Asian Banking & Finance (January-March 2016)

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thai banks going global exclusive interviews with: kasikornbank ceo predee daochai and krungsri ceo noriaki goto

Predee Daochai

Noriaki Goto

FIRST Banks strap on wearable technology

vendor view Powering up a new breed of ATMs in Asia

COUNTRY REPORT Thai banks’ asset quality to remain under pressure

sector report RMB gaining ground as a global trade currency

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We are kicking off 2016 with an issue that focuses on the Thai banking sector, featuring exclusive interviews with the CEOs of two of the biggest Thai banks.

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We met and spoke with Mr Predee Daochai, Kasikornbank’s president and director, to gain more first-hand information on the current status of the Thai banking system, as well as how Kasikornbank is coping with the challenges in the banking sector.

We also talked to Krungsri’s president and CEO Noriaki Goto, and he shared his thoughts on being a strategic subsidiary of the Bank of Tokyo-Mitsubishi UFJ. Thai banks will be sailing in rough seas this year as analysts predict asset quality to remain under pressure in the coming months. Our Thai country report discusses more about the surging non-performing loans resulting in asset quality deterioration.

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In this issue, you will also find our inaugural Vendor View section that talks about the future of ATMs in Asia. We talked to three of the best players in the ATM industry to bring you a comprehensive report on the new breed of ATMs in the region.

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ASIAN BANKING AND FINANCE | MARCH 2016 1

CONTENTS

report 20 country Thai banks’ asset quality feared to remain under pressure in 2016

FIRST 06 Bank loyalty programs pile on personalisation

07 Banks strap on wearable tech 08 Asean banks not out of the woods yet

10 Regulatory hurdles Asian banks must watch out for in 2016

ANALYSIS

14

first Krung Thai Bank revs up core business for a strong rebound in 2016

COUNTRY REPORT

30 Examining customer behavior and loyalty in retail banking

SECTOR REPORT 28 Fast-paced changes in custody and clearing keep Asian bankers on their toes

24

sector report RMB gaining ground as a global trade currency

26 Singapore banks still heavily tethered as most indicators point to a tepid 2016

CEO INTERVIEW 16 Kasikornbank president Predee Daochai talks about his goals and initiatives

18 CEO Noriaki Goto on the ‘new Krungsri’ following the bank’s integration with MUFG

Published Quarterly 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 2016

For the latest banking news from Asia visit the website

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Co-published corporate profile

SmartStream slashes cost of trade breaks due to bad data by around 90%

Three of the world’s biggest banks – Goldman Sachs, JPMorgan Chase and Morgan Stanley – are now founding members of SmartStream’s Reference Data Utility.

Chambadal says. “In terms of benefits to users, the direct impact is on the cost of data management systems—typically we can save at least 30 to 40% of the direct operational costs of data management systems. However, the greater benefits are on the impact of bad data on downstream systems. With SmartStream, repair costs of trade breaks due to reference mismatches are slashed by a significant 85 to 90%.”

Philippe Chambadal, CEO, SmartStream

O

ver the past few years, financial firms have become more conscientious when it comes to the handling of their data. There is simply no room for complacency as companies are beginning to place a heavy premium on investing in data processing and management. Firms can no longer afford to be caught flat-footed with inefficient and inflexible systems in the face of economic headwinds.

Enter SmartStream Technologies, a global software and managed services provider founded in 2000 to bring automation and control to post-trade operations by creating more efficient, customer-focused, cost-effective, and compliant operations.

Originally focused on reconciliations, SmartStream now claims to outperform most of its peers in the financial markets sector, with services and products including innovative post-trade processing solutions and data management services.

When it comes to transactions, the company aims to provide a real-time and pre-emptive approach to reducing trade failures while also accelerating and

automating trade processes.

In its 15-year existence, SmartStream has kept one step ahead of its competitors thanks to its firm commitment to providing transaction value to its customers, its top executive says. “It’s all about thinking what is unique to a bank, what should be performed inside a bank, what is ripe for ‘mutualisation,’” shares Philippe Chambadal, SmartStream chief executive officer, when asked to describe the company.

The London-headquartered firm’s most significant and recent offering is the SmartStream Reference Data Utility (RDU), a product first developed five years ago that addresses issues around cross-referencing, data cleansing and data enrichment. “In effect, we have created a common data model for the industry, and we have very high-quality data so we can increase STP (straight-through-processing) rates within the financial world,”

The founding banks Just how effective is this reference data utility? Well, in October 2015, Goldman Sachs, JPMorgan Chase and Morgan Stanley – three of the world’s biggest banks – signed up to the RDU, becoming shareholders in the process.

“The founding banks – all of whom are significant names – are becoming both clients and shareholders. The goal for them is not only to improve their internal efficiency and improve their operational risk control,” Chambadal shares, “but also to deploy the same data model and the same pristine data to their clients. This way they can eliminate a lot of friction and trade breaks, and improve quality of service between say, prime brokerage and the hedge funds, or the custody-side and the buy-side.”

And it’s not only in the reference data management world that the SmartStream utility model is starting to become an industry standard. “We believe that in the post-trade world, all services performed are ripe for mutualisation. We have another utility for brokerage clearing and exchange fees management,” adds Chambadal, “where SmartStream takes in all invoices and deconstructs them down to transaction level. Additionally we are in discussions around developing utilities in the collateral management space and derivatives trade reporting space to see if we can improve efficiency in other parts of the market.”

“In the post-trade world all services performed are ripe for mutualisation and SmartStream is looking at a number of other utilities.”

ASIAN BANKING AND FINANCE | MARCH 2016 3

News from asianbankingandfinance.net Daily news from Asia most read

RETAIL BANKING

Malaysian banks’ absolute NPLs rose 2.1% in November 2015 Maybank Kim Eng reports that absolute NPLs rose a marginal 1% MoM and 2.1% YoY end-Nov 2015. The industry’s gross NPL ratio was marginally higher at 1.61% end-Nov 2015 vs 1.59% end-Oct 2015. On a segmental basis, NPL ratios were higher MoM for auto, personal loans and working capital loans. The loan loss coverage ratio, however, slipped to 97.2% from 98.1% end-Oct 2015.

RETAIL BANKING

RETAIL BANKING

KBANK’s one-time IT expense worth THB2.4b hurts 4Q15 earnings Kasikornbank reported weaker 4Q15 earnings, partly due to onetime extra expenses regarding IT infrastructure totalling THB2.4b incurred this quarter. This should have caused operating expenses to jump 33% QoQ. Maybank Kim Eng estimates net interest income rose 3.4% QoQ, mainly due to a 2.3% expansion in loans. Net interest margin also strengthened by 7bps to 3.64%.

Hard landing in China remains a key threat for Asian banks in 2016 A more severe slowdown or hard landing in China would add significantly to the challenges and rising risks for the banks within China and across the rest of APAC. Fitch’s base case is for decelerating growth to be an ongoing theme.

“We forecast China’s GDP growth at 6.3% in 2016, and to decelerate further to 6.0% in 2017. This will continue to weigh on regional growth prospects,” says Fitch.

The future of banking: More traditional than you’d think

BY MOORAD CHOUDHRY It has become fashionable to sound the end of banking. Recently the CEO of one of the new crop of digital “challenger” banks suggested that the banking model was broken; according to some commentators P2P and FinTech are queuing up to take away banks’ customer bases.

What’s driving job creation in finance in Asia?

BY CHRISTINE WRIGHT Despite slower economic growth in China, the country is slowly transitioning to a more consumerdriven economy. China is integrating the Internet, and other technologies with established industries such as retail in a strategy known as ‘Internet Plus’. The initiative is set to boost China’s vast e-commerce market.

most read commentary Mitigating the troublesome lack of funding for SMEs

BY VINCENT O’BRIEN Indeed, the ICC’s latest Global Survey on Trade Finance – which surveyed 482 banks across 112 countries – shows that SMEs are finding it significantly more challenging to access trade finance than their corporate counterparts.

Specifically, 53% of SMEs’ trade finance proposals are rejected.

4 ASIAN BANKING AND FINANCE | MARCH 2016

FIRST demand down

If you’re a jobseeker in the banking and finance sector and you’re having a hard time finding a job, then you’re not alone. The demand for banking professionals has plummeted across Southeast Asia, as economic conditions in the region shift towards a gloomy mood.

According to the Monster Employment Index, Singapore, Malaysia, and the Philippines have experienced a drop in demand for banking professionals, with the Philippines registering the largest year-on-year decline at 3%. The report said this number is down from October’s 25% year-on-year growth, and the market’s first negative growth in three months—not to mention the steepest month-on-month decline among all markets.

Declining demand Malaysia, on the other hand, registered the steepest yearover-year decline at 24%, falling almost six times as much as its 4% decline in October.

E-recruitment in Singapore’s banking, financial services, and insurance (BFSI) sector also slipped by 5% between October and November. However, Singapore has shown flashes of improvement, with the threemonth growth rate for November improving by 3%, an improvement by a solitary percentage compared to October.

According to Sanjay Modi, managing director of monster.com, even though Singapore’s and the Philippines’ markets appear to be on the decline, there are still some upsides to be seen.

“Singapore’s vigilance to any potential economic risks and the Philippines’ strong economic fundamentals in its domestic systems should help see them through external threats.

6 ASIAN BANKING AND FINANCE | MARCH 2016

Pamper clients with personalised programs

Bank loyalty programs pile on personalisation

W

hen OCBC Bank created a customer loyalty program for their OCBC Voyage card users, it was determined to remove the usual complications and restrictions that hounded such airline travel credit cards. The bank let card holders redeem their Voyage Miles from their desired airlines, be it full service or budget, and the bank did not impose any points expiry or blackout date restrictions. The goal was to remove features that could frustrate customers enough to leave the loyalty program.

“One of the shortcomings for existing loyalty programs lies in the restriction placed on redemption of points collected, which can increase the barriers to customers staying active in these programs,” says Theng Kiat Goh, chief marketing officer, global consumer financial services, OCBC Bank.

Personalised programs Faced with tougher competition and users who will not hesitate to switch banks if their existing ones proved less than accommodating, banks are developing loyalty programs with full-on personalisation.

