Asian Banking and Finance (July to September 2015)

DISPLAY TO SEPTEMBER 30, 2015

ceo leung’s digital dreams bnp paribas wealth management’s new ceo eyes tech investments

retail banking report:

bpi & krungsri on

omni-channel banking

korea’s fintech boost cards & payments report:

uob and kbank on

the mobile tsunami FIRST China’s RMB 100bn P2P industry feared to crash

analysis Six priorities for capital markets in 2020

COUNTRY REPORT Consolidation in the Indonesian banking sector

first How compliant are ASEAN banks to Basel III?

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PAge 30

PAge 20

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C2 SINGAPORE BUSINESS REVIEW | JANUARY 2014

FROM THE EDITOR Asia’s banking and finance industry is undergoing rapid developments across all fronts. In this issue, we try to investigate the most pertinent matters in various banking sectors across Asia in hopes of giving you a bird’s eye view of what to expect in the near term.

Publisher & EDITOR-IN-CHIEF Tim Charlton production EDITOR Roxanne Primo Uy

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Shadow banking activities in China may have slowed recently, but peer-to-peer lending is surging at unprecedented levels. The industry has reached RMB 100bn in 2014 and analysts are now worried over a potential crash.

While the rest of Asia is talking about the positive and negative impacts of the booming financial technology industry to banking, Korea is looking to ease regulation to allow banks to invest in fintech companies and vice versa. Meanwhile, the use of RMB in trade finance is also making much noise in different countries, especially with intra-Asia trade growing significantly in recent years. Many are seeing the RMB to be the next global trade currency, so we talked to analysts and industry players to know how far the proliferation of RMB can go.

You will also find our annual sector reports on Retail Banking and Cards & Payments in this issue, as well as the comprehensive Indonesian country report.

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

ASIAN BANKING AND FINANCE | SEPTEMBER 2015 1

CONTENTS

sector report breaking the tethers of Asia’s payments revolution

22

C

M

Y

24

people profile BNP Paribas Wealth Management Singapore’s new CEO eyes rapid growth of digital solutions

28

sector report Omni-channel is the way to go for Asian banks

CM

MY

CY

ANALYSIS

FIRST

FIRST 06 China’s RMB 100bn P2P industry

12 Alternative funding sources

26 Driving competitive advantage

feared to crash

vs banks

07 Fintech gets a boost in Korea

14 How the RMB-denominated

08 How compliant are ASEAN banks

to Basel III?

08 Wealth management ‘dating’

service now in Singapore

10 Why portfolio customisation

is key to win the wealth management race

financing is following the Asian trade boom

with a new investment banking culture

30 Six priorities for capital

markets in 2020

16 Menacing headwinds

threaten to slow UOB’s strong margin momentum

COUNTRY REPORT 20 Indonesian banking sector

ANALYSIS 18 Arresting the great investment

edges near crunch time for consolidation

slowdown

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

2 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

CMY

K

News from asianbankingandfinance.net Daily news from Asia most read

retail banking

Maybank Q1 net profit up 6.2% to RM1.7 billion The Maybank Group has announced that it has delivered first quarter net profit of RM1.7 billion, a 6.2% increase from the RM1.60 billion achieved in the first quarter of 2014.

This comes as a healthy rise in fee income coupled with robust loans growth boosted performance across all its business pillars.

retail banking

ICBC Singapore unveils combination dual currency card Industrial and Commercial Bank of China Singapore recently launched the VISA USD/SGD Dual Currency Credit Card, the first dual currency card in Singapore to combine both USD and SGD customer accounts in one credit card.

4 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

markets

China steps up focus on reforming cross-border investment schemes According to Credit Suisse, attention was focused intensely on the pace of internationalization of the CNY and the related freeing up of China’s capital account. There are two key upcoming event risks, i.e. the IMF’s review of its Special Drawing Rights basket and the MSCI’s market classification review.

retail banking

Korea’s long bank merger transitions hold up benefits Fitch Ratings says the long transition periods following bank mergers in Korea delay the materialisation of benefits such as cost savings through increased economies of scale and eliminating duplicate functions, and the minimisation of risks.

retail banking

Would stricter leverage ratio be an issue for Philippine banking sector?

The Philippine central bank will impose a minimum Basel III leverage ratio for local universal &commercial banks effective 1 January 2017.

Maybank Kim Eng says such framework will be anchored on the international standard, but at a higher minimum ratio of 5% vs 3% in the global setting.

retail banking

1 in 4 Hong Kongers willing to share DNA with banks Telstra revealed that the majority of Hong Kong consumers using mobile banking applications want their mobile devices to instantly recognise them via biometrics, such as fingerprint and voiceprint, instead of passwords and usernames.

FIRST of time until the industry will endure large scale default,” says Cui.

yuppies resigning

If you are an employee in your early 20s and are looking to leave work due to lack of work life balance and disinterest in your job, you’re not alone. The Randstad Award 2015 survey revealed that 29% of those under 25 are more likely to leave due to these reasons compared to their older colleagues. The survey also found out that 24% of employees in Hong Kong intend to leave their jobs within the next 12 months, citing low compensation (38%), limited career growth opportunities (28%) and a lack of recognition (26%).

Peter Yu, Director of Randstad Hong Kong, said the findings reflect the challenging landscape faced by employers in Hong Kong.

“Not only do employers need to deal with the tight labour crunch creating a climate where workers are threatening to leave, but the diverse needs of the multigenerational workforce mean that it’s more important than ever for companies to invest in their employer brands. As the war for talent continues, all organisations need to look at their full employee value proposition and offer benefits that appeal to every generation of workers. Otherwise, they will find their employees looking to move to companies which offer the benefits that suit their needs,” said Yu. Most attractive employer Meanwhile, when asked which company is the most attractive employer for them, most of the respondents voted for Cathay Pacific.

“As the de facto international flag carrier of Hong Kong, Cathay Pacific is well-known for its career progression opportunities.

Almost seven in ten Hong Kong employees expressed a desire to work for Cathay Pacific. This included both men and women across all age groups.”

6 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

The P2P business increased fourfold

Collateral damage Defaults in the P2P lending business may pose significant danger to the Chinese economy because of the interlinked nature of the P2P industry and the shadow banking sector, and, in turn, of the shadow banking sector and the formal banking system. Cui warns that if and when many of them ultimately fail, the collateral damage can be meaningful – it has become one of the nodes linking various players in the shadow banking sector including banks, insurers, guarantors and industrial enterprises.

“The damage would not be isolated within the P2P sector. Many P2P platforms are serving as a funding channel for other shadow banks, including high risk lenders like small lenders, guarantors and pawn houses.

Many P2Ps’ shareholders may also have to foot a significant portion of The size of the the ultimate losses due to the implicit P2P industry reached RMB100 guarantee. These shareholders include listed banks, insurers, brokers.” billion in 2014, If China’s shadow banking system increasing almost four-fold falters due to a P2P lending crash, the formal banking system will from RMB27 likely feel the pinch as well. There is billion the a high degree of interconnectedness previous year. between the shadow and formal banking systems in China, according to Michael Taylor, chief credit officer for Asia-Pacific at Moody’s Investors Service. And even as shadow banking activity seems to have slowed down in 2014, linkages arising from banks’ distribution of wealth management products, bank lending to trust and securities companies, and spillover risks from financial leasing and guarantees, continue to pose risks.

China’s RMB 100bn P2P industry feared to crash

D

espite the recent slowdown in China’s shadow banking activity, peer-to-peer or P2P lending is seeing an unbridled surge that has analysts worried about a potential crash. The size of the P2P industry reached RMB100 billion in 2014, increasing almost four-fold from RMB27 billion the previous year, and much of its growth momentum can be attributed to the industry’s lucrative profit spread.

But analysts warn that China’s P2P lending business is akin to a house of cards that will eventually fall, due to the unsustainably high borrower rates.

“In general, P2P platforms charge what are considered exorbitant rates and have weak credit control. Some of them run pools which have strong elements of a Ponzi scheme, in our view,” says David Cui, strategist at Bank of America Merrill Lynch.

He explains that many P2P platforms charge borrowers 24-36% per annum (p.a.) but only pass on 8-15% p.a. to lenders. While this wide spread makes the business very attractive to promoters, it has also blinded operators to the risks that they are supposed to be checking for. “It’s difficult to imagine, in the current tough business environment, that many going concerns can afford such high rates. So it’s only a matter

P2P loan balance

Source: Wandaizhijia, BofA Merrill Lynch Global Research

FIRST Reaching all-time lows South Korea - net interest margins, %

Source: BMI, Bloomberg, FSS

Tap, pay, and go

Fintech gets a boost in Korea

W

hen Korea launched Kakao Pay and Bank Wallet Kakao in 2014, many thought the country could be on its way to maximizing the potential of the lucrative financial technology (fintech) industry.

However, due to limited scale, these initiatives have been slow to gain traction in Korea.

“Despite being an IT powerhouse, Korea lags significantly behind the US and Japan in terms of direct banking via the internet and mobile channels, providing much room for the development of the

domestic fintech sector,” says Chia Shuhui, Asia analyst at BMI Research.

