provided forecasts on their return on equity (ROE) in 2015, and on their ROE in three to five years. By Ernst & Young

Market growth challenges

Source: Ernst & Young

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