ICBC Singapore, for instance, launched the first RMB/SGD credit card and the first USD/SGD credit

Cao Yunchuan

Chris Rogers

Goh Theng Kiat

card in Singapore complete with fee waivers in an effort to woo dualcurrency credit card holders. Credit card holders receive administrative fee waivers of up to 2.5% for purchases made in yuan within mainland China, or for all purchases – both on- and off-line – made in USD. “This is especially appealing to the modern, internet-savvy traveller, who can look forward to saving money on their transactions, be it in China, or anywhere else in the world through the internet,” says Yunchuan Cao, deputy general manager at Industrial and Commercial Bank of China (Singapore).

One of the best ways banks can boost customer loyalty is by redesigning their reward programs to become more personalised, concurs Chris Rogers, director, market development at Collinson Group.

In explaining the value of pampering and personalisation, he cites his firm’s research which found less than half of consumers in Singapore feel they receive a high level of personal service. Singapore consumers also feel that their banks do not reward them for staying, citing this as the strongest reason for not feeling loyal to their bank.

Rogers also mentions the growing importance of tapping e-commerce trends to further increase points accumulation and redemption.

“Embracing and integrating modern e-commerce techniques with loyalty programs to deliver relevant and motivating experiences across multiple devices and channels will boost loyalty as consumers expect to be connected to their loyalty programs and redeem their rewards anytime, anywhere,” he says.

Recognition and reward

Source: Collinson Group

FIRST Factors that banks believe will increase wearables adoption

Source: Misys

Banking on your watch

Banks strap on wearable tech

I

f banks and other financial institutions want to tap into the Apple Watch-wearing crowd, then they would need to straddle the fine line between delight and disturbance.

Wearable technology promises a huge potential for financial institutions to increase customer engagement and generate new business, according to analysts. But the round-the-clock attachment of these devices and limited screen space require banks to adopt smoother alert systems.

Currently the primary usage of wearables by financial institutions is alerting, says Andrew Parker, digital banking specialist at Fiserv, but those

who ride on this bandwagon should focus on quick and simple actions due to small screen sizes, such as replying ‘pay’ in response to a bill notification alert. Frequency of alerts should also be considered to prevent customer backlash.

“While the benefits of enabling the delivery of alerts to wearable devices are undisputable, a challenge for banks is to choose the solution which ensures the right frequency of issuing such alerts since most of these devices are worn on the wrist,” says Parker.

Wearables are beginning to become a key focus in banking, according to a Misys survey, which 72% of banks

Andrew Parker

Nitin Bhas

say wearables are on their roadmap for the next three years. Around 15% of banks already have or are currently rolling out wearable apps, and 66% say proximity payments are the most attractive capability of wearables.

Only a small percentage of banks currently support wearables since it is not easy to reengineer processes around the customer, says Balazs Vinnai, general manager, digital channels at Misys.

Banks in the more developed parts of Asia such as Singapore and Malaysia are leading the way, having already launched or are currently launching banking apps or extension apps for wearables such as Apple Watch, says Nitin Bhas, head of research at Juniper Research. “We expect this to increase over the next 12 month; with other emerging markets following soon. However, as in any other markets, these will be initially restricted to basic alert functionalities such as account balance,” says Bhas.

The Chartist: downside risks to thai banks’ asset quality Thailand’s continued weak operating environment, and the lingering effects of high credit growth prior to 2014, are combining to increase downside risks to banks’ asset quality, according to Fitch Ratings. “The NPL ratio of Thai commercial banks had increased to 3.3% by September 15, and we expect this to rise further in 2016.”

“Fitch views that the segment most at risk from deteriorating asset quality comprises loans to SMEs, which makes up around 39% of total bank loans.

Both SME lending and unsecured consumer lending have risen more rapidly than other segments since 2013, which raises the vulnerabilities as loans season.”

Thailand: Key performance trends

Banks’ lending breakdown

Source: Fitch, banks

Source: Bank of Thailand

ASIAN BANKING AND FINANCE | MARCH 2016 7

FIRST

Asean banks not out of the woods yet

Cyber crime spooks Singapore banks

I

f ASEAN banks were hoping to step out of the darkly lit forest they seem to have entered and carefully traversed following the 2007 financial crisis, then this year is not it. ASEAN banks will remain on guard because of global growth woes bearing down on the region, particularly a Chinese economic slowdown, US monetary policy tightening and commoditycurrency interplay, says Sumedh Deorukhkar, analyst at BBVA. “The concoction of a pullback in Chinese demand, a firming interest rate environment, the sharp depreciation of domestic currencies and growth woes is affecting the corporate and retail loan books of ASEAN banks,” says Deorukhkar.

Deteriorating asset quality Recent trends across the region suggest a modest asset quality deterioration amid the sharp slowdown in the credit cycle, with a notable exception of the Philippines where non-performing loan ratios have been relatively stable.

Deorukhkar expects asset quality deterioration to be concentrated mostly across mid-sized corporate segments, which have seen rapid

Which direction must banks take?

investment-related loan growth.

The energy and mining sectors, particularly across Malaysia and Indonesia, will also be vulnerable as they grapple with the global commodity price slump and slowing Chinese demand.

“Rising loan loss reserves of banks – a leading indicator of asset quality – suggests that asset quality will deteriorate further, albeit moderately, over the next year across bulk of ASEAN,” says Deorukhkar.

This moderate deterioration in asset quality, along with a tighter operating environment and domestic growth headwinds will likely drag on ASEAN banks’ profitability over the next year.

Rising loan loss reserves of banks suggests that asset quality will deteriorate further, albeit moderately.

survey

6 in 10 financial institutions worried over AML regulation The clamp-down on money laundering has left Asia-Pacific’s financial institutions scrambling to comply with the Anti-Money Laundering (AML) and Countering Terrorist Financing (CTF) reporting requirements. According to the latest APAC survey by Wolters Kluwer Financial Services, 64% of APAC financial institutions surveyed were concerned with the heightened regulatory push to clamp down on money laundering.

“Governments are starting to introduce AML laws which means institutions have to take reporting more seriously than before,” says Michael Thomas, North Asia director at Wolters Kluwer Financial Services. As a result, the increased demand was aggravated by a limited pool of trained AML specialists, with 56% of respondents citing this as their second most important challenge in compliance. This is also up from 46% in 2014.

8 ASIAN BANKING AND FINANCE | MARCH 2016

With Singapore’s banks going digital and online, they are not only enjoying the benefits of these innovations, but they are also being exposed to cyber criminals. According to a survey

by PwC and the Centre for the Study of Financial Innovation (CSFI), cyber crime has jumped from being the 9th concern for banks to 2nd this year globally, behind only criminality.

According to the survey, cyber criminals tend to target the weak links in a closely interwoven worldwide banking system. “The ability of banks to manage the growth in crime is also under question, as shown by strong concern about the quality of their technology (No. 4 globally) and of their risk management systems (No.6 globally),” the survey says.

A top concern Meanwhile, the survey says this is not a surprise, as an earlier report found that there was a 38% increase in security incidents from 2014 to 2015.

“This sentiment is echoed strongly by respondents in Singapore with criminality and technology risks emerging as the top concerns amongst local banks,” the report says.On the other hand, the number of Singaporean banks unnerved by the current macro-economic environment also increased, as shaky economic conditions rose from being the top 15 concern last year to third this year.

“Although much work has been done by banks and their regulators to strengthen risk controls, banks still have more to do to address the scale of risk and its ever changing nature,” according to Karen Loon, banking and capital markets leader at PwC Singapore.

FIRST

Regulatory hurdles Asian banks must watch out for in 2016

I

f there is one area where banking regulators are not letting up, it is in the creation and implementation of more crisis response regulation. “Resiliency will remain a dominating regulatory theme through 2016. This reflects both the wholesale recalibration of existing regulation and the drawn-out implementation of crisis-response reforms,” says Thio Tse Gan, executive director – Southeast Asia at Deloitte Asia Pacific Centre for Regulatory Strategy.

“Much crisis response regulation has concerned making institutions and markets resilient to financial stress. Despite substantial reforms already, these initiatives will continue through 2016 and beyond,” he adds.

Thio reckons that for banks, the end of 2015 and 2016 will see the release of proposed and finalised revisions to the standardised and model-based approaches to calculating risk-weighted assets across major risk areas.

Other themes Another major area of regulatory activity that banks in Asia Pacific should pay attention to is in consumer and investor protection and market integrity.

In addition to resilience, the Deloitte Survey

Singaporeans find branch banking tedious

With effortless means of banking sprouting everywhere, it’s no surprise that residents of the city-state are finding branch banking more tedious and unnecessary. In fact, according ot a survey by Bain & Company, consumers who are frequent branch-goers are more likely to turn away from their primary bank and flock to more on-demand ways to bank, with 60% of those surveyed choosing their mobile phones over their physical wallets.

This repulsion to branch banking illustrates how Singaporeans have grown accustomed to banking on their mobile banking. Additionally, those who were used to banking on their phones were also 40% less likely to switch banks compared to those who use mobile rarely. “Conversely, those who frequently use a bank branch say they are three times more likely to switch,” the study said.

10 ASIAN BANKING AND FINANCE | MARCH 2016

Asia Pacific Centre for Regulatory Strategy has identified three other major regulatory themes for the Asia Pacific financial services industry in 2016: Culture and conduct, technology and implementation.

Thio says institutions will need to ensure they have robust processes to assess and, where necessary, improve their culture and conduct standards. Financial institutions will also be made more accountable to the risks associated with technology, particularly with respect to cyber-security, as well as face implementation challenges to their regulatory plans in 2016.

New regulatory paradigm For his part, Matthias Memminger, partner, financial services at Bain & Company, views 2016 as a year when banks will have to grapple with a new regulatory paradigm consisting of three key areas: strategy, resilience and resolvability.

Memminger reckons only up to onethird of banks have adapted to the new paradigm, and these are mainly based in the United States, United Kingdom and Switzerland since these countries were among those who led the imposition of more stringent regulatory reforms.

For the rest of the world, including Asia, the toughest part of adapting to the new

Crisis response regulations abound as e-banking rises A more proactive stance is required

paradigm is resolution planning. “This will involve heavy analysis on a bank’s part and, if done poorly, can be quite costly and time consuming for senior management and the board,” says Memminger.

In order to improve their resolution planning, senior management in banks have several viable actions such as reducing their exposure to risky assets by exiting risk-weighted, asset-intensive businesses.

But some are taking measures to a more proactive level.

co-published Corporate profile

Diebold steps into the future of ATM banking Marketing director Phillip Bedford talks about making radical changes to the current ATM business paradigm.