But that is set to change as the Financial Services Commission looks to ease regulation, to encourage consumer participation in fintech and change the system to one in which multiple channels of identification can be used for online banking transactions.

The FSC is also considering allowing banks to invest in fintech companies. Conversely, tech companies may soon be allowed to increase their investments in financial companies to more than

Despite being an IT powerhouse, Korea lags significantly behind the US and Japan in terms of direct banking via the internet and mobile channels.

a 4% stake. According to BMI Research, Korean banks have been struggling to establish dominance within the domestic market.

Narrowing margins continue to squeeze profitability, with average net interest margins reaching all time lows of 1.79 in 4Q14. With the country’s business environment dominated by industrial giants, local banks have not been able to look to the country’s smaller businesses as a source of growth.

“We believe that the easing of regulations will provide a boost to the nascent fintech industry in South Korea, enabling both banks and tech companies to profit. The new interpretations will allow banks to invest in companies that specialize in electronic payments, financial software development, and credit information analysis, thereby expanding the range of products they will be able to offer,” says Shuhui.

the chartist: malaysian banks’ household loans secured FOR NOW Malaysia’s household debt grew 10% in 2014, slowing from 15% growth in 2010. Fitch Ratings sees this as a healthy adjustment for the system. For banks, growth eased in all segments except mortgages. Fitch director Elaine Koh expects banks’ direct household credit costs to be manageable, although impaired ratios may rise as existing loans season.

“We estimate 70%-80% of banks’ household loans are secured, with roughly half backed by housing.

Household non-housing assets of 2.1% debt also suggest some debt-servicing flexibility. However, second-order economic effects may have further repercussions for banks.”

Banks’ impaired loan ratios

Banks’ household loans By purpose of financing at end-2014

Source: BNM, Fitch

*Purchases of non-residential property, securities & others Source: BNM, Fitch estimates

ASIAN BANKING AND FINANCE | SEPTEMBER 2015 7

FIRST

How compliant are ASEAN banks to Basel III?

Survey

TALENT SHORTAGE

T

he slew of regulations in recent years has long topped the agenda of various banks not only in Asia, but all around the world. But some banks seem to have found a way to adapt to the stricter requirements imposed by these regulations. Moody’s says that ASEAN banks — namely those in Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines — are well placed to comply with stricter capital and liquidity requirements under Basel III. In fact, liquidity coverage ratios have already been implemented in Singapore and Malaysia. According to Moody’s senior analyst Alka Anbarasu, “Given the predominance of retail funding as well as government bonds in the investment portfolio, Moody’s expects most rated banks in the region will be able to comply with the 60% minimum requirement by end-2015; in many cases banks are already 100% compliant.”

However, Anbarasu says national differences on the definition of high quality liquid assets and outflows, among other things, could make it difficult to compare the reported ratios across different banking

ASEAN banks well placed to comply

systems.

Meanwhile, Fitch Ratings director Elaine Koh says a number of large Philippine banks raised capital through the financial markets over the past few years to prepare for more demanding Basel III capital rules, which took effect in 2014.

Koh adds that “Bank of the Philippine Islands and Philippine National Bank both raised equity in early 2014, and Metropolitan Bank & Trust Company is set to issue stock in the coming months. 2014 was also an active year for the issuance of Basel III-compliant subordinated debt, which qualifies as Tier 2 capital under the new regulatory regime.”

Moody’s expects most rated banks in the region will be able to comply with the 60% minimum requirement by end-2015.

innovation watch

Wealth management ‘dating’ service now in Singapore If you are an investor in Singapore and you’re looking for the right wealth manager to cater to your needs, findaWEALTHMANAGER.com may just be your newest bestfriend. This service matching high net worth individuals with wealth management institutions has just launched in Singapore after 3 years of success in the UK. Its proprietary algorithm generates precise matches based on criteria set by both the client and institution, and this can take a very wide range of variables into account.

Dominic Gamble, chief executive of findaWEALTHMANAGER.com, says, “As a former private banker I knew that both clients and institutions were crying out for an easier way to form relationships - but even I did not foresee that we would match over 1,000 high net worth individuals with UK wealth managers so quickly.”

Gamble hopes to have matched 500 HNWIs with their ideal providers in Singapore by 2016.

8 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

Dominic Gamble

As one of the major financial hubs in the world, Hong Kong is home to the regional offices of some of the biggest banks in Asia. But the city’s thriving banking and finance industry is currently experiencing a shortage of professionals with sufficient experience and the right language skills.

According to Morgan McKinley’s Corporate and Investment Banking Global Trend Report, the talent shortage issues are expected to intensify as China continues to develop.

Recruitment trends Adam Jeffes, manager, global banking & markets at Morgan McKinley Hong Kong, says there is a sustained increase in demand for relationship managers, project finance and structured asset finance professionals in the Corporate Banking sector. Export finance is expected to drive further demand in 2H15.

Meanwhile, in Investment Banking, financial institutions are cautiously adding to their M&A, sector and capital markets teams, although deal flow and hiring trends vary by team. Jeffes adds that most of this growth in recruitment is focused at the mid-manager level and where banks have difficulty sourcing local talent; many will look to North America for Chinese and Hong Kong nationals or other candidates with the right language skills.

“Candidates need to take a holistic view when looking to move firms, and seek guidance from a variety of sources while taking into account any bias in their views. This also applies to advice that you receive from recruitment agencies,” he says.

FIRST

Why portfolio customisation is key to win the wealth management race

S

ince 2008, the world has been in an unprecedented bull market across all asset classes, and the amount of Assets Under Management (AUM) held by wealth managers has been steadily rising. According to Alan Gemes, a senior partner with Strategy& (formerly known as Booz & Co.), AUMs have doubled since the crisis, and growing at a CAGR of 15% ever since. However, this has not been followed by the bump in profitability that most wealth managers would expect to follow from a recovery.

The 2014-2015 Global Wealth Management Industry Outlook that Gemes co-authored says, “new global regulations, changing client behavior, the rapid advance of digitization, and a fluid competitive landscape have permanently altered the rules of the game and raised the cost of doing business.” Cost-to-income ratios, the level of service demanded by clients, and increasing competition have squeezed profitability, and forced players to reassess how they compete.

The focus of wealth managers has previously been on the ensuring quality on the operational side – high quality research, well-executed portfolio construction, and strategic risk management. There is an impetus now for money management

houses to shift to higher service levels over multiple channels on the relationship management side, along with increasing the extent to which client input can be fed into the portfolio construction process.

Liew Nam Soon, managing partner of Ernst & Young’s financial services advisory practice, notes that “Many institutions are looking to differentiate their service offerings, though digital platforms for the clients, and mobile tools with rich asset allocation and fulfillment.” There is also a growing need to optimize the product suite, with clear delineation between “active” Alpha-producing products, versus more Beta-oriented investments.

Do-it-yourself diversification The democratization of affordable trading & execution products has exponentially increased the demand for portfolio customization across asset classes. The prevalence of alternative channels of access compounds this phenomenon especially with younger high net worth clients, who have even taken to social media and forums to benchmark their returns against those of peers and famous fund managers.

“We are moving toward a 24/7 multichannel, digital environment dictated by clients — especially for standard products and

Portfolio customisation A more proactive stanceisiskey required as e-banking rises

services,” says Gemes.

Asset allocation, which used to be almost completely at the discretion of the asset manager, must now take the client’s personal views into consideration if possible. Building a wealth management platform which clients can build a diversified portfolio tailor-fit to their risk appetite and goals has become the new name of the game, and wealth managers that must quickly adapt or lose market share to new entrants and disruptors.

Bank watch

UOB opens branch in Yangon, Myanmar

Located at the PARKROYAL Hotel in Yaw Min Gyi Road, Dagon Township, UOB is boosting its presence in Yangon, Myanmar to offer stronger network coverage. UOB’s commitment to Myanmar dates back more than two decades, from when it opened a representative office in Yangon in 1994.

According to Ian Wong, UOB group head of Global Strategy and International Management, the UOB Yangon branch will focus on providing corporate loans, trade finance, project financing and cash management solutions to regional and global companies expanding into Myanmar.

“The key industries which we are focusing on are energy, manufacturing, construction and hospitality, as we believe these industries are the ones where foreign investors can make the most difference due to Myanmar’s rapid development and urbanisation,” says Wong.

10 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

UOB Yangon branch entrance

Mr Loi Kai Cheow of UOB Yangon, Ms Su Su Tin of Rangoon Excelsior, H.E. Mr Robert Chua, Singapore Ambassador to Myanmar, and Mr Harry Loh of UOB Myanmar

FIRST NUMBERS

SMEs choose between P2P funding and bank lending

Alternative funding sources vs banks

I

f you think small and medium enterprises are going to continue lining up for loan applications even as the more reliable peer-to-peer lending model goes mainstream, then you’re betting on the wrong horse.

P2P financing makes it easier for SMEs to obtain capital without needing to jump through the hoops of the banks. Consequently, the banks’ strict provisions for working capital loans are being criticized as being too unreasonable for smaller players.

Ian Gan, CEO of Smaths Consulting, comments that, “certain grants like the PIC (by IRAS) per se have requirements SMEs simply cannot meet.” Indeed, having a minimum number of employees and high loan rates will likely hinder any growth out of microfinance opportunities.

Hugh Mason, CEO of JFDI.Asia, strongly disagrees. “Given the variety of SMEs, it’s probably not wise to make a general statement like that.

The core business of banks is making loans to finance people and businesses, so they would go out of business if they stopped that.” He explains that banks look towards security and serviceability – not business type – in approving or rejecting requests. As long as the ventures in question can satisfactorily repay the bank in good time, there’s no reason for applications to be tossed out.

This spells good news for non12 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

pioneering SMEs that are offshoots and franchises of established names.

“Someone starting up another branch of a long-established fast food franchise, where the whole business model is completely understood, could be a good prospect for a bank,” says Mason.

On the flip side, even though innovation-driven enterprises offer the highest growth potential among SMEs, they’re also high risk subjects that fulfill neither of the two elements banks are looking for. Unless you’re a huge risk taker (or can predict the future), investing in new players with no mortgage security and service guarantee could spell the end of your career. To offset the stringent nature of loan applications, Liew Nam Soon, managing partner, financial services ASEAN at EY says, “banks should look to continually leverage on innovative technologies, and bundle other services, to improve the loan offering.” He adds, “it would not be wise to lower lending criteria [in] reaction to threats from alternative financial sources.”

Mason, however, is more optimistic about these new modes. “It’s an interesting and welcome development, not just because it brings extra cash to innovation, but because it creates a ring of enthusiastic supporters around someone trying to do something new.”

Banks should look to continually leverage on innovative technologies, and bundle other services, to improve the loan offering.

special feature: investments

GAM’s Smouha talks subordinated debt

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

Jeremy Smouha Senior Advisor, GAM

W

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FIRST

How the RMB-denominated financing is following the Asian trade boom

A

sia’s rapid growth in recent years, and the expansion of regional trade, has led to the growing popularity of the RMB as a medium of global exchange.

“Many firms, especially in Asia where intra-Asian trade has grown significantly, may have no contact with US firms, in which case it makes little sense to settle trade transactions in US dollars,” says Steven Beck, head of trade finance at the Asian Development Bank.

Despite that, there continues to be an over-reliance on the dollar as the most widely used currency for the financing of global trade.

But recently there has been an impetus for another currency, such as the renminbi, to gain widespread usage, especially in Asia where the large amount of intra-regional trade does not widely hold the incumbents as their functional currency. Even in Kyrgyzstan, there is growing interest among local companies in carrying out settlements with their foreign partners in national currencies, in particular, Russian roubles, Kazakhstani tenge and, of course, in RMB. “In 2014, the tendency of growth of trade turnover between Kyrgyzstan and China increased by 10%. As per data of the National Statistical Committee of Kyrgyz 14 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

Republic, the volume of turnover between the two countries reached $1.5bn in 2014,” says Chinara Alybaeva, chief specialist at Optima Bank.

ADB’s Beck notes that given the prominence of China in trade, it is inevitable that the RMB will become a major settlement currency, and this would contribute to a more stable global trading system. “But it is a long way off from being a major settlement currency at this point in time, how long is entirely dependent on the PRC. Once the currency becomes freely convertible, it will become a major settlement currency in little time,” he adds.

According to HSBC’s RMB Internationalisation Survey 2015, there are three main reasons for the proliferation of the RMB. The first is requests from counterparts, which is understandable given the growing amount of international and crossborder trade with China.

The second reason cited by HSBC is that settling in RMB reduces foreign exchange risk on the part of the transacting parties. As mentioned earlier, the USD or EUR does not serve as the functional currency of an increasing number of firms, which adds an element of risk to global transactions. In

Settlement in the functional currency eliminates the need to take on this risk, allowing trade participants to get better pricing.

addition to micro, macro and product risks, a third-currency operating company will have an overlay of FX risk, especially on long gestation transactions.

Settlement in the functional currency eliminates the need to take on this risk, allowing trade participants to get better pricing, which is the third reason for the RMB gaining popularity. HSBC notes that the demand will cause banks to provide a larger renminbidenominated product suite, which will only help the currency’s ascent into a widely-used settlement medium.

The People’s Bank of China (PBoC) has undertaken a number of initiatives to internationalize the currency. They are in the midst of rolling out the first phase of the China International Payment System (CIPS), which is expected to come in by the end of 2015. OCBC analyst Tommy Xie Dongming says this will improve the efficiency of RMB cross-border settlement, along with lowering the time and language barrier the current China National Advanced Payment System faces.

Ying Jian, senior economist at the Bank of China (Hong Kong) notes that this trend may continue in the next few years.

“Many Asian banks believe that business opportunities arising from RMB internationalization will be one of their major sources of revenue. Therefore they are willing to invest more resources to develop new RMB products and enhance their service standards, in order to take advantage of the opportunities that come with RMB internationalization,” he adds.

RMB ranked #5 as payment currency

Note: Top 12. Inbound and outbound. As of April 2015.

Source: SWIFT, Morgan Stanley Research

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FIRST The Analysts’ call

Any positive forecast for UOB?

Menacing headwinds threaten to slow UOB’s strong margin momentum

W

hen UOB surprised the market with stronger margins in the first quarter of the year, analysts viewed the upside, and the bank’s ability to sustain it, with a large dose of doubt. The first quarter of 2015 (1Q15) saw margins improve 7 basis points as UOB benefitted from higher repricing of loans. “We do not think the increase will be sustainable and for the full year FY15,” says Krishna Guha, equity analyst at Jefferies Singapore Limited.

Since 2013, UOB’s fee income has struggled to exceed the S$450 million quarterly run rate.

“Margins will be at similar level to last year.”

Guha gives two reasons for this: lagged repricing of the Singapore dollar funding base; and an expectation that wholesale loans will be difficult to price up given weak loan demand.

Similarly, Carmen Lee, analyst at OCBC Investment Research expects net interest margins for UOB to stay relatively flat for the rest of the year from the levels seen in 1Q15, especially in the face of a possible delay in US Federal rates increase amid a softer economic rebound.

UOB also faces pressure on the fee income and expense fronts. Guha notes that the bank’s fee income franchise, normally its 16 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

strong point, has been disappointing.

Since 2013, UOB’s fee income has struggled to exceed the S$450 million quarterly run rate. “We suspect competition is increasing in its traditional fee pool of loan-related and trade-related fees,” says Guha. “That said, management expressed strong confidence that fees from credit cards, wealth management and fund management will show strong growth.”

UOB’s expense should also continue to remain elevated as the bank looks to hire front office staff to build up its wholesale banking capabilities, and as more depreciation expense from its information technology systems is accounted for. Lee also believes that UOB will not get a short-term reprieve from its elevated technology and staff costs, but says that this should eventually be compensated by higher cross-selling of products and services in the region.

Looking overseas, Lee warns that UOB management has admitted that the environment in Malaysia and Indonesia is challenging, a sour note that could offset the fairly positive outlook for Singapore in 2015.

As such, Lee expects UOB’s loans growth to moderate from the strong double-digit growth rates experienced in FY01-FY14 to mid-single digit level in FY15.

One silver lining for UOB is that, compared with its Singapore banking peers OCBC and DBS, the bank has the greatest share of its loans in Singapore, according to Eugene Tarzimanov of Moody’s.

Krishna Guha – Jefferies Singapore Management expressed strong confidence that fees from credit cards, wealth management and fund management will show strong growth.

Wealth management and fund management fees grew 15% QoQ, 10% YoY. Management reiterated cautious stance in Malaysia and Indonesia but expressed confidence about asset quality in Thailand.

Carmen Lee – OCBC Investment Research We are projecting earnings compounded annual growth rate of 6% from FY14-FY16 for UOB. Although we are expecting costs to go up, bringing cost-income ratio from the current level of 42% to about 44% by FY16, this will be absorbed by income growth as well as a projected decline in impairment charges in FY16, down from the recent peak of S$635m in FY14.

Eugene Tarzimanov – Moody’s Investors Service UOB’s still-larger exposure to Singapore and lower share of loans in banking markets that we consider riskier than Singapore – such as China, Thailand and Indonesia – reduce its exposure to countryrelated risks relative to OCBC and DBS. Countries such as China, Thailand and Indonesia in general expose Singapore banks to higher credit risks than more established markets such as Hong Kong.

OCBC had the largest combined exposure to these riskier markets, at 21% of gross loans at year-end 2014, followed by DBS with 18% and UOB with 16%. We also note that among the three banks, UOB has the greatest share of its loans in Singapore, a credit positive for UOB.

ANALYSIS: asian investment

People save less and consume more when incomes go up

Arresting the great investment slowdown DBS Group Research says some of the slowdown owes to falling savings rates that typically accompany rising incomes. But investment has slowed far more than higher incomes alone can explain.

A

sia’s investment growth has slowed to a crawl. After averaging 15% per year for decades, real investment growth in the Asia-10 has slowed from an 11odd percent pace in 2008, to 6.5%, on average, in 2009/10, 5% in 2012, 4% in 2013 and below 3% in 2014.