Phillip Bedford Marketing Director, Asia Pacific Diebold

W

hen Diebold launched its latest strategy “Diebold 2.0”, the company embarked on a new direction, veering away from the typical path of a traditional hardware company by transforming it into a services-led, software-enabled company supported by innovative hardware. A paradigm shift for the ATM industry.

“The company focuses on four services that align to drive innovation and transformation for its customers, while maintaining a strong focus on operations,” says Phillip Bedford, Marketing Director, Asia Pacific at Diebold. “These services are Managed, Maintenance, Security, and Professional & Advisory Services. In the last two years Diebold has invested in industry leaders to join the APAC regional team from banks, services companies and its competitors. This combination of knowledge and experience provides us with a 360 degree view of the market and our customers.

“We also have scale across the region.

From Asia Pacific, we currently service approximately 200,000 ATMs with a team of over 3,400 associates, including over 2,500 direct services staff in more than 11 countries.”

Diebold recently opened its first Global Delivery Center in India which manages over 43,000 multi-vendor ATMs in Asia, 12 ASIAN BANKING AND FINANCE | MARCH 2016

Australia and the US. With close to 500 staff, the Global Delivery Center operates 24/7 and provides valuable services to an ever-increasing number of global clients. In addition, Diebold has regional managed services delivery centers in India, China and the Philippines.

“We are expanding our services and software to cover multi-vendor ATMs to provide a platform-agnostic approach, enabling us to serve more customers who have different technology within their fleet,” says Bedford. “Last year, we acquired Phoenix Interactive, a multivendor software platform with a strong global customer base including a number of clients in Australia and New Zealand.”

Diebold is helping clients tackle the security risks associated with ATM banking, as potential threats to customers are on the increase. “We introduced Diebold ActivEdge, an ATM security solution that makes every existing skimmer obsolete. The industry’s first secure card reader, it counteracts skimming by altering the way an ATM card is inserted and read,” says Bedford.

Managed services portfolio The company’s broadest services portfolio lies in managed services, where they have proven solutions for their customers to address the innumerable risks and opportunities of software, security, cash handling, compliance, and analytics, to name a few. “Diebold’s comprehensive managed services suite allows our customers to capitalize on opportunities, avoid threats and focus their time on their most profitable tasks and most valued consumers,” Thomas Karakalos, VP for Managed Services says.

“With Diebold’s growing foothold in Asia Pacific, it is an essential part of the company’s long-term plan to provide the necessary infrastructure and services to suit the increasing demand,” he adds.

“Globally, we partner with many financial institutions to build customized

solutions to help meet their business needs. We have two Solution Centers in Asia Pacific located in Thailand and Indonesia where our customers can understand more about our solutions and how we can collaborate together.

Our research and development centers in India, China and Thailand create solutions specifically tailored to both the global and regional markets,” says Bedford.

A recent collaboration The company’s professional services team recently collaborated with a leading retail bank in ASEAN to help drive financial inclusion. Diebold brought technology it had created globally and developed with its customer to create Singapore’s first ATM solution for visually impaired customers. More than 86 ATMs have been equipped with customized software to provide audio instructions with a special transaction flow making the overall experience convenient, fast and easy-to-use. The special audio equipment which is accessed using a consumers personal headphones provide a high level of confidentiality and user security.

“These solutions support our FITbanking™ philosophy, which is all about creating banking experiences to seamlessly FIT with consumer demands and financial institutions’ business objectives,” says Bedford.

“Although we are seeing a rise in the number of payments used by mobile devices, cash is still a main staple of our society. I believe there will be a reduction in the footprint of branches but an expansion in their services throughout the neighborhoods and communities through miniature branches and selfservice kiosks. The underbanked will still be a huge driver for banks, so there will continue to be collaborative innovation on how to reach those customers. Lastly, big data and analytics will transform the way we perform services and the cash management ecosystem.”

“We introduced Diebold ActivEdge, an ATM security solution that makes every existing skimmer obsolete.”

I want solutions that aren’t so one-size-fits-all.

Try this on for size.

Every consumer has different preferences. Every financial institution has different business objectives. That’s why Diebold believes in FITbankingTM — providing services nimble enough to FIT your vision and experiences flexible enough to FIT your consumer’s aspirations.

Regardless of the circumstance, we can help you find the right FIT.

WHAT DOES IT TAKE TO CREATE FULLY INTEGRATED AND TRANSFORMATIVE BANKING EXPERIENCES? FIND OUT AT DIEBOLD.COM/FITbanking.

© Copyright 2015 Diebold, Incorporated.

All rights reserved.

FIRST The Analysts’ call

What’s the fallout from SSI’s default?

Krung Thai Bank revs up core business for a strong rebound in 2016

A

fter a disappointing 2015 led by a major loan default from Sahaviriya Steel Industries (SSI), Krung Thai Bank (KTB) has a plan to get back its groove and focus on core business. The staterun bank plans to pull back on retail and small business loans, segments which are becoming more vulnerable to default risk.

It will then try to make up for the lost income by cutting down costs and wooing high-margin banking clients. Analysts believe this is a sound strategy but profits will

wealth management, digital banking, and risk management.

“Fee income from these services could help boost earnings, offsetting the drag from slower loan growth. Thus, we view its pre-provisioning operating profit to remain resilient,” says Maybank Kim Eng. KTB forecasts a robust growth of 25% for loans to medium-scale SMEs alone, and a 9% growth expected for medium and large-scale SMEs combined. Fee-based revenue should grow by more than 12% in 2016, compared with 15% in 2015 and 6-7% in 2014, according to KTB, as a Krung Thai Bank forecasts a robust results of its stronger focus on wealth management and digital banking. growth of 25% for loans to mediumMaria Lapiz, analyst at Maybank scale SMEs alone.

Kim Eng, reckons the Thai government will provide an still likely take a hit from the SSI fallout. increasing number of stimulus “It is appropriate for the bank to be more measures that will benefit KTB, and these cautious on new lending, especially in the will act as additional catalysts to its loan segments that are currently witnessing outlook. accelerating NPL formations such as retail KTB’s plan to boost its fee income follows and small business sectors,” says Maybank a strong showing in 2015. Thananchai Kim Eng. Jittanoon, analyst at UOB Kay Hian, notes KTB’s core business will remain solid going that in the third quarter of 2015, KTB forward. The bank has been successful in delivered strong fee income growth of improving its net interest margin by reaching 22% year-on-year during the quarter with out to higher-yielding customers and cutting bancassurance and card operations coming funding costs. This will insulate net interest in as key growth drivers. income from slower loan growth,” adds Other non-interest income also grew Maybank Kim Eng. strongly, driven by a 48% jump in foreign 2016 will see KTB start to roll out its exchange income. Overall, non-interest three-year business plan named “Summit II” income surged 17% y-o-y, beating our that will focus on offering products such as forecast of 13% y-o-y growth.

14 ASIAN BANKING AND FINANCE | MARCH 2016

Edward Lane – SNL Financial Krung Thai Bank posted a 42.2% year-over-year drop in third-quarter net profit, the steepest fall, with consolidated nonperforming loans jumping 59.22% as of September 30 from December 31, 2014.

If it were not for newly classified bad debt linked to the troubled steel company, the increase would have been 19.11%, the bank said when it released third-quarter results.

Provisions for bad debt and doubtful accounts swelled 162.44% in the three months to September from the 2014 third quarter.

Maybank Kim Eng Reported profitability is likely to be depressed by the elevated credit cost in an effort to boost the nonperforming loan (NPL) coverage ratio back to the pre-SSI reclassification on 125%. Thus, return on equity may remain unimpressive.

Thananchai Jittanoon– UOB Kay Hian After SSI’s loan default, KTB’s NPL balance jumped 36% quarteron-quarter to THB91.5 billion or 4.03% of total loans. Excluding SSI’s defaulted loans, the bank’s NPL balance inched up 1% q-o-q to THB68.5 billion or 3.05% of total loans.

KTB’s third quarter 2015 earnings came in 16% below our forecast on higher-than-expected provisions.

Core operating profit, however, came in ahead of our forecast on strong non-interest income growth. With the SSI overhang removed, we expect KTB’s bottom line to recover strongly in the upcoming quarters. KTB delivered strong fee income growth of 22% yoy during the quarter with bancassurance and card operations coming in as key growth drivers.

Other non-II also grew strongly.

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Predee Daochai President Kasikornbank 16 ASIAN BANKING AND FINANCE | MARCH 2016

CEO INTERVIEW

KBANK president Predee Daochai speaks of digitisation and overseas partnerships He is leading partnerships between KasikornBank and ASEAN countries plus China, Japan, and Korea.

T

he weak operating environment and limited prospects for economic growth remain major dilemmas for Thai banks, including Kasikornbank.

However, analysts expect that the investment-led economic recovery will accelerate in 2016, and the recovery will drive stronger earnings for the bank this year.

We met and spoke with Mr Predee Daochai, Kasikornbank’s president and director, to gain more first-hand information on the current status of the Thai banking system, as well as how Kasikornbank is coping with the challenges in the banking sector.

ABF: What are the latest trends and challenges in Thailand’s banking sector?

We see four major trends. The first is we foresee more trade agreements will be made between countries.

The second trend is technological innovation customers want to be able to do their banking anytime, anywhere. They are expecting better and faster services.

We have been preparing ourselves to deal with all those issues and thinking about how we will transform Kasikornbank into a more digital organization.

The third trend is the aging society in Thailand. By 2022, more than 20% of the population will be aged 60 and above. We have to prepare ourselves for this demographic shift.

Lastly, urbanization and regionalization is a major trend.

In the past, most of our income came from Bangkok. But now, other provinces show more potential than Bangkok itself because the other provinces are growing faster.

A main challenge for the banking sector is the slow recovery of Thailand’s economy brought about by the slow recovery in exports, sluggish domestic consumption, and weak investment sentiment. These factors will affect business loans and loan-related fees because loan growth will be sluggish.

In 2015, the year-on-year loan growth for the whole system reached 6-7% at most, compared to 2014 when loan growth was 9-10%. Banks also have to pay more attention to asset quality and interest rates. During the current slowdown, banks may have to set aside extra reserves to reflect the loan dynamism in this cycle. The interest rate movement could be a delicate issue. If interest rates go up, the higher interest rates will impact some customer segments, including SMEs. I think the authorities will be very careful in terms of raising interest rates.

Another challenge is the tougher liquidity requirement.

Banks have to maintain a certain liquidity ratio and a certain capital requirement. Thai banks may have sufficient capital to meet all those requirements this year. But looking forward, banks may require more capital, taking into account their expansion plans.

ABF: What do you consider as your biggest achievement so far as president of KBank?

As the president, I am responsible for the organization’s overall performance. We are a successful, leading financial conglomerate in Thailand. In order to maintain our position, we must constantly come up with winning business strategies.

In 2015, we have been quite successful in maintaining good asset quality and achieving our revenue targets.

One other major achievement came in 2015. We finished what we call the K-Transformation (KT) project. We made significant system improvements in July 2015, and the improvements created a better digital system for the entire bank. Moving forward, IT support will help us have quicker times to market for a number of products. We will be able to deliver better, faster services to business and retail customers.

ABF: What three goals are you focused on?

We have a very clear, customer-centric strategy for the bank. We have been doing this for years and all the people in the bank know this. From this strategy, we have three goals. The first goal is to become the main bank for customers through strong brand positioning.

The second goal is to become a leader in digital banking and transaction banking services. By using our customercentric strategy, we have clear product solutions, plus we have branding, marketing, and service quality.

Lastly, we want to be an AEC + 3 bank, covering ASEAN, plus China, Japan and Korea.

ABF: What are your current initiatives in terms of partnering with other overseas banks?

We work in partnership with overseas banks, say, in Japan.

Currently, we have MoUs with almost 30 banks in Japan one prefecture, one bank. When their customers come to Bangkok, we take care of them. The Japanese banks also have their staff with us here in Bangkok, working with us. We then provide the foreign clients with services like lending.

Recently we initiated what we called the Bangkok Declaration. Thirty-five banks came here to join the declaration. We discussed issues such as information sharing, banking product services, customer referral, cross-border payments, and business matching.

In China we take a somewhat different approach than the partnership model. In China, we have four branches, one each in Hong Kong, Shenzhen, Chengdu and a subbranch in Longgang; plus three representative offices, one each in Shanghai, Beijing, and Kun Ming. All these branches and representative offices support our China strategy. For example, Chinese firms may wish to invest in Thailand as foreign direct investment. KBank can service their needs with a full spectrum of services.

ASIAN BANKING AND FINANCE | MARCH 2016 17

Noriaki Goto President & CEO Bank of Ayudhya (Krungsri) 18 ASIAN BANKING AND FINANCE | MARCH 2016

CEO INTERVIEW

CEO Noriaki Goto on the ‘new Krungsri’ following the bank’s integration with MUFG Partnering Krungsri’s local expertise with Mitsubishi UFJ Financial Group’s global network pays off.

T

he Bank of Ayudhya’s (Krungsri) integration with the Mitsubishi UFJ Financial Group opened up a lot of opportunities not only for the bank, but also for its clients. And with the newly-launched ASEAN Economic Community, Krungsri is better positioned now more than ever to help its clients expand into ASEAN. In an exclusive interview with Asian Banking and Finance, Krungsri’s president and CEO Noriaki Goto talked about their involvement in the AEC, being a strategic subsidiary of the Bank of Tokyo-Mitsubishi UFJ and their current goals and initiatives as a bank.

better.

We have embarked on several joint initiatives by leveraging Krungsri’s local expertise and market strength partnered with MUFG’s global network and financial expertise.

Such synergy allows us to provide financial supports and services to our clients to expand their global businesses as well as to connect MUFG’s and Krungsri’s clients to realise new business prospects. This helps to differentiate Krungsri from other financial service providers in Thailand.

ABF: What are the latest trends and challenges in Thailand’s banking sector?

On the short term horizon, the uncertainty given by both internal and external factors and their impacts on the Thai economy can pose challenges for me as a bank CEO. Managing business prudently, supporting our customers under the slowing economy, and positioning our business to be ready for the future economic and loan demand recovery are my key priorities.

The growing inter-linkages of global economic and financial markets to the Thai economy and financial system give us the opportunity to go beyond Thailand’s domestic borders.

For instance, the ASEAN Economic Community (AEC) represents both challenges and opportunities for Krungsri. AEC offers an extension of opportunities for us in terms of a larger single and more unified market, as opposed to the domestic market that we were limited to in the past. Krungsri can take this on as an opportunity to support businesses venturing into ASEAN.

ABF: What three goals are you focused on?

Our aspiration set out under our Mid Term Business Plan (2015-2017) is to become a leading regional financial institution with a global reach. Krungsri’s business directions and plans were formulated with a forward-looking approach, incorporating projected macroeconomic outlooks, regulatory trends, growth opportunities, and MUFG’s global growth strategies.

Krungsri’s executions toward our aspiration are built on three key strategic thrusts: 1) growing assets; 2) increasing fee income; and 3) reducing cost of funds.

These three strategic thrusts are further supported by the following core business dimensions: continuous leadership in consumer finance, stronger commercial banking market position, and enlargement of customer base under a customer-centric approach.

ABF: What do you consider as your biggest achievements so far as the CEO of Krungsri?

On December 18, 2013, The Bank of Tokyo-Mitsubishi UFJ (BTMU) announced the successful completion of a Voluntary Tender Offer (VTO) of Krungsri shares securing approximately 72% of the total issued shares of Krungsri.

Krungsri has become a strategic subsidiary of BTMU, which is the wholly-owned subsidiary of Mitsubishi UFJ Financial Group (MUFG).

Following the VTO completion, on 5 January 2015, we completed a successful integration of BTMU Bangkok Branch business into Krungsri, and resulted in MUFG’s ownership in Krungsri through BTMU increased to 76.88%. Prior to the integration, the BTMU Bangkok Branch had been providing services primarily to corporate clients for more than 50 years, and was the largest in terms of asset size among the foreign banks operating in Thailand.

Following the integration, New Krungsri is in the right position to expand our business and enhance our capabilities to serve our customers and the society

ABF: What are your key business philosophies?

Integrity is an important value for us as we are in the business of other people’s money. We are embedded with trust and honor in looking after our customers’ finance, integrity and honesty are thus the most important ethics for me.

‘Integrity’ is also one of the six core values of Krungsri.

The others include ‘Customer Centricity’, ‘Team Spirit’, ‘Passion for Excellence’,‘Embracing Changes’, and ‘Global Awareness.’

ABF: Please tell us more about your recent projects/ initiatives in the bank.

One of our ongoing initiatives is to better serve our corporate clients through a complete range of financial solutions to support their overseas business expansions and opportunities. Such initiative is well-supported through the synergy with MUFG, through leveraging its product offering capabilities and its global network in over 40 countries.

The recent development included the opening of our representative office in Yangon, Myanmar in April 2015, to support our clients to capture business opportunities there. BTMU also commenced its full branch operations in Yangon on the same day.

ASIAN BANKING AND FINANCE | MARCH 2016 19

Country report 1: Thailand

2016 offers little reprieve for Thai banks

Thai banks’ asset quality feared to remain under pressure in 2016

The deterioration in asset quality can be seen as Thai commercial banks’ non-performing loans surge.

I

f Thai banks plan to reach the end of 2016 unscathed, then shifting gears to a more cautious pace may be optimal given the potholes that dot the operating environment, led by a limping domestic economy and mounting household debt. Thai banks will be tested this year on the asset quality and regulatory fronts, according to analysts, but those with sufficient buffers should swerve past these obstacles and even post modest profits.

Fitch expects asset quality to remain under pressure for most of 2016, with the small and medium enterprise (SME) segment being particularly at risk of rising nonperforming loans (NPL). The deterioration in asset quality can be seen among Thai commercial banks whose non-performing loan (NPL) ratio rose to 3.3% in mid-September, with Fitch forecasting a further increase in 2016.

20 ASIAN BANKING AND FINANCE | MARCH 2016

Fitch expects asset quality to remain under pressure for most of 2016, with the small and medium enterprise (SME) segment being particularly at risk of rising non-performing loans (NPL).

The incoming year offers little reprieve as Thailand’s domestic economy faces a difficult recovery.

Not only have exports been hurt by slow global trading conditions, but also domestic investment has been inadequate in propping up the economy.

“The operating environment for the Thai banking sector remains weak, with limited prospects for economic growth and muted consumer sentiment,” says Fitch Ratings.

The problem of a flailing economy is compounded by the credit buildup in the Thai private sector and households in the past five years.

Relative to regional peers, the leverage seen in Thailand is higher than average. “This indebtedness limits the potential for further credit-led growth, and also raises downside risks for lenders in the event of a sharper-than-expected or very prolonged economic recession,” says

Fitch Ratings.

“Thailand’s continued weak operating environment, and the lingering effects of high credit growth prior to 2014, are combining to increase downside risks to banks’ asset quality.”

Among the banking segments, the most at risk from deteriorating asset quality are loans to SMEs, which make up around 39% of total bank loans, adds Fitch. Unsecured personal lending, which makes up a smaller portion, around 8%, of loans is also vulnerable given an economic downturn.

“Both SME lending and unsecured consumer lending have risen more rapidly than other segments since 2013, which raises their vulnerabilities as loans season,” says Fitch Ratings.

As a reaction to this tougher operating environment, loan growth will likely fall among most Thai

Country report 1: Thailand banks, says Maria Lapiz, analyst at Maybank Kim Eng. “When banks envisage a dimmer economic outlook, they will tighten their credit standard, resulting in lower credit supply.

Worsening credit conditions may amplify and propagate the economic weakness, resulting in slower economic growth than it should have been. We foresee a rising probability of this scenario next year,” says Lapiz.

But even as the sector outlook remained negative, Fitch Ratings kept its ratings outlooks for most banks at stable, reflecting an expectation that most banks in their coverage will have sufficient buffers, such as loan-loss reserves and capital, to withstand a cyclical downtrend.

For its part BMI Research cautions that in addition to the slow economic recovery, the banking sector should be wary of two key risks that send the sector into a tailspin.

The first risk is the high level of household debt in the country, which could result in rising NPLs while acting as a drag on private consumption, and hence consumer loan growth, says Chan Jin Lai, Asia analyst, BMI Research.

Official data showed that in the first quarter of 2015, Thailand’s household debt as a percentage of annualised gross domestic product is among the highest in the region. The second major downside risk could come from renewed political turmoil.

Regulatory shifts To make the year even trickier for Thai banks, a crop of regulatory changes, from deposit insurance to liquidity coverage ratio, will be coming online. Analysts say some of these changes will improve the sector as a whole, but there will pronounced

winners among the pack.

In August 2016, the minimum amount that qualifies for protection under Thailand’s deposit insurance will fall from THB25 million per depositor per bank to THB1 million.