The drop isn’t just about China, where any would say a slowdown is overdue. These figures are simple averages of the Asia-10, so tiny Singapore counts just as much as the massive mainland.

Savings and investment have been key to the growth equation in Asia since 1950 as indeed they are everywhere. Higher incomes tomorrow can only come from sacrificed consumption today. With few exceptions, the more you save, the faster you grow. So far, Asia’s GDP growth hasn’t suffered much. In simple average terms (again to avoid heavily biasing the picture with China), growth has run between 4.5%-4.75% for the past four years.

18 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

Hong Kong, Korea and Taiwan – Asia’s three highest income countries after Singapore – have experienced the most marked slowing in investment.

But it won’t stay there if investment doesn’t stabilize soon. Output, incomes and employment will all take a hit. How do you arrest Asia’s great investment slowdown? How do you turn it around?

Alas, a big part of the answer is, you don’t. As discussed below, much of the great investment slowdown is ‘structural’ – owing to the steady rise in incomes over the past few decades. To this extent (but no further), slower investment is good news, not bad.

It’s no surprise then that Hong Kong, Korea and Taiwan – Asia’s three highest income countries after Singapore – have experienced the most marked slowing in investment.

China and India, at the lower end of the income spectrum, haven’t experienced much if any slowdown in trend investment growth. Most would agree this makes sense for India, where per-capita income is Asia’s lowest at USD1,700. But even after years of fast growth, China’s

income remains low by Asian standards at $7,600 and, from this perspective, the recent ‘slowdown’ could prove to be more cyclical than structural. In the event, it hasn’t been especially large to begin with.

Why does investment slow when incomes go up?

The main reason is people save less/ consume more. And at the end of the day saving and investment are one and the same. It doesn’t start out that way of course. At very low incomes, the opposite is true. At very low incomes most economies are agrarian based and most of what gets produced, by necessity, gets consumed. But if you can scrimp and save a bit, the surplus can be invested in better seeds or capital equipment – productivity and incomes jump sharply. This allows more saving and more investment.

A virtuous circle ensues.

But as incomes continue to rise, two things happen. The returns

ANALYSIS: asian investment Asia – per capita GDP timeline

Asia 10 – real investment growth

Source: DBS Group Research

Source: DBS Group Research

from more machinery or fertilizer, say, grow smaller. The second ‘tractor’ doesn’t bring the same bang as the first; the third even less, and so on. All countries find it increasingly difficult to lift productivity the higher it already is. This is the technical, supply-side of the equation: returns to saving fall.

The second thing that happens is on the softer, demand side: people themselves change. As incomes go up, most want to enjoy the fruits of their labor. Another dollar in the bank becomes less attractive than a new dress, a night on the town, a trip to Spain. Falling returns from saving and a rising preference for consumption join hands and bring a reduction in savings as a proportion of income. Less savings means less investment.

U-shaped savings rates are seen virtually everywhere, eventually.

Hong Kong’s saving rate peaked when incomes hit US$20,000 in today’s prices. Malaysia’s saving rate turned south when incomes reached a much lower $8000 per person – thankfully the rate itself remains a very high 35% of GDP. The same occurred in Thailand.

Over-investment, poor investment The experiences of China and Singapore are interesting and instructive.

China is often accused of ‘overinvesting’ – it saves too much and consumes too little, or so it is said.

Saving and investment close to 50% of GDP can only lead to the kind of debt trouble that China seems to be in today. A greater consumption share in GDP ‘is needed’.

But is it really? Singapore saves and invests just as much as China

– and it’s done so for 30 years – but nobody accuses Singapore of macro mismanagement. On the contrary, Singapore rightfully receives kudos all the time for its growth record.

What gives? Why is Singapore a hero; China a reprobate?

Whatever it is, it has nothing to do with ‘over-investment’. Fifty percent of GDP is fifty percent of GDP whether it’s China’s or Singapore’s.

China may have invested poorly, as most countries do from time to time.

But that’s different. Even China’s infamous ‘ghost towns’ – built but not yet occupied cities – are, at worst, an example of poor investment, not over-investment. Any technocrat could have used the money spent on the ghost town to build something more immediately beneficial to society and have been praised for his efforts. Which isn’t to say that ‘immediately beneficial’ is the most important criteria to judge investments by.

Four quick points: First, roads always go nowhere when you build them. It’s what happens later that counts. Second, over-investment from a national / macro perspective isn’t a well-defined term; it’s nigh impossible to induce. If poor investment is the worry, call it poor investment.

Third, a high consumption share in GDP is not something to strive for, as if having one provides some sort of macro benefit, like ‘sustainability’. Singapore has sustained a saving / investment ratio of 50% of GDP for decades and has little to show for it but one of the highest incomes in the world. Falling savings rates tend to occur as incomes go up.

But the process isn’t set in stone and

when it occurs it occurs naturally.

Most importantly, there’s nothing good or bad about it. Consumption, saving and investment shares in GDP are choices, not exam grades.

Finally, judging by relative income levels, Singapore’s experience and China’s vast undeveloped inland areas, it could well take another 50 years before China’s investment rate starts to fall. And the country could well be better off for it than were it to pursue greater consumption today.

Asia-10 growth in real fixed capital formation has fallen below 3% per year and that simply won’t sustain the kind of GDP growth needed to raise incomes and employ growing populations.

Arresting the slide in investment For most Asian countries, including China and Singapore, the issue isn’t how to guard against ‘overinvestment’, it’s how do you arrest its slide of the past few years? Asia-10 growth in real fixed capital formation has fallen below 3% per year and that simply won’t sustain the kind of GDP growth needed to raise incomes and employ growing populations.

Enter China’s new Asian Infrastructure Investment Bank (AIIB) – might that turn the tide? Unfortunately no, and not because Japan and the US remain petulantly reluctant to join. The AIIB aims to raise $100bn for regional investment projects, which simply isn’t a large amount of money. In 2014, Asia-10 gross fixed capital formation amounted to US$6,700bn. If the AIIB raised and then dispersed all $100bn of its funds over the next three years – a highly unlikely event – it could finance an additional 0.4% of Asia-10 investment over and above what is already likely to occur on that time frame. That’s better than nothing but not by much. By David Carbon, DBS Group Research ASIAN BANKING AND FINANCE | SEPTEMBER 2015 19

Country report: indonesia

Strong profits await state-owned banks in 2015

Indonesian banking sector edges near crunch time for consolidation

The government finally plans to consolidate its banks to increase efficiency and lower borrower burden.

W

hen Indonesian borrowers look to their regional peers, they are often filled with envy, as Indonesian banks continue to impose prohibitively high interest rates. But 2015 could be the year when the Indonesian government starts to pursue consolidation in the banking industry, to increase economies of scale and alleviate the interest burden passed on to borrowers.

In its April industry forecast, BMI Research expects the Indonesian government to begin addressing the financial sector’s notoriously high net interest margins and prohibitively high cost of borrowing by pushing for increased consolidation.

The high number of financial institutions has contributed to inefficiencies in the sector as small, private sector lenders cannot hope to compete with dominant stateowned players. Less aggressive 20 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

The consolidation of the industry should allow the consolidated entities to benefit from greater economies of scale.

competition for deposits have also led to slower development of banking infrastructure in rural areas, which has kept many rural Indonesians without access to deposit accounts, credit, and other banking services.

The World Bank estimates that only 41% of Indonesians have bank accounts, a paltry percentage which has contributed to a lack of savings in the banking system. The result is a mismatch between the demand for credit and the supply, elevated interest rates compared with the rest of the region, and a heavier burden on Indonesian borrowers, says Andrew Wood, head of Asia Country Risk Research at BMI Research.

The Indonesian government looks to lower interest rates primarily through forced consolidation, which will reduce the total number of financial institutions to 80 from 119, says Wood. The government will also look to boost financial literacy

and access to banking services in the country’s more rural areas.

These issues are exacerbated by the highly under-banked nature of the Indonesian population. The government is also expected to push for increased financial literacy, rolling out regulations that will force major banks to open a set number of rural branches relative to urban ones.

With access to more branches, rural Indonesians should start to open more bank accounts, which should help raise bank funding.

“The consolidation of the industry should allow the consolidated entities to benefit from greater economies of scale, with lower costs feeding through to the cost of credit for borrowers,” says Wood.

Without government intervention, the notoriously fragmented Indonesian banking sector has been slow to consolidate. Fauzi Ichsan, the head of Indonesian president

Country report: indonesia Joko Widodo’s banking and finance advisory team, has noted that there has only been an average of one or two mergers and acquisitions per year over the last ten years. While initiatives to consolidate the banking industry and increase banking access to rural areas are positive, Wood warns that the government could limit any gains made by adopting a protectionist regulatory stance that will deter foreign investors from pouring funds into local banks.

In parallel with consolidation, the Indonesian government is also looking to bolster the capital of major banks to help them weather stronger competition and possible macroeconomic headwinds in the coming years. The government plans to inject capital into state-owned banks in the next two to three years to strengthen their capital positions further, says Julita Wikana, analyst at Fitch Ratings.