While the number of accounts affected are small with 98.5% of bank accounts under THB1 million, the total amount of deposits involved in the regulatory change is substantial as accounts with over THB1 million make up 76% of total deposits.

Fitch Ratings expects larger banks with well-known franchises and branch networks to benefit from some deposit shifts, although the overall effect on the industry will be limited.

“Banks and depositors have had many years to prepare, and most banks have been trying to reduce dependence on large deposit concentrations,” says Fitch Ratings.

Commercial banks, which continue to be pressured by state policy banks in the area of deposits, may also find reprieve with the Ministry of Finance looking to finalise a deposit levy on state policy bank deposits which will likely be implemented in 1Q16 with an initial charge of 0.18% of deposits.

This regulatory change will help reduce the competitive disparity experienced by commercial banks, says Fitch Ratings. By not paying any deposit insurance premium, state policy banks have had a clear competitive advantage in garnering deposits over commercial banks, which pay total fees of around 0.47% of deposits.

Moreover, state policy banks gain public support due to a perception of strong state support.

Banks have not been caught flat-

Banks still have to grapple with sustained low growth in bank deposits which lead to liquidity management challenges.

footed by the growing popularity of mutual funds, making moves to service the demand themselves.

Currently, the eight largest mutualfund providers are subsidiaries of the eight largest commercial banks.

But banks still have to grapple with sustained low growth in bank deposits which lead to liquidity management challenges. Fitch Ratings reckons that Thai banks’ loanto-deposit ratios are already relatively high compared with other countries in the region.

In 2016, the requirements on the Basel III liquidity coverage ratio will commence as well. Starting at 60%, the ratio requirement will increase 10% annually until 100% is reached in line with the Basel Committee recommendations.

Similarly, the Basel III conservation buff will commence in 2016, slapping an additional 0.625% initially into all capital ratio requirements, although Fitch says that since capital levels in the Thai banking system are generally sound, this not be seen as a threat.

Potential threats What could pose as threats, though, according to analysts, are foreign banks such as Australia and New Zealand Banking Group Limited and Sumitomo Mitsui Trust Bank, Limited that have set up Thai subsidiaries in 2015 and plan to ride out the near-term turbulence.

“The new entrants are likely to concentrate on niche markets in the short term, and have a limited impact on the sector. But the large capital that each bank has committed to Thailand (THB20 billion each) points to the longer-term opportunities that some regional lenders see in the Thai banking sector,” says Fitch.

Thai banks’ performance

Source: Fitch, banks

ASIAN BANKING AND FINANCE | MARCH 2016 21

Vendor View: Asian ATM

Customers are looking for automation, convenience and security

Powering up a new breed of ATMs in Asia Automated teller machines (ATMs) in Asia are leaping forward in functionality as banks try to meet and exceed the expectations of its increasingly demanding users.

W

hen global ATM provider NCR thought of creating a better generation of ATMs suited for the modern Asian customer, what came to mind were three words: faster, smoother, safer.

ATM users in the region are starting to choose their preferred banks based on how well they perform in these three key areas of speed, efficiency and security of transactions – and the industry is embracing the challenge by exploring a swathe of smart technology.

“It is evident that automation, convenience and security are some of the key features consumers expect from ATM transactions today,” says Yiannos Papadopoulos, regional vice president for Asia Pacific at NCR. “It becomes imperative for financial institutions to meet these demands to make customers remain loyal.”

Facing a shift in preferences and behavior among Asian ATM users, NCR developed a new ecosystem 22 ASIAN BANKING AND FINANCE | MARCH 2016

called NCR Kalpana from which banks and other financial institutions could make machines that shine on these three fronts. The problem for banks is that upgrading their ATMs can be a slow and expensive process especially for those operating hundreds of machines.

In this regard, Papadopoulos says NCR Kalpana is a “game-changer” because it enables banks to deploy new ATMs in a fraction of the usual time, and is packed with the advanced security features that Asian users now come to expect.

“Services for consumers can take months or even years to bring to market as operators navigate through a myriad of vendors, including processors, switches, ATM vendors, regulators and software makers. NCR Kalpana can introduce new services at twice the speed of today,” he says.

“Kalpana enables flexible rapid deployments so banks can dramatically reduce costs and gain more freedom and choice. Its

“ATM users in the region are starting to choose their preferred banks based on how well they perform in these three key areas of speed, efficiency and security of transactions.”

ground-breaking security model is designed to eliminate malware and offers the world’s first ATM security certification to PCI 4.0,” adds Papadopoulos.

Papadopoulos says Asian ATM users have become wealthier and very impatient, pushing banks towards full automation and self-service systems. Users want transactions completed almost instantaneously, and request for an array of services to be available in ATMs such as bank account opening and video tellers that assist virtually.

“Traditional banking services, which could typically require several tellers performing a host of transactions that vary from opening a new account to depositing cash, are now moving towards becoming completely automated,” says Phillip Bedford, marketing director, Asia Pacific at Diebold.

“The staff don’t even need to physically be in the branch. Instead, bank personnel can provide two-way

Vendor View: Asian ATM communication through a video teller, which is similar to a Skype experience. These sorts of traditional banking services, which used to take days or weeks, now take only minutes,” he adds.

The growing demands for convenience and accessibility are two factors that are heavily shaping the future of ATMs, says David Siah, country manager, Singapore at Trend Micro. “International banks and financial institutions have been innovating to meet these increasing needs by setting up internet-enabled services such as mobile cash withdrawals, and moving the entire ATM networks onto the cloud,” he says.

Security threats As more ATM systems and transactions take place online, these systems are becoming juicier targets for hackers. This has made combatting cyber security a primary consideration for newer ATMs. “In recent years, there has been a rise of hackers capitalising on terminals such as mobile banking apps, ATMs, and online banking sites, to get around the existing system; after all, the attack is always aimed at where the money is,” says Siah.

“There are many ways a hacker could hijack an ATM. One common way of attack is via skimmers–devices that steal the data encoded on the magnetic strips of ATM cards,” he adds. Siah reckons another major concern for Asian ATM systems is malware, and countries

David Siah

Philip Bedford

Yiannos Papadopoulos

like Malaysia have seen this issue come to the fore. He says that with around 90% of ATMs currently running on Windows, they are as highly vulnerable to malware as any ordinary computer.

“Just last year, 14 ATMs in Malaysia were attacked by a Latin America organised crime gang that embezzled approximately RM3 million (US$1 million). The gang hacked ATMs that utilised old operating systems by installing malware that exploited flaws in the authentication process,” says Siah.

“In addition, it was found that the malware (BKDR_PADPIN.A) could be manipulated to spew cash from selected ATMs, display information such as total amount stored and cash unit information, and could uninstall itself and dis-enable network connections between the ATM and banks,” he adds.

Siah attributes the increasing vulnerability of ATMs to the rapid rollout of such machines in Asia, giving potential attackers more avenues to perpetrate their crimes.

“In many markets in Asia, including Hong Kong and mainland China, the use of ATMs is on the rise as cities quickly scale up their banking infrastructure and install ATMs at almost every street corner to serve the growing demand. As more services that make withdrawing money from and storing money in ATMs easier for both consumers and banks are offered, the industry exposes itself to more potential cyber-attacks,” says Siah.

In fighting back, ATM makers are ramping up their security protocols, and Siah says it is highly probable that the industry could soon see sophisticated versions that requires reading off a QR code rather than a card for increased protection.

Some ATMs are even starting to use iris scanning and other types of biometrics technology for transaction authentication.

Personalised experience Financial institutions can use technology to create slick ATM features, but it is even better if these same features work together to deliver a more personalised experience than

traditional ATMs and branch tellers.

“Consumers in Asia are looking for a personalised banking experience and financial institutions want to deliver tailored products and services that meet those expectations,” says Bedford.

As an example, Bedford says financial institutions can customise ATM user interfaces so that consumers can select and set their favourite options when conducting everyday ATM transactions. They can also provide an alphabetised screen instead of the usual numeric screen so users can easily perform advanced transactions on ATMs. Many Asian users are not only making simple cash withdrawals via ATMs, but also advanced transactions such as opening an account or claiming a debit card.

Bedford reckons consumers can even use their mobile phone to pre-stage a transaction and gain instant access to cash without using a debit card at all.

Technology and the customer As ATM transactions become more complex, banks and other financial institutions are starting to analyse big data to identify what customised options they can start offering to clients. “When a consumer is at an ATM located within a branch, the staff have real-time access to that person’s data via a tablet which enables them to offer a product or service that is tailored to that particular individual. They can even make approvals, if required,” says Bedford.

ATM systems can benefit greatly from the current leaps in technology, but banks can only squeeze out the most value from such investments if they leave a memorable impact with customers. “We believe that transactions don’t supersede relationships and we see consumers continuing to use technology to grow strong emotional connections,” says Bedford.

“To ensure long-term success and to keep consumers happy, financial institutions must integrate the physical and the digital to create consistent, effortless and channel-less experiences – whether consumers are at home, on the go, or in the branch.”

ASIAN BANKING AND FINANCE | MARCH 2016 23

SECTOR REPORT 1: Trade finance

RMB is now part of the IMF’s Special Drawing Rights currency basket

RMB gaining ground as a global trade currency

The Yuan continues to gain favor after inclusion in the IMF’s SDR Basket and Implementation CBIS

T

he end of 2015 was pivotal for the RMB, as it was included in the International Monetary Fund’s (IMF) Special Drawing Rights currency basket, solidifying its status as a global reserve currency.

Following numerous steps to liberalise its capital account and improve openness, the country’s currency finally met the IMF’s criteria for ability to be used freely.

The RMB is assigned a weight of 10.92%, making it the most heavilyweighted component of the basket behind the US dollar and the Euro.

The recent move to include the Yuan in the currency basket emphasises the continuously increasing significance that Asia has to global trade, with its largest economy’s currency being deemed a universal store of value.

According to Suan Teck Kin, an analyst at UOB, “the RMB’s status is now elevated to that of ‘reserve 24 ASIAN BANKING AND FINANCE | MARCH 2016

“Financial services providers are increasing the scope and variety of RMBdenominated products and services, particularly in the trade finance business segment.”

currency’. This means that central banks and other asset managers would need to adjust their portfolio allocation to accommodate RMBdenominated assets.

As the number of companies in Asia increases, there is also an increasing number of firms that do not do business with Western counterparties. The increasing economic activity in Asia means that an ever larger part of trade is being kept within the region, and it makes no sense for these firms to be transacting in western currencies.

With the renminbi’s continued push towards becoming a global currency, it is increasingly becoming a preferred medium of exchange for companies in Asia. Financial services providers are beginning to take notice, increasing the scope and variety of RMB-denominated products and services, particularly in

the trade finance business segment.

The growing relevance of the yuan is only a small part of the larger trend of Asia becoming a much more significant contributor to global trade.

Unmet demand in Asia Despite China’s status as the world’s largest exporter, the RMB accounted for less than 2% of global payments in 2014, according to Ernst & Young Banking & Capital Markets GEM leader, Jan Bellens. Previously, there was a persistent gap between the contribution of China to trade and the facilities provided by stakeholders to transact in a more relevant currency.

“This is currently changing in favor of China with the launch of its first phase of the Cross-border Interbank Payment System (CIPS) in October”, according to Bellens.

He says that this facility allows institutions to “enjoy clearing services and capital settlement for cross-border yuan transactions without using an offshore clearing centre.” This will remove much of the friction cost or delays that may have hindered transactions from being denominated in yuan, along with the additional costs or

SECTOR REPORT 1: Trade finance Allocation of global official foreign reserve currency assets

Source: IMF, UOB Global Economics & Markets Research

RMB joins the other leading currencies

risks involved with Asian parties transacting in foreign currencies.

Further, the implementation of this payment system will further improve the quality of yuan-denominated clearing and settlement standards, and “aligning these with international practice and processes and allowing for higher compatibility,” according to Bellens.

He expects impact from this new system to begin manifesting in the medium term as CIPS lowers the cost of clearing RMB-denominated transactions for more international banks and help increase volumes globally as more trade participants are able to link with the PBOC’s system. These changes will take some time, and Bellens notes that they “do not anticipate massive moves on the Asian banks’ China strategy also because the initial cost of the technology needed to join CIPS as a direct member would keep many on the sidelines.”

Developing strategies As the currency gains traction as a preferred exchange medium, financial services providers will also have to respond to this growing client need. “Asian banks need to develop concrete international strategies to quickly respond to the CIPS and the high increase in RMB usage” according to Noppawan Jermhansa, executive vice president at Kasikornbank.

Beyond China, the ASEAN community is also quickly gaining importance in the global economy with the region growing at a 5.04% CAGR over the last five years, making it one of the fastest growing regions in the world. Despite this,

Asian SME’s continue have difficulty obtaining access to trade financing, according to Westpac’s institutional bank director for global transaction services, Gordon Sparrow. He reckons there still remains a number of low-hanging fruit for improving businesses ability to transact that banks have not yet serviced. Ernst & Young’s Bellens notes that “banks – particularly more so the global players – have opted to ignore the SME segment and focus resources on satisfying the trade finance requirements of multinationals.”

According to Bellens, the unmet trade finance requirement of $1.1 trillion will continue to expand as the region’s economy continues to grow.

The size and significance of SME’s to the ASEAN economy are difficult to overstate and Bellens says that “this segment contributes more than 50% of GDP and private sector jobs created, and up to two-thirds of all full-time employment in emerging countries.” The importance of SME’s to the continued development of ASEAN means that financial service providers have the rare opportunity to invest in a direct play on the region’s development.

Opportunities abound The rapid development of Asia’s economy means that demand for trade finance in the region will continue to grow, especially given the growingly global nature of modern business. “As a community, the AEC’s trade volume ranks alongside India and China in importance, rather than suffering from the dilutive effect of fragmentation,” according to Westpac’s Sparrow. He also notes that the Asean Economic Community

Gordon Sparrow

Jan Bellens

Noppawan Jermhansa

Suan Teck Kin

will continuously attract new investment in business, infrastructure and people. This level of capital flow and trade development will create continuous demand for facilitation of these transactions. Some banks have begun to take notice and are positioning to take advantage of this theme.

Kasikornbank, for example, has put up a business matching service in Asia in order to enhance both inbound and outbound FDI and trade finance. They have also begun to build the support infrastructure such as employing multi-lingual staff ready to serve the diverse customer base and interconnected, international branches to support clients that conduct business abroad.

Financial services providers that are quick to react to new client needs from both China, and other key emerging markets in the region are in prime position to enter a highly underserved segment. Thorough knowledge of clients’ businesses will be the key to succeeding in the segment moving forward.

Sparrow notes that SME’s often need liquidity solutions and solutions related to their supply chain. Trade finance solutions can play a role in lowering the overall cost in the supply chain in addition to just facilitating settlement. Bellens notes hat relationships and focus on service levels will also be crucial, especially as competition begins to come into the picture. He notes that SME’s for example, are an extremely sticky customer base that use very few providers. “On the customer front, banks will need to revamp service models to match evolving customer needs,” adds Bellens.

ASIAN BANKING AND FINANCE | MARCH 2016 25

Country report 2: Singapore

Earnings are expected to moderate

Singapore banks still heavily tethered as most indicators point to a tepid 2016 Singapore banks spent 2015 bound by slow growth chains, and they will not likely break free in 2016.

W

hen Singapore banks rang in the new year, they did so with a lot of trepidation and head-shaking resignation as most indicators point to a tepid, if not terrible, 2016. Earnings are expected to moderate, loan growth will remain lacklustre and increasing corporate leverage will further add fear to an already badly shaken Singapore banking sector.

The malaise in 2015 should continue to extend to this year, and earnings will be moderated as Singapore banks grasp at straws when it comes to growing their revenues.

An increase in net interest margin (NIM) could be on the cards, but even this will be blunted by rising funding costs and possibly lower nonloan asset yields.

Given these factors, Singapore bank earnings will grow a tepid 6% in 2016, says Sue Lin Lim, analyst at DBS, down from an expected 15% earnings 26 ASIAN BANKING AND FINANCE | MARCH 2016

If the excitement of the NIM spike for the Singapore banks cools off, there leaves hardly any drivers for growth in 2016.

growth in 2015.

“Revenues are expected to grow at a slower pace for Singapore banks in 2016,” says Lim.“With loan growth likely to stay in the low single digits, topline growth will be slower. Noninterest income is unlikely to excite as well and may be volatile depending on markets, and to some extent, be the wildcard to earnings. As we exit the benign credit cycle, credit costs will start to accelerate.”

“If the excitement of the NIM spike for the Singapore banks cools off, there leaves hardly any drivers for growth in 2016. Judging from the trends we have seen in 2015, we believe that even with the Fed rate hikes, there is not much room for NIM to rise significantly,” she adds.

Sluggish loan growth will not only continue to pummel Singapore banks’ revenues, but Lim says their non-interest incomes will also remain depressed amid the challenging

macro-environment.

“We have already seen wealth management income moderating as customers have turned cautious and are switching to deposits instead of investment related products which translates to lower wealth management fees earned,” says Lim. “We expect similar trends to persist in 2016 until the risk-on sentiment dissipates. We have forecasted overall non-interest income growth to be in the single digit levels in 2016,” she adds, noting that trading and investment income can still serve as wildcards depending on market opportunities.

Lim recognises the potential upside surprise from a higher-than-expected NIM increase, with every 10bps increase in NIM translating to 4-7% rise in earnings. But she believes that, based on 2015 trends, any rise in NIM from SIBOR hikes will be muted, for three reasons.

Country report 2: SINGAPORE First, while loan yields will be priced up accordingly, Lim expects funding costs to catch up both within Singapore and at the banks’ regional operations, especially Malaysia for UOB and OCBC, which is the second largest profit contributor to these banks. Second, Singapore banks’ S$ loan-to-deposit ratio have reached a high of 87% from 79% two years ago which Lim says may imply that liquidity has somewhat tightened and there is little room to further leverage on; this would add pressure to S$ deposit costs. Finally, if Singapore banks still carry surplus US$, a situation seen in early 2015, this may dampen non-loan asset yields and hence overall NIM. Loan growth to remain sluggish 2015 saw the Singapore banking sector decelerate to its slowest loan growth in five years, which dragged down revenues, and this trend will persist in 2016, according to analysts.

“With expectations of lacklustre gross domestic product growth coupled with regional economies grappling to pick up growth, Singapore banks’ loan growth will likely drift down and stay below the 5% level in 2016. Forex translation may just add an additional 1-2bps to overall loan growth, bringing our modelled loan growth forecast close to 5%,” says Lim. “Total loan growth is likely to remain tepid through the end of 2016, and we have downgraded our forecast for loan market growth to a single-digit of 5.0% for the year, down from 10.0% previously,” echoes BMI Research. “The Singapore banking sector is in dire straits at present. The headwinds in the broader economy combined with the evolving commodity crunch have compounded vulnerable asset quality and seen lending activity in the city state grind to a near halt.”

Dealogic data show that as of December 2015, Singapore syndicated loan activity nosedived to US$23.1bn (via 56 deals), down 59% year-on-year from US$55.9bn recorded (across 104 facilities) in the same period in 2014.

“Put into a broader context, this means that borrowers have successfully secure fresh loan facilities

at their slowest rate in five years, since US$15.5bn was tallied up in 2010,” says BMI Research.

In fact, Singapore’s three largest lenders - OCBC Bank, UOB, and DBS Group - have all endured disappointing single-digit growth over recent quarters, with the lenders securing 1.0%, 0.4%, and 2.0% in credit growth respectively as recently as the third quarter of 2015.

Singapore is not alone in the region, with other countries also experiencing slower loan growth.

Southeast Asia syndicated loan activity has also dropped to US$54.4bn as of December 2015, also equating to the lowest haul of deals in five years since the same stage in 2010, and representing nearly half the US$109.2bn borrowed across the region in same period in 2014.

Rising corporate leverage and NPLs On top of crumbling earnings and lacklustre loan growth, Singapore banks should also spend 2016 grappling with the threat of increased corporate leverage and nonperforming loans (NPLs).

“Together with the fall away in lending activity, the banking sector in Singapore has ongoing concerns relating to the persistently high level of NPLs,” says BMI Research.

“Singapore’s banks face an uncertain outlook over the coming quarters amid a subdued regional economic environment and continued financial market volatility.”

In November 2015, the Monetary Authority of Singapore published its Financial Stability Report, which showed an increase in nonperforming loan (NPL) ratios across Singapore banks, says Simon Chen, VP-senior analyst, at Moody’s Investors Service.