Islamic bank consolidation The second half of 2015 will also pave the way for a more growth-supportive banking sector guidance for Islamic banks, which will encourage consolidation among smaller Islamic banks and foster development of a more significant domestic sukuk market, says Simon Chen, VP-senior analyst at Moody’s Investors Service.

Chen expects the government to release an Islamic Finance roadmap, which will include support for consolidation of state-owned and commercial lenders. This move should enable the banks to expand their capital bases and improve cost efficiencies.

The OJK has rolled out similar initiatives over the past year.

In August 2014 it encouraged greater public- and private-sector coordination in the Islamic sector.

Then, in November 2014, a memorandum of understanding with the National Shariah Board of Indonesian Ulema Council was signed, to help promote cooperation and sustainable development.

Most significantly, also in November 2014, new rules on Islamic finance development were promulgated covering capital levels, capital instruments, and profit-

sharing ratio disclosures. The rules also require all conventional banks to restructure their Islamic unit operations into standalone subsidiary banks by 2023, notes Chen.

“Such active support of Islamic banking represents a significant change for Indonesia, which has not been as proactive in fostering the sector’s development as for example, neighbouring Malaysia,” says Chen.“This policy is similar to directives issued by the Qatar Central Bank in February 2011 that subsequently resulted in higher growth rates for Islamic versus conventional banks since their forced separation.”

Chen believes that consolidation of small Islamic banks will help them nurture their corporate and infrastructure financing operations, as well as reduce credit costs and improve profitability and efficiency.

Consolidation would also increase the ability of the sector to generate, as well as raise, the capital needed for expansion.

Indonesian Islamic banks typically have less extensive branch networks and smaller capital bases than most conventional banks, so they have mainly focused on retail customers, micro enterprises and small and medium-sized enterprises, rather than corporates. Chen says by focusing on these segments, Islamic banks’ nonperforming financing ratios have been consistently higher than the comparable nonperforming loan ratios at conventional banks.

“As a result of these higher credit costs, as well as smaller economies of scale, Islamic banking is currently not as profitable as conventional banking,” says Chen. “Consolidation among the 12 small standalone Islamic financial institutions and the 22 Islamic business units of larger conventional banks would help the merged entities better compete and address some of the above issues.”

Aside from Islamic bank consolidation, the Indonesian government should push for the development of a more significant domestic sukuk market, which will diversify funding sources and improve liquidity management of Islamic banks.

Chen says the lack of a deep sukuk market has limited the ability of Indonesian Islamic banks to raise non-deposit funding and match long-duration Islamic assets, such as home financing, with funding of similar duration. He notes that more than 90% of outstanding sukuk in Indonesia is currently issued by the sovereign, with very few bank or corporate issuers.

Chen expects the Islamic Finance roadmap to encourage more privatesector issuance. But while the supply side problem will be addressed by the roadmap, Islamic banks would still need to grapple with sluggish appetite for Shariah-compliant investments. Still, Chen believes that efforts to develop the sukuk market with various incentives should gradually address these deficiencies, and ultimately help support growth of Islamic banks. “With strong policy coordination, Indonesia can benefit from its late start in Islamic finance,” says Chen, citing data showing that the Islamic banking sector accounted for only 4.6% of total banking assets in Indonesia as of 2014, compared with a 20-50% penetration rate in Malaysia and the Gulf countries.

Aside from Islamic bank consolidation, the Indonesian government should push for the development of a more significant domestic sukuk market.

Islamic banking assets and deposits have grown rapidly in Indonesia from a low base

Source: Bank Indonesia (BI), Otoritas Jasa Keuangan (OJK)

Top-ten Islamic banks have 81% market share of Islamic financings at year-end 2014

Note: BU = Business units Source: BI, OJK

ASIAN BANKING AND FINANCE | SEPTEMBER 2015 21

SECTOR REPORT 1: CArds & payments

Mobile payments not interoperable unlike card schemes

Breaking the tethers of Asia’s payments revolution

Asia boasts a phenomenal scaling potential in mobile banking and payments but logistical barriers are keeping the sector chained.

W

hen banks saw that mobile penetration rates in many Asian countries began to exceed their bank penetration rates, it was one of the glaring signs that a mobile banking and payments revolution was about to sweep the region and those that failed to ride the waves will be left woefully behind. The rapid rise of smartphone adoption in the region has only accelerated the pace of change, but the Asian mobile banking and payments sector remains held back by a number of limiting factors such as weak infrastructure support and geographical hindrances.

“In theory, Indonesia, Vietnam, China and the Philippines, with large finite, as well as large rural based populations should be leading the way in the use of mobile banking. However a number of challenges prevail such as too many players, limited regulator support and facilitation, massive 22 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

“In theory, Indonesia, Vietnam, China and the Philippines, with large finite, as well as large rural based populations should be leading the way in the use of mobile banking.”

geography and the lack of central registry processes, mixed with the keenness of the banks to expand their automated teller machine (ATM) networks and other points of contact,” says Keith Pogson, financial services senior partner at EY. As an example, Pogson cites the struggles of Indonesia as an archipelago, having to explore satellite and other technologies, along with branchless banking and mobile branches, as an alternative to the massive costs of laying fibre optic cables across the country’s 6,000 or so islands. Indonesia, as with all other Southeast Asian countries, also faces the need for a common communication standard for payment technologies.

Meanwhile in markets like Vietnam, Pogson says players are pondering how best to offer the services through more innovative approaches.

“Do they give away free or cheap phones hardwired to their product?

Do they use an app-based solution that sits on multi-phone vendor platforms or do they tie up with a specific mobile phone network?”

Scaling up Asian mobile banking and payments is made more difficult by the constantly changing technologies in the field, which run the risk of making newly installed and prohibitively expensive mobile banking and payments systems obsolete before they provide a healthy return on investment. “The key challenges for scaling up mobile payments are ever changing technologies,” Ashis K. Sharma, head – card & electronic payments at KBZ Bank Limited. “We can see the launching of new technology replacing previous one in a very short period of time creating threats on the investments made by the banks in technologies.”

Sharma says Asia is also hobbled by the absence of global interoperable mobile payment systems. “All the mobile payment initiatives as on date are in closed loop environment and do not facilitate international interoperable transactions unlike card schemes. Now this is high time for big card brands to come up with

SECTOR REPORT 1: CArds & payments

Riding the mobile tsunami

holistic approach to enable global interoperable mobile financial system with common standards. This will facilitate financial institutions globally to shape up their offering in mobile financial services,” says Sharma.

Mobile tsunami Banks facing these challenges in Asian mobile banking and payments are under pressure to figure out solutions in order to ride the mobile tsunami that is sweeping the region instead of drowning in its wake.

Singapore, for example, has been showing high growth rates in mobile banking activity as they become more comfortable in using smartphones to perform bank transactions, and other countries in the region are poised to follow suit.

UOB reports that its mobile banking application conducts two million transactions each month. “This means more than 20 percent of all funds transfer and 16 percent of bill payments transactions are conducted via mobile banking. The growth potential of mobile banking is huge and we will be making investments in mobile services to serve our customers better,” says Dennis Khoo, head of personal financial services, Singapore at UOB. Thailand has also been seeing a notable shift from cash representing 59% of the total payment value, down from around 70% in the past few years, while mobile payments surged. This has led banks to focus on developing improvements to the mobile payments experience mainly through technology upgrades.

“Shifting from cash to mobile payments, consumers expect faster, more

convenient, more secure and increasing alternative forms of payments.

Advancement of new technology, such as the proximity payments, allows attaining of such qualities. Thus, proximity payments technology such as contactless, QR, barcode or even cloud based mobile payments have been developed and widely used in the payments market,” says Thawee Teerasoontornwong, executive vice president, retail business division head at Kasikornbank.

“However, each has their strengths and weaknesses. QR, for example, is simple to use on the one hand, but on the other hand, it is a one-way communication of which security issue can be doubtful; whilst, contactless payments is a more secured two-way communication, yet, it is expensive and thus is less interesting to be adopted by merchants. Although mobile contactless has not taken off in Thailand, it is expected to become an alternative payment of the near future,” he adds.

“All in all, winning in the mobile payments market requires unlocking of both customer and merchant obstacles and delivering payment services that attend to changing consumer expectations as well as providing incentives to encourage adopting mobile payments.”

Another key driver to mobile payments is the booming premium cards market in Asia. In Thailand, where the ultra-affluent segment take strong pride in their association with prestigious cards, banks are bundling premium services with their card memberships. “The memberships to limited prestigious cards are typically done through invitations only, and

Ashis Sharma

Dan Harsono

Dennis Khoo

Keith Pogson

T. Teerasoontornwong

often endowed with premium membership fees. In return, membership’s benefits include ‘status and services’ privileges such customized and often exclusive and super luxury services and offerings. As Asia continues in her wealth accumulation, we see the continuing trend of this ultra-affluent segment attributes and requirements,” says Dan Harsono, head of marketing and branding group at Bank of Ayudhya (Krungsri).

With Asia starting to warm up to mobile banking and payments, the resulting improvements in technology and processes have also upgraded the level of service in traditional bank branch activities.