He notes that as of September 2015, the corporate NPL ratio was 1.8%, compared with the three-year average of 1.6%. Also, as of June 2015, the NPL ratio in the small and medium enterprise (SME) sector was 1.3%, higher than the three-year average of 0.9%. Chen also reckons that 2015 data indicates eroding credit quality of domestic corporates, which is a credit negative for the Singapore’s three domestic Singapore banks as

Together with the fall away in lending activity, the banking sector in Singapore has ongoing concerns relating to the persistently high level of NPLs.

their asset quality will be negatively pressured, leading to higher credit costs and more constricted capital generation.

“These headwinds will erode banks’ capital levels as profitability weakens and negative credit migrations result in higher risk weights on their credit exposures,” says Chen.“Nevertheless, the Singapore banks will still have strong capital buffers. As of September 2015, all three banks had common equity Tier 1 ratios well above regulatory minimum of 9%, which includes 2.5% capital conservation buffer and 2% buffer for domestic systemically important banks.”

Lim agrees that asset quality as of December 2015 remains relatively healthy. “So far, an asset quality capitulation appears remote. But banks have been prudently setting aside additional provisions where required.”

Stress tests have been carried out on selected portfolios, particularly the commodities and oil and gas sectors, but so far, there has been little stress, but she warns that worse-thanexpected unemployment numbers could further diminish asset quality.

Singapore banks: Earnings growth trend

Note: DBS forecasts are obrained from Bloomberg consensus; cumulative forecasts for the sector uses Bloomberg consensus forecasts for DBS Source: Companies, DBS Bank

Singapore banks: Loan yields (quarterly)

Source: Companies, DBS Bank

ASIAN BANKING AND FINANCE | MARCH 2016 27

SECTOR REPORT 2: custody & clearing

There’s no time to fool around

Fast-paced changes in custody and clearing keep Asian bankers on their toes Industry insiders share strategies as the market faces increased regulation and regional harmonisation.

2

016 might be the Year of the Monkey, but there will be no time for fooling around as fast-paced changes in the custody and clearing sector keep Asian banks on their toes. Trends such as the Chinese currency’s rising profile and stricter regulations are shaking up the industry, and Asian banks seem to be adopting different strategies that they believe will push them ahead of the pack.

The Chinese currency is becoming more important to the custody and clearing industry due primarily to its increased usage, according to banking executives. “We should never lose sight of the global developments of RMB and also the related RMB investment products or services, which are already on an expansion mode,” says Fanny Wong, head of custody at Bank of China (Hong Kong).

For some banks like Industrial and 28 ASIAN BANKING AND FINANCE | MARCH 2016

With the SDR development, over 180 economic bodies will automatically hold the yuan within their foreign reserves, and central banks will also be exploring the option of investing in yuan products.

Commercial Bank of China (ICBC) Singapore, the Chinese currency offers such immense potential that it has become their central focus.

“The ongoing internationalisation of the yuan is an area that we are paying special attention to, especially in terms of the opportunities it will bring to the table for us – and our fellow Asian banks – in terms of custody and clearing,” says Yunchuan Cao, deputy general manager at ICBC Singapore.

Cao reckons the recent decision by the International Monetary Fund to include the yuan within the special drawing right (SDR) basket as the fifth currency, which takes effect on October 1, 2016, will be a strong growth catalyst that Asian banks would do well to ride.

“Given the IMF’s recent decision to include the yuan within the SDR basket, the space for further development of yuan-denominated

assets looks set to grow further, and yuan-related innovations and investment channels to increase in number. With the SDR development, over 180 economic bodies will automatically hold the yuan within their foreign reserves, and central banks will also be exploring the option of investing in yuan products,” says Cao. “These factors will drive the development of yuan-denominated financial products across both onshore and offshore markets, which will in turn generate huge demand for yuan product clearing and custody services for the Asian custody and clearing sector,” he adds.

Regulatory roadblocks While Asian banks face the challenge of incorporating the Chinese currency in their growth strategies, they must also allot enough attention to the influx of new

SECTOR REPORT 2: custody & clearing industry regulations. In particular, regulatory reforms and obligations around OTC derivatives are pushing into Asia Pacific following Dodd Franck and the European Markets and Infrastructure Regulation, says Mostapha Tahiri, head of Singapore and ASEAN at BNP Paribas Securities Services.

He reckons keeping up with the reforms – which are undertaken in response to the global G20 commitments for reforms on trade reporting, clearing, electronic platforms, capital and margin requirements – can prove to be a challenge especially for banking clients in Asia Pacific.

“In Asia Pacific, each jurisdiction is at a different stage of the three areas of OTC derivatives reforms (clearing, reporting and collateral obligations).

Our clients are looking for solutions to achieve operational efficiency, technology flexibility and scalability and managing risks,” says Tahiri.

By themselves, Asian banks might find it difficult to grapple with the onslaught of regulations as well as various tax regimes and market practices in each country in the region, so striking local partnerships will be a crucial strategy.

“Banks have to learn and understand these issues. To have enough knowledge of each country may not be possible, thus, building up a strong partner network in the local market is necessary,” says Noppawan Jermhansa, executive vice president at KASIKORNBANK. Cao reckons one of the most pertinent issues in Asia’s OTC market is in the current variation of regulatory requirements among

What are the winning strategies?

markets, but he hopes this will be addressed by national regulatory bodies in the near future. “A standard protocol will go a long way towards driving more participation in Asia’s OTC market,” he says.

Success in standardisation Asia as a region is moving towards standardisation, and while the process will be fraught with painful changes and strong resistance, it is one that will elevate the custody and clearing sector. “The winning strategy in Asia is similar to what has worked in North America and Europe.

Leading firms should strive for a single platform across all asset classes with robust reporting and analytics while offering deep regulatory expertise,” says Mark Wightman, partner, Wealth & Asset Management Advisory at EY. “While the strategy is similar, the operating environment is far more complex. Local players face complex operating conditions in the region, including nonconvertible currencies, product mix and multiple exchanges with different cutoffs, languages and cultures,” he adds.

Despite the difficulties in implementation, Wightman notes that there are a number of cross border schemes in process that are working towards standardising the trading and settlement and clearing process across Asia. “Full implementation of programs such as the Shanghai – Hong Kong Stock Connect and the ASEAN trading link will be positive for asset servicing firms,” he says. “They are expected to increase global investment inflows to the region and also simplify back-

Cao Yunchuan

Mark Wightman

Mostapha Tahiri

Noppawan Jermhansa

Fanny Wong

office operations by standardising the settlement and clearing process and enhancing straight-through processing. This should allow asset servicers to take cost out of their operations while taking advantage of higher asset levels,” he adds.

“Regionally and globally increased standardisation will drive operational efficiency and allow firms to run a global operating model benefitting clients and firms alike,” he says further.

Bourses in Western countries have been striving going for integration, harmonisation and collaboration in various shapes and forms, but the process is proving much slower and a lot more complex in Asia, according to Wong. Still, developments such the Hong Kong Exchanges and Clearing Limited–LME Holdings acquisition three years ago, show that the trend is very much in Asia already. This calls on Asian banks to be more attentive and nimble.

“Meanwhile, stock exchanges in Singapore, Taiwan, Korea and so on are all trying new means to boost their market magnitude, turnovers, efficiency and governance requirements, so custodians and clearing banks are faced with new challenges every day. They can no longer stick to a market-by-market approach but will have to switch quickly to a more macro, holistic and dynamic view to be able to grasp and embrace such developments,” says Wong.

More hurdles In outlining the hurdles required before Asia reaches a more harmonised post trade infrastructure, Tahiri reckons there will be a need to carefully address issues in currency, laws, trading rules, matching, valuation, clearing and settlement infrastructure, among others. As such, Asia’s harmonisation process will require a lot more time, at least if precursors are any indication.

For example, the harmonisation of European capital markets and the recent launch of TARGET2-Securities (T2S), the new central engine for European securities settlement, came after more than ten years of consultation and testing.

ASIAN BANKING AND FINANCE | MARCH 2016 29

ANALYSIS: customer behavior and loyalty

Consumers lead the mobile charge in banking

Examining customer behavior and loyalty in retail banking

Bain & Company says the quality of the channel experience and the mix of channel volumes matter most.

A

global race is on to “mobilize” banking. Banks around the world have been working furiously to improve their mobile applications and optimize their websites for customers’ smartphones and tablets.

Yet the race has just begun. Leading banks are still learning how to take a mobile-first approach to reimagine customer experiences in everything from buying a home to resolving an incident of fraud.

By migrating customers to digital channels, banks have begun to reap significant cost savings as they drive bad and avoidable interactions (generated by errors or better routed to lower-cost and more convenient digital channels) out of the branch and call center. And the benefits extend well beyond cost. Mobile channels are far more likely to delight and less likely to annoy than the branch or call center experiences, leading to increased loyalty with higher customer retention, repeat purchases and referrals.

This shift entails new roles for the branch and frontline employees. Complex sales and service activities, for instance, now usually start with the customer turning fi rst to digital, often mobile, channels. Customers increasingly expect to follow up with bank staff through digital chat, video or other real-time options rather than having to visit a branch or separately call a contact center. As a 30 ASIAN BANKING AND FINANCE | MARCH 2016

When Bain & Company’s 2015 global survey asked 114,696 consumers which they’d miss more for a day, their mobile phone or physical wallet, more than half chose their phone.

result, most branches no longer need their own product specialists, because pooled specialists can deliver better service with higher productivity. So not only is the branch’s role in routine transactions rapidly diminishing, the future configuration of sales and service in the branch network is not so clear.

Consumers continue to lead the mobile charge in most markets, spurred by the ease and convenience of mobile through leaders in other categories, from Alibaba to Uber. As a quick indicator, consider that when Bain & Company’s 2015 global survey asked 114,696 consumers which they’d miss more for a day, their mobile phone or physical wallet, more than half chose their phone, with the share reaching 79% in China. Mobile clearly has advanced past the tipping point.

But the pace of progress in encouraging customers to migrate from branches to digital channels varies dramatically from country to country and from bank to bank within countries. The Netherlands and South Korea may provide a view of the future as they have the highest mobile adoption of countries surveyed, both in total and for sales and service; Dutch respondents’ mobile usage has risen fourfold in two years while the branch plays a minor role. Similarly, the inroads made by digital insurgent companies vary around the globe, with

ANALYSIS: customer behavior and loyalty China demonstrating the most comprehensive examples so far. So banks can learn from the global leaders that have advanced furthest down the experience curve, not just from their competitors next door.

As more banking activities go mobile, a major challenge for bankers has been to identify the right priorities and sequence of moves—right both for earning greater customer loyalty and for funding investments in digital channels through cost reductions in the branch network.

Bain’s latest consumer research and statistical analysis, summarized below, points the way to the right priorities by shedding light on the relationship between specific channel experiences and customer loyalty.

The new hub of personal finance Our analysis shows that for the average bank, a high priority is to migrate routine activities out of the branch, where they are more likely to annoy customers, into selfservice digital channels, including mobile. That means improving the mobile experience to the extent that it truly delights customers, making the experience fast, intuitive, convenient, and capable of handling the most common transactions and service requests. Moreover, given scarce resources, it’s more valuable to focus on improving a mobile app than a website because, on average, customers use apps almost twice as often as mobile web browsing for routine interactions, and apps are consistently more likely to delight.

Indeed, mobile has evolved from a separate channel to become the hub of personal finance. To succeed in banking, therefore, demands new capabilities of bank organizations: • Extraordinary design discipline, given the small screen, slow speed of accurate typing and impatience of users (many will give up if a screen load takes more than a few seconds) • Radical simplifi cation of products, processes and communications • Personalization, powered by good data and analytics, so that only relevant information is displayed to the user • Contact methods that allow for anytime, anywhere chat and video calls with fast authentication • Much faster development cycles to keep up with the pace of new functionality and rising expectations of consumers • A new operating model that provides organizational agility, based on a commitment to breaking down barriers that divide internal departments and a willingness to collaborate with third-party developers Both the quality of the channel experience and the mix of channel volumes matter when creating a great experience for customers. Among US banks, 70% of the difference in channel experience scores (defi ned as the channel’s likelihood to delight minus its likelihood to annoy) between the average regional bank and top performer USAA is due to quality of the experience as rated by consumers; the mix of channels accounts for the other 30%.

Human interactions still offer a means to excel in customers’ eyes, and those customers who use both physical and digital channels still tend to be more loyal and more valuable to their primary bank.

These factors also have a strong influence on a bank’s Net Promoter Score, Bain’s key metric for customer loyalty. Our statistical analysis shows that the most significant factors for a bank’s Net Promoter Score are annoyance with the branch experience, the branch’s share of interactions, and delight in the mobile and online experiences.

Investing in mobile, in part to reduce branch transactions, clearly pays off in greater loyalty. Apps used for routine transactions, for instance, are one-third more likely to delight US customers than similar transactions at the branch and only half as likely to annoy. Mobile beats phone and ATM channels as well; in fact, phone interactions are most likely, on average, to cause annoyance.

The mobile payoff also shows up in consumers’ propensity to switch banks. In the US, customers who use a bank’s mobile channel frequently are 40% less likely to switch to another bank as customers who use mobile rarely. Conversely, customers who use branches frequently are almost three times more likely to switch banks as customers who rarely use branches.

Reimagining the branch Banks cannot rely exclusively on mobile, of course. Human interactions still offer a means to excel in customers’ eyes, and those customers who use both physical and digital channels still tend to be more loyal and more valuable to their primary bank. Interactions with bank staff, a bank’s product value proposition (including rates and fees), and the emotional connection (or lack thereof) to the brand all play important roles in loyalty. However, the role of the branch and frontline staff is changing rapidly. Our consumer surveys and evidence from leading bank initiatives all show that routine interactions work better and cost less when done digitally, without requiring a customer to visit a branch or call a contact center.

Many banks have started down this path. In Germany, for example, banks have cut routine interactions at the branch by half over the past two years by migrating those interactions online and to ATMs. Employees still play essential roles in more complex sales, service and advice, but the way they interact with customers is changing as well. They’re increasingly communicating not in a branch but via chat or video.

Dutch bank ABN Amro, for instance, has been advis-

Mobile is consistently more likely to delight than other channels

Notes: Responses on a scale from -5 to 5 for “to what extent did the interaction increase or decrease your likelihood to recommend your bank?’; likelihood to delight=percentage of respondents answering >=4; likelihood to annoy=percentage of respondents answering <= -1 Source: Bain/Research Now US NPS survey, 2015

ASIAN BANKING AND FINANCE | MARCH 2016 31

ANALYSIS: customer behavior and loyalty ing on and processing mortgages via webcam so that customers don’t have to physically hand over documents at a branch. As banks plug their frontline staff into the mobile hub, they can raise sales and service productivity by reaching more customers and reducing paperwork.

The writing is on the wall: Customers increasingly view having to use branches and call centers as an inconvenience for many transactions. We estimate that 50% to 70% of call volumes at a typical bank are bad or avoidable. So although omnichannel customers still give higher loyalty scores than digital-only or branch-only customers, the branch as currently configured will not survive. At all cost, banks should avoid policies (such as ceilings on remote deposits) that force customers to go to a branch and stand in line.

Some banks, including mBank in Poland, Hana Bank in South Korea and NatWest in the UK, have made exceptional progress in mobile and point the way for others. Since launching its app in 2011, mBank has kept innovating the mobile experience. For example, users can access basic fi nancial information without needing to log in, obtain one-click loans with 30-second approval and disbursement, and make peer-to-peer money transfers using their smartphone’s contact list. These banks have discovered that mobile adoption in conjunction with advanced ATM functionality that can eliminate cash handling from branches offer the best opportunity in decades for cost take-outs.

Once banks have established solid apps for routine transactions, the next big mobile opportunity is to improve product sales capabilities. Already, 26% of respondents globally use mobile channels to research or purchase banking products, and that behavior is even more pronounced in Asia. In China and India, 52% and 43% of respondents, respectively, do their product research through mobile. In China and the UK, 20% and 18%, respectively, actually buy through mobile. Banks that lead in mobile purchases as a share of all purchases include Barclays in the UK, China Minsheng Bank, and Commonwealth Bank of Australia (CBA).

Consumer pull, bank push The pace of mobile innovation varies substantially around the world. In some countries, such as South Korea and China, consumer enthusiasm for mobile has led to stunningly rapid adoption; roughly half of all bank interactions in South Korea happen through mobile devices. Elsewhere, such as in Japan and Germany, consumer adoption of mobile commerce has been much slower, and banks have been slow to push the pace of change. This raises a classic chicken-and-egg question: Does consumer pull or bank push influence mobile adoption?

Evidence suggests that banks have a significant ability to push consumers along, and the differences in mobile adoption depend on how aggressively banks compete with each other on mobile innovation rather than on the structure of their markets.

Consider the different trajectories of Australia and Canada, which have similar market structures, income 32 ASIAN BANKING AND FINANCE | MARCH 2016

Evidence suggests that banks have a significant ability to push consumers along, and the differences in mobile adoption depend on how aggressively banks compete with each other on mobile innovation rather than on the structure of their markets.

distributions, smartphone adoption and regulatory regimes. Australia has roughly 50% greater mobile banking usage and two-thirds the branch usage as Canada. The explanation for this disparity lies in early moves by CBA to pursue mobile innovations and thereby distinguish itself with customers. That prompted other big banks in Australia to invest in mobile in order to maintain their share. By contrast, no big bank in Canada made an early bid to outinvest in mobile, and innovation and customer adoption have lagged, leaving banks there to play global catch-up.

And catch up they must. In product after product, consumers have proven more willing than suppliers anticipated to transact via mobile or online. Just as the share of customers who would pursue online fl ight check-in soared past the airlines’ notional maximum, the adoption rate of mobile banking will signifi cantly exceed what many banks are planning for today. And if one bank won’t make it easy enough to do so, another one will.

China leads the disruption With customers’ expectations for the mobile experience rising, bankers will be forced to measure their offerings against competitors around the world, not just within their home country. The biggest threat comes not from banks but from insurgent companies devising better ways to deliver banking services through mobile. Much of the industry’s attention has focused on companies based in Silicon Valley, including LendingTree, Betterment and Apple Pay. Yet these Western insurgents have not yet managed to achieve large scale or the coveted network effect in their banking and payments offerings.

Chinese insurgents such as Alipay and WeChat, meanwhile, have leapfrogged the West and offer a compelling example of what Silicon Valley has been threatening to do at scale.

In China, for instance, some 600 million users active on Tencent Holdings’ WeChat messaging app can pay merchants and utilities, send money to friends, deposit investments into money market accounts, book travel tickets, borrow money, and carry out other daily fi nancial transactions with just a touch or two. WeChat shows how payments, commerce and social media can converge. More than half of users open the app at least 10 times a day, and purchase volume to date has been 11 billion yuan ($1.7 billion) through WeChat Wallet. On the most recent Chinese Lunar New Year’s Eve, WeChat users sent 1 billion virtual red envelopes, inspired by the Chinese holiday tradition of gifting cash-stuffed red envelopes— hongbao in Chinese — to friends and family.

The scariest part for bankers: While WeChat’s wallet functionality currently operates only in mainland China, WeChat now has more than 100 million users abroad.

Other messaging platforms such as WhatsApp, which has 900 million active users and was acquired in 2014 by Facebook, also aspire to add similar broad wallet functionality, further pressuring banks.

By Gerard du Toit and Maureen Burns, partners in Bain’s Financial Services practice.

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33

PT Bank Mandiri (Persero) Tbk. is a public listed financial institution under the supervisory of the Indonesian Financial Services Authority (OJK).

Leading, Trusted. Enabling growth.

905,8

560,6 September 2015

654,6

14,6

798,2

506,5

590,9

14,5

ASSETS

LENDING

THIRD PARTY FUNDS

NET INCOME

September 2015

September 2014

(in Rp trillion)

September 2014

(in Rp trillion)

September 2015

September 2014

(in Rp trillion)

September 2015

2.380

17.341

September 2014

(in Rp trillion)

NUMBER OF BRANCHES NUMBER OF ATMS

bank Mandiriâ&#x20AC;&#x2122;s achievements in advancing the country Bank Mandiri is consistent in maintaining the quality of economic growth in order to advance the country and play a role in growing and developing business so as to be one of the strongest banks in South East Asia.

1. Assets increased by Rp 107.6 trillion, up 13.5% from Rp 798.2 trillion to Rp 905.8 trillion in the third quarter of 2015.

2. Lending increased by Rp 54.2 trillion, up 10.7% from Rp 506.5 trillion to Rp 560.6 trillion in the third quarter of 2015.

3. Net Interest Margin of 5.8%.

4. Net income of Rp 14.6 trillion.

5. Capital Adequacy Ratio (CAR) of 17.8%.

mandiri, for whatever your dreams.