“Real time transaction execution is becoming popular using mobile, which has significantly reduced the time and cost of doing transactions using traditional bank branches.

Banks are also investing heavily on omni-channels in delivering the services to customer as they have been able to offer quick and efficient services compared from traditional bank branches. We can see the positive impact of mobile banking services in traditional banking services,” says Sharma.

Looking to East Africa For all its potential, Asia needs to overcome its challenges and the region could take lessons from East Africa, which has been leading the way in mobile wallet and payment networks and services. “In East Africa, a combination of a lack of legacy infrastructure, a rurally spread population with enough density that network coverage makes sense, and a willingness for shop keepers to be effectively quasi bank branches, has enabled the highly innovative and very successful uptake of mobile wallet services provided by mobile phone network providers,” says Pogson.

“This has been enabled by willing and supportive regulators who understand and promote the benefits of financial security and inclusiveness, and hence have supported customer registers for mobile phone numbers and equipment as a way of addressing know your customer and anti-money laundering challenges combined with relatively small monetary amounts.”

ASIAN BANKING AND FINANCE | SEPTEMBER 2015 23

PEOPLE PROFILE

BNP Paribas Wealth Management Singapore’s new CEO eyes rapid growth of digital solutions With younger generations being more globally mobile, Ernest Leung aims to invest in digital technologies to create new value propositions to clients.

Ernest Leung CEO for Wealth Management BNP Paribas Singapore

E

rnest Leung, chief operating officer for BNP Paribas Wealth Management Asia Pacific, will now assume another position - chief executive officer for wealth management, BNP Paribas Singapore. Ernest will retain his role as chief operating officer for BNP Paribas Wealth Management Asia Pacific. In a talk with Asian Banking and Finance, Leung outlines his insights and plans: ABF: What makes you excited about your new position?

I am particularly excited to witness first-hand the growing presence of BNP Paribas Wealth Management in the market place. According to industry data, Singapore has $0.5 trillion of assets under management, a growth rate of 25% since 2008. There is no doubt that Singapore is right at the heart of this explosion of wealth in Asia. Its value proposition including political and economic stability, transparency in governance and regulatory framework has helped to intermediate this growing pool of wealth and put it to productive use.

24 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

ABF: What three goals are you focused on in your new position?

Firstly, BNP Paribas Wealth Management is committed to growing its business in Asia and my foremost task is to continue to invest in local talents in order to develop new business, broaden our client base and serve them with the highest standards.

Secondly, we shall further expand and upgrade bankers via targeted recruitment and training.

BNP Paribas Wealth Management is taking a holistic and long-term view on talent development. The opening of the BNP Paribas Asia Pacific Campus in Singapore a year ago is an example of our commitment to invest in talent for the long term in the country. A range of programmes designed to cover key paths are offered through the Campus, including leadership and management, individual skills, risk and credit as well as product and technical proficiencies.

Thirdly, we will continue to improve our platform in order to enhance overall efficiency and deliver quality service to our clients by leveraging more on BNP Paribas Group, both on front and back offices.

ABF: What will you do differently in this position?

BNP Paribas Wealth Management has been a leading private bank in Asia and has maintained a presence in the region since 1860. We opened a representative office in Singapore in 1968. We shall continue to leverage on this solid foundation and grow the business.

Digital is an area that we aim to develop and grow very rapidly.

Younger generations have different traits compared to their predecessors. They are more globally mo-

bile and technology aware. To keep apprised of these new demographic changes, we are strengthening our digital and mobile capabilities to complement our bankers to deliver the bank’s service to the client.

ABF: What changes are you planning for?

Digital and mobile solutions are definitely going to be a game changer for the wealth management industry. Technology will generate more touch points and improve the ways in which private bankers serve their clients. BNP Paribas Wealth Management is ready to manage this transition in a rapidly evolving environment by investing in digital technologies to create new value propositions to target clients.

Emerging HNW markets are more skewed towards UHNW and the key driver of growth in Asia is expected in the UHNW client segment. BNP Paribas Wealth Management has established the Key Client Group – a specialised team dedicated to serving the mega wealth clients by providing a suite of customised offerings for single family and billionaires.

My foremost task is to continue to invest in local talents in order to develop new business, broaden our client base and serve them with the highest standards.

ABF: What are your key business philosophies?

BNP Paribas Wealth Management leverages on a “one bank” approach to mobilise resources from the BNP Paribas Group, allowing us to deliver a full suite of investment banking activities to clients in addition to wealth management offerings.

Developing a client-centric approach is at the heart of our strategy: we organise our business by markets, which allows us to have closer proximity and a better understanding of our clients’ needs.

Analysis: investment banking

A great strategy is only great if the culture accepts it

Driving competitive advantage with a new investment banking culture

Find out why KPMG says taking a new approach to culture can help uncover new opportunities for growth.

F

inancial institutions are currently rethinking the future success of their investment banks post-crisis. They have come to realize that conduct, culture and technology (including cyber security) are now vital elements of their agenda, which already includes traditional thinking around the strategic role investment banking plays in a diversified Financial Institution model, the right mix for the organization, the impact of new regulatory requirements, the cost of capital, and the ROE needs of the institution.

There is much work to be done.

While some within the industry continue to hunker down post-crisis, fresh opportunities for competitive advantage are emerging for organizations able to take a leap forward in key areas such as culture and technology. But first, let’s frame the issues.

In the decade prior to the financial crisis, the investment banking indus26 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

try took huge leaps forward. Volume, volatility customized complexity were name game during this period massive innovation unprecedented profitability. Some was shown later recklessness, but there also genuine valuable improvement.

But it couldn’t last. The profitability allowed greed to seep in and this drove some irresponsible behaviors.

Oversight by management and regulators was different in the last decade and the free economy model which had delivered so much benefit globally in preceding decades got out of hand. The checks and balances in standards, regulations and governance structures couldn’t prevent a bubble from building – then bursting.

Capital markets management are still adjusting to the ensuing financial crisis and the severe contraction in the industry.

So on which of the many compet-

“Capital markets management are still adjusting to the ensuing financial crisis and the severe contraction in the industry.”

ing priorities should boards of banks focus? To begin with, it’s instructive to examine the lingering effects of the pre-crisis hangover today: Firstly, optimism in investment banking has waned. Secondly, lower volumes and electronic trading/settlement are the new normal. Thirdly, cultural shortcomings are still common.

Next, there is meager investment in back-office improvements. And lastly, many organizations have taken a wait-and-see approach.

While the flow of new regulations has begun to slow, the marketplace has not yet settled. Banks today still generally view their future outlooks through a ‘post-crisis’ lens. This mindset, though conservative, is probably appropriate given the severity of the recent crisis. As such, banks seem content to pause to consider next steps before developing a new business model and maybe a new identity to their culture to supplant

Analysis: investment banking the formerly profitable trading environment. But what is next? Clearly, there is no way to ‘future-proof’ the investment banking business. However, there are ways to better prepare for what’s to come.

Culture: the next big arena in the banking industry As big banks focus on the implementation of new regulations, a new back- and middle-office model and how the new world of technology can transform their business, there seems to be a shift to a clearer client focus (putting the client’s needs first) that can potentially break the logjam in industry stagnation.

In particular, with regulatory issues on the mend and new technology being installed, how does management drive their business forward on the path to growth? And let’s not forget the last item to be addressed from the crises hangover – culture.

This is a good time for banks to turn their attention to fixing their culture issues, which will drive their business forward and differentiate them from their competitors. Taking a new approach to culture and harnessing client-centricity can help uncover new opportunities for growth.

Based on prior problems within the industry, clearly changes are necessary. In a nutshell, the combination of crises, losses and bailouts has focused a spotlight on how banks do business.

Such illumination has exposed all of

“Not only does bank conduct and culture need to improve on past performance, it also needs to lead the world in developing new approaches to customercentricity.”

the deficiencies within the industry, and there is no indication that the focus will shift anytime soon. In fact, late last year, New York Fed President William Dudley reportedly used the word ‘culture’ more than 40 times in a speech to bank executives.

We believe this is a true watershed moment in the 100+ year history of the sector. The public backlash against misbehavior and excessive pay within the industry is spurring real change and public outcry for change.

We’ve already come a long way since the wild days of The Wolf of Wall Street, but we still have far to go as the new generation of investment bankers joins the ranks having grown up with a different ’purpose in life’. In the name of profitability, it’s time to clean up the cultures that allowed bad behaviors to live in the industry.

Customers need to ‘beware’ in many industries. For example, the automotive industry has had recalls that came a little too late. You only need to buy your child a mobile phone to worry about the value of some insurance products being sold; and even weather-related price fluctuations for snow shovels driven by supply and demand make the news.

When it comes to banks, politicians are rapidly shifting the standard from ‘buyer beware’ to ‘seller beware’. If you cannot produce analysis to show why a product was good for your customer, you may have to compensate them. Not only does bank conduct and culture need to improve on past performance, it also needs to lead the world in developing new approaches to customer-centricity.

If culture is the key to investment banks moving forward in the current economy, those who discover how to baseline and measure where their culture is today, then design and implement measurable improvements for the new world of investment banking, will have a significant advantage over their competitors.

Banks must redefine their culture to help drive strategy as a great strategy is only great if the culture accepts it – so make sure culture is aligned so the strategy can be executed.

One final area of opportunity within culture is the culture of high pay. It has been argued that pay did

not reflect the risk adjusted capital that was needed to hold such risk, and as a result bigger payouts may have been viewed as reasonable for the profit margin on the needed capital. In the boom years, the argument was made that the advances being made in re-engineering the financial world justified premium pay for bankers. This argument isn’t accepted today because the new capital charges on these highly complex trades now make these trades much less profitable. However, pay levels have still not adequately normalized yet. If boards can keep pay levels trending down, heading for the point where their talent is paid equally with the return on capital in the industry now, they can reap a stream of long-term cost savings and throw some good news into the mix for shareholders.

Technology: Revolution or evolution?

Beyond culture, banks must also embrace new technology to advance their business interests. If the culture of an organization does not embrace new and changing technologies and reverts back to doing things the old way, a great deal of money will be spent with little benefit to the bottom line. In fact, technology can be a foundation for the future of the industry through which investment banks advance the quality of regulatory compliance, increase transparency, reduce costs, and improve overall profitability through technology implementation.

Many financial institutions in the capital markets are saddled with information technology (IT) systems appropriate to another era. In our view, banks should focus as much attention as possible on technology to bring the sector into the 21st century and potentially generate more sustainable revenue in this changing industry. In the past, investments in IT and data projects largely went into the front-end of the business. IT investment now should focus on middle- and back-office functions and architectures to streamline duplicative, siloed and inefficient operations.

By Mike Conover, global head of capital markets, and David Todd, partner, KPMG ASIAN BANKING AND FINANCE | SEPTEMBER 2015 27

SECTOR REPORT 2: retail banking

Accessible banking anytime, anywhere

Banks are a-changin’: Omni-channel is the way to go for Asian banks Technology is paving the way for omni-channel banking—but challenges remain across markets.

W

hen omni-channel banking began making its presence felt back in the early 2000s, bankers believed that this novel way of banking—combining the latest technology with providing a better customer experience—was simply a passing fad. Years later, it turns out omni-channel banking is now more or less the norm among Asia’s lenders.

“I think Asian banks must understand that omni-channel is the natural progression of banking,” says Manuel Tagaza, senior vice president and head of the electronic channels group at the Bank of the Philippine Islands. “Moving to an omni-channel-strategy is sure to bring more opportunities and happier, more loyal customers if there is a synergy between customer insighting and IT (information technology) innovations,” Tagaza observes.

Dennis Khoo, head of personal 28 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

“Asian banks must invest heavily on market research (leveraging on big data), upgrade to legacy systems, and strengthen straightthrough process (STP) initiatives.”

financial services, Singapore at UOB, describes his bank’s embrace of digital technology as a step that “allows us to extend our ability to serve customers beyond the brick and mortar branches.”

According to Tagaza, Asian banks must invest heavily on market research (leveraging on big data), upgrade to legacy systems, and strengthen straight-through process (STP) initiatives as part of their shift to omni-channel banking.

“Expanding analytic capabilities by leveraging big data analytics will enable banks to cover extensive customer information from all channels and derive customer intelligence that can be fed back to channels in real-time and readily to interact with customers,” Dan Harsono, head of the marketing and branding group at the Bank of Ayudhya (Krungsri), says.

Doing so, he adds, will allow banks to effectively communicate with cus-

tomers, deliver appropriate products and services, and extend customer relationships.

But in addition to mere hardware upgrades, “a lot can also be said about IT personnel having appreciation of the customer experience—working closely with the marketing teams in understanding the customer from a single point of truth,” Tagaza notes.

Keith Pogson, senior partner at EY Financial Services, agrees, describing how banks are simply responding to evolving consumer tastes and needs as they explore new banking channels. “Asian banks are moving rapidly to fully embrace omni-channel banking, primarily as they have limited choice as customer loyalty falls, and expectations as to how services can be conveniently delivered increase,” he says.

Banks, however, need to make sure they are always on top of the technology game—but at the same time

SECTOR REPORT 2: retail banking remain relevant and relatable to their customers, Pogson explains.

“To stay ahead in the space, players need to have the latest technology, particularly in the payments space (mobile based, near field communication ideas etc.), often acting through one unified interface or a series of easy to carry and use products (e.g. chip-embedded credit cards or ATM [automated teller machine] cards, that allow other forms of payments to be made by near field communication such as tap and go etc. as well as mobile phones). Banks need to ensure that their interfaces are easy to access, yet give a sense of being secure (“trust and convenience” being the anchors of banking relationships),” Pogson says.

The millennial factor Meanwhile, Asian banks are beginning to recognize that if they wish to effectively compete in omni-channel banking or in the digital space in general, they would have to effectively cater to clients belonging to the fast-growing millennial age group, generally described as young, digitally-savvy 20-somethings now making an impact in society—including banking.

“The millennial is known as part of the first generation of digital natives, and so they are highly self-sufficient and want to manage their financials on their own. Banks have been focusing on establishing efficient digital banking platform to serve this customer segment,” notes Harsono. “As their life is at their fingertips, banks must be ready to engage with them anywhere and anytime,” he adds.

How do millennials bank? For one,

they prefer to bank on the go. “Just as Internet banking has impacted traditional branch banking, mobile banking will change online banking in the future,” says Khoo.

Further, banking products aimed at millennials must be simple enough to use, with a degree of personalization to reflect unique traits and habits.

“They also believe in spending, and both the basic and advanced payment services are required to facilitate their sophisticated consumption behaviors, in which they do not mind paying a premium for services that are available whenever their needs arise,” Harsono explains.

At the end of the day, millennials are currently proving that they are a force to be reckoned with as they increasingly mirror the shape of things to come for the banking industry.

“This generation will increasingly be a reflection of the trends impacting the banking system. Whether they shape the trends will be left to be seen, but in reality most of the phenomena that are seen with this group are increasingly being seen across many, if not most age groups,” Pogson says.

The challenge of cyber security Cyber security, meanwhile, remains a top threat to businesses in the region, and Asian banks are no exception.

With an enormous volume of data being exchanged in day-to-day banking transactions, it comes as no surprise as banks become attractive targets for cyber-criminals seeking to defraud clients and lenders alike.

“Cyber security threats continue to multiply and evolve almost every single day. As such, Asian banks have been continuously implementing and

Dan Harsono

Dennis Khoo

Keith Pogson

George Koshy

Ho Kok Yong

Manuel Tagaza

Banking at your fingertips

upgrading their security solutions and protocols in their digital channels in order to adhere to the highest available global security standards. With any bank, the security of the client’s information and transaction data should be a main priority,” Tagaza recommends.

In addition to the banking industry itself, governments are also urged to continue doing its share in shielding lenders from cyber security attacks.

“In recent years, there have been growing attention to cybersecurity threats in Asia amidst the significant awareness created by the local regulatory and industry bodies. Local regulators are also strengthening their oversight and regulatory frameworks.

All these work towards helping Asian banks understand the importance and urgency of getting ready to prevent or respond to cyber security threats,” says Ho Kok Yong, financial indusry leader at Deloitte.

Serving the underserved Another major challenge for banks seeking to carve a space in the digital sector would be ramping up efforts to serve unbanked or underbanked markets in the region. Myanmar, for instance, presents a typical picture.

“Myanmar is an example of an underserved market, with only a purported 5 to 10% of the population having a bank account,” says George Koshy, director of wholesale and retail banking at Myanmar’s United Amara Bank, noting that much of the country’s everyday transactions still rely on cash alone.

To remedy this dismal set-up, Koshy urges strong bank supervision from Myanmar’s central bank “to ensure the strengthening of financial institutions and that confidence in the banking is restored,” the improvement of the country’s telecommunications infrastructure, and the drafting of a well-defined master plan to guide the banking sector’s development.

“This will assist decision-makers as to priority areas and timelines,” Koshy claims.

As in mainstream banking processes, Asian banks expect digital to play a huge role in accessing new markets and enabling unbanked sectors to enjoy new banking services.

ASIAN BANKING AND FINANCE | SEPTEMBER 2015 29

ANALYSIS: capital markets 2020

What must capital markets players do to succeed through 2020?

Six priorities for capital markets in 2020 Are capital markets participants and users prepared and capable to reimagine the future, innovate and compete against this still unfolding backdrop?

T

oday’s new equilibrium with an industry average RoE of 9–11%, will impact both participants and users of capital markets. Policymakers and regulators are leading the reform agenda and are forcing its pace, but they are only the catalysts. The real drivers – the expectations of a wider set of stakeholders and the realities of a new economic and commercial landscape – will fundamentally and permanently reshape the capital markets landscape. We believe a new equilibrium will emerge in terms of innovation, technology, industry structures, business models, financial structures, products and remuneration. As such, players must prioritise responding to the aftermath of the financial crisis, meeting new client demands, adapting to technological advances and adjusting to the industry reform agenda. Otherwise, participants and users run the risk of emerging from the crisis recapitalised, restructured and reformed, but irrelevant.

To stay competitive through 2020, we have identified the following six priorities that financial institutions must confront now in order to emerge as leaders.

Participants and users need to have a clear sense of the posture they wish to adopt – whether to shape the industry or to follow rapidly behind the leaders. We believe that industry leaders need to have a clear strategy to deal with these challenges and to address these priorities.

30 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

Participants and users need to have a clear sense of the posture they wish to adopt – whether to shape the industry or to follow rapidly behind the leaders.

Clearly, every institution is at a different starting place, yet all institutions need to be focused at some level on these priorities to succeed.

Focusing on one or two of the below priorities will not be enough, nor will it be sufficient to manage these efforts in siloes. Institutions will need to look at issues strategically and holistically and manage their transformation efforts in a coordinated manner. This means understanding interdependencies, analysing the impact on future performance and estimating the net benefits – both tangible and intangible – in a top-down and consistent manner. A primary objective for management will be to consider its core competencies vis-à-vis these priorities in order to understand the impact on its competitive position and ability to successfully tackle obstacles of tomorrow.

1. Proactively manage risk, regulation and capital The rationale is clear: regulators do not want financial institutions to simply look at rules as they are written.

Rather, they want institutions to embrace intent and to create sound, secure, straightforward business models, supported by strong governance and risk and capital management frameworks, where regulatory compliance is embedded in the processes and values of everyday operations.

ANALYSIS: capital markets 2020 To address the upcoming pipeline of requirements and to assuage public sentiment, players will need to be proactive in terms of managing risk, regulation and capital.

The importance of these activities will not be simply to keep regulatory watchdogs at bay, but to build a truly competitive and profitable business for the future. Sound decision-making supported by proper risk management principles, internal oversight and ‘strong’ culture will be a fundamental building block of a lasting capital markets business model in 2020.

In the post-financial crisis world, the basic principles of risk management have not changed, as risk appetite and capital considerations continue to be two of the most important constraints when developing and executing on a business strategy. However, the complexity associated with these two fundamental concepts has changed and evolved. There are more constraints and new analytical factors. As such, through 2020 we see proactivity becoming an even greater imperative.

Nonetheless, most institutions today – understandably strained by the plethora of regulatory requirements and cost pressures – are merely reactive. A select few capital markets participants are beginning to take this a step further and are considering the implication of risk and capital on business strategy.

They are making explicit decisions about the nature and extent of their businesses. Our survey further underscores that industry leaders feel that integrating risk and regulations on an enterprise level is a great challenge; less than 3% of executives expect that many capital markets players will fully master and recognise risk/regulatory enterprise integration by 2020.

Three key elements of regulatory assessment for capital markets participants

Within our Capital Markets 2020 survey, 90% believe that it is important to establish a strong culture and conduct focused on higher ethical standards.

Structuring an integrated function to quickly draw insight from an evolving regulatory landscape, understand impacts and effectively deliver change

Source: PwC

2. Establish stronger culture and conduct The topic of people and change to date received only peripheral attention and typically only during times of M&A activity. Even then, our anecdotal observations reveal that within the focused integration planning context, many questions relating to culture often do not get fully addressed, as firms struggle to successfully define and apply a common and consistent set of values and behavioural norms. All these issues have or continue to plague almost every major capital markets player.

Despite challenges and drawbacks, the pressure to maintain this status quo has been significant. Individuals or groups that drove sizeable revenues and received sizeable remuneration were often given wide latitude and influence within the organisation.

Attracting and retaining talent remains a top priority among our surveyed executives. If an institution tried to choose a different path it risked losing talent, clients and revenues. However, the financial crisis and the public relations misdeeds stemming from issues associated with misaligned incentive structures and conflicts of interest have now fundamentally shaken these arguments.

Rather, we believe that culture in some ways, will become a source of competitive advantage: attracting clients, reducing unwanted regulatory and market scrutiny and helping curb operating losses over the long-term.

It appears that senior executives and boards have understood this as well. Many, particularly larger institutions, have launched formal culture programmes, but there remains a long way to go. Within our Capital Markets 2020 survey, 90% believe that it is important to establish a strong culture and conduct focused on higher ethical standards.

However, 71% don’t believe that this will be pervasive within their businesses through 2020. The main question remains: How can the industry ‘change for good’, in a way that restores confidence in the very institutions we depend upon for capital formation and economic growth?

To make culture and conduct change effective, it cannot be treated just as a separate set of initiatives or workstreams. Each organisation needs to envision its own identity and drive toward it relentlessly in everything it does. More than that, cultural change needs to be embedded and integrated into every other transformation that a capital markets institution embarks upon.

For example, redefining the business model or operating model, transforming technology or rethinking the geographic footprint all need to be evaluated in the context of their impact upon culture and conduct.

3. Redefine the business model Moving forward, significant structural changes to existing capital markets participants’ business models will be required, particularly for the larger institutions. Among the many actions capital markets players will have to consider are determining which clients to prioritise, geographies and businesses to stay within the long-term (and at what levels) and which products to shed in the medium-term. An overwhelming number of executives ASIAN BANKING AND FINANCE | SEPTEMBER 2015 31

ANALYSIS: capital markets 2020 A 4-stage plan to align corporate objectives and innovation execution

5. Enable innovation, and the capabilities to foster it Many FS executives could argue that the pressing challenges of the last several years – from the financial crisis to regulatory pressures – have forced innovation within FS to take a back seat. This answer however, is only partially true. The other half of the answer lies in the way financial institutions have managed innovation to date; PwC’s Global Innovation Survey reveals that FS falls well below other industries in its ability to manage innovation effectively.

Only 27% of FS institutions surveyed stated that their innovation activities are coordinated and managed efficiently. In fact, the majority of surveyed executives feel that only some (or fewer) capital markets players will have mastered a client-focused approach to innovation through 2020, while less than 40% indicate that they are currently investing in this. The greatest barrier according to our respondents, remains commitment of capital and financial investment when promoting innovation. We see cultural challenges such as the acceptance of failure and regulatory restrictions as more significant barriers.

While innovation traditionally has not been part of the ‘recipe for success’, all of the changes that we have already discussed – challenged revenue pools, complex legacy operations and technology, rising regulatory requirements – have created a need to incorporate innovation into capital markets players’ long-term strategy.

Source: PwC

surveyed are planning to redefine their business models to adapt to the changes in the industry environment through 2020. The executives surveyed, who were looking to sell assets or wind down businesses feel that they have only completed 50% or less of the necessary sales or firmwide consolidations needed.

We believe that the competitive landscape will fragment rather than unify, as players both large and small increasingly abandon the ‘everything to everyone’ service model and carve out unique niches within the capital markets ecosystem. As such the considerations and the end result will be unique for each institution and will inherently depend on intrinsic capabilities, client needs, local regulatory overlays and ambitions of individual institutions.

The end state will be such that participants will create business models that are more focused on what is deemed to be ‘core’ (or differentiating), with ‘non-core’ activities shed or marginalised. Additionally, building a more client-centric/service-oriented model and moving further along the value chain (i.e. expanding into adjacent areas such as clearing, settlement, collateral management, electronic trading and distribution) were cited in our survey as ways participants are thinking about strategically redefining their businesses.

4. Strategically renew the operating model Over the last couple of decades capital markets participants and users – particularly the larger ones – have developed highly intricate operating models, fuelled by a flurry of mergers, acquisitions and integrations, leading to a labyrinth of technology platforms to support various processes.

As a result, each product often has a unique complex process flow and it is not uncommon to have redundancies and misaligned technology platforms simultaneously supporting an individual trade. Across asset classes there is often little consistency in the way trades are executed. Because products run on different systems, it is often difficult – if not impossible – to aggregate and 32 ASIAN BANKING AND FINANCE | SEPTEMBER 2015

analyse cross-asset class positions and risk measures.

The result is obvious: a bloated cost structure comprised of decades of disparate cultures, technologies and redundant processes and a veritable tangled mess.

Surveyed executives are in agreement and have cited simplifying internal processes and reducing redundancies, training personnel to operate cross-functionally, and simplifying or changing the organisational structure as high priority actions to focus on when defining operating models through 2020.

Only 27% of FS institutions surveyed stated that their innovation activities are coordinated and managed efficiently.

6. Obtain an information advantage So is big data a long-term trend or just a fad? We believe the ability to aggregate enormous amounts of data, analyse and interpret it will be an absolute minimum requirement to be in the game. Almost all of surveyed respondents believe big data is important, and nearly a third believes it to be a key priority. Nonetheless, the surveyed respondents believe the industry is far from seeing many players master the uses of big data.

Remarkably, 45% are not investing in big data capabilities. Challenges are perceived to be stemming from many angles; the most widely cited constraints to truly achieving a big data advantage are related to talent, technology and market forces.

The organisational framework and process by which players turn information into knowledge – leveraging structured and unstructured data across all facets of the organisation to make informed decisions about markets and clients – will be the competitive advantage.

By Antony Eldridge, Asia-Pacific banking and capital markets leader, PwC Singapore