Asian Banking and Finance July-September 2014

DISPLAY TO SEPTEMBER 30, 2014

WHO’S AFRAID OF BITCOIN? HOW CAN ASIAN BANKS TAKE ON BITCOIN-TYPE COMPETITION ?

THE TREASURY WEARS PRADA

ISLAMIC BANKING CASHINGINONFAITH PRIVATE BANKS VS FAMILY OFFICES

BANKS EYE UBIQUITY IN

A PAPERLESS FUTURE

WHAT COULD BE LEARNT FROM UOB’S STRATEGIES?

PEOPLE PROFILE DBS’ new chief innovation officer Neal Cross

COUNTRY REPORT Indonesian banks not out of the woods yet

OPINION Is the fraud strategy of banks ready for the football fever?

ANALYSIS Can Singapore’s banks take on rivals in Asian market?

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FROM THE EDITOR PUBLISHER & EDITOR-IN-CHIEF ASSOCIATE PUBLISHER PRODUCTION EDITOR ASSISTANT EDITOR GRAPHIC ARTIST

Laarni S. Navida Roxanne Primo Uy Jason Oliver Tamara Pangilinan

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Joana Rizza Bagano

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Alex Wong

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Asian banks should not only be on the lookout for what their rivals are doing because the competition today is not only between banks. The rise of nonbank competition such as Google, Paypal, and Bitcoin poses significant threats to banks with more customers beginning to prefer the comfort of e-payments rather than going to the branch.

Tim Charlton

Laarni Salazar-Navida lanie@charltonmediamail.com

Lovelyn Labrador accounts@charltonmediamail.com advertising@charltonmediamail.com

Our channel checks reveal that Asian retail banks are currently caught in an arms race to develop the most innovative, cost-effective solutions for a trio of challenges facing the entire industry. The rise of Bitcoin and other non-bank financial alternatives have pushed banks to differentiate their services or risk a shriveled market share and margins in the booming micropayments sector.

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We talked to top Asian bankers to know more about the threats and opportunities in the Cards & Payments and Retail Banking sectors.

We also give you a comprehensive report on what’s happening in the Indonesian banking industry. Find out why the first half of 2014, where macro trends seemed to have been taking a turn in favour of the banking system, became a mere breather rather than the start of a smooth ride for the country’s banking system.

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

2 SINGAPORE BUSINESS REVIEW | JANUARY 2014

ASIAN BANKING AND FINANCE | SEPTEMBER 2014 3

CONTENTS

FIRST

COULD BE LEARNT FROM UOB’S 16 WHAT REGIONALIZATION STRATEGIES?

INSIGHT 18 FINANCIAL THE HUNT FOR SINGAPORE’S

STORY 28 COVER BANKS UNDER ATTACK FROM .COM STARTUPS

FIRST

BILLION-DOLLAR STARTUP BEGINS

ANALYSIS

OPINION

08 Digital banks and the

26 Can Singapore’s banks take on

32 Is the fraud strategy of Asian banks

ready for the football fever?

dare to innovate

34 Applause for the MAS’s new

09 Private banks vs family offices

REPORTS

09 The Chartist: CHINA banks 10 Is Islamic banking cashing in

on faith?

12 How critical is digital banking to

financial inclusion?

rivals in Asian market?

securities trading rules

20 Indonesian banks not out of the

woods yet

24 Banks eye ubiquity in a paperless future

14 The treasury wears Prada 14 Factors driving digital strategies

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 06-09 E, Maxwell House 20 Maxwell Road Singapore 069113

4 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

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RETAIL BANKING

Singapore overtakes London as top RMB offshore clearing centre SWIFT data shows that Singapore’s RMB payments value increased by 375% between March 2013 and March 2014, making Singapore number one in terms of RMB world payments value.

Singapore’s weight represents 6.8% of the overall RMB payments value, second behind Hong Kong, which still leads with 72.4%.

London now carries the weight of 5.9%.

RETAIL BANKING

RETAIL BANKING

Hong Leong Bank posts MYR1.56bn in net earnings for 9MFY2014 According to Nomura, Hong Leong Bank reported 9MFY14 net earnings of MYR1.56bn, accounting for 74% of our full-year estimates and 77% of consensus full-year estimates.

Weak treasury & FX income was more than offset by better NIMs, lower cost-income ratio, and robust asset quality. Hong Leong Bank is one of the few banking groups that has seen stable NIMs, and we attribute this to its rising LD ratio.

Taiwan lags US as an offshore RMB clearing centre SWIFT’s RMB Tracker shows that United States’ RMB payments value increased by 327% between April 2013 and April 2014, placing the United States at #3 in the world for RMB payments value, excluding China and Hong Kong.

In April 2014, 2.6% of total RMB payments value was carried out via the United States, up from 1.3% one year ago. Singapore remains in the top position followed by the UK.

Here are the skills in demand in the Asian banking and finance sector

BY CHRISTINE WRIGHT All-round Finance Managers and Financial Planning & Analysis professionals are among the skills in high demand across Asia, according to our latest Hays Quarterly Hotspots list of jobs in demand. A robust rate of economic growth should continue in Asia-Pacific this year.

Rising standards in the funds industry

BY LEON SANTOS There is a current trend in offshore fund and deal structuring towards more compliance and corporate governance, evident in two strong investment themes involving clients. The first is investment across South East Asia, which has been one of the top emerging market destinations for private equity capital.

FROM THE BLOG CNH: Offshore loans set to grow and here’s why

BY NATHAN CHOW HUNG LAI Ten years into its internationalisation, Hong Kong’s yuan loan business has lagged behind other offshore business. Current outstanding yuan loans of Hong Kong banks, total only RMB123 billion, about 1/6 of the RMB704 billion dim sum bond market (including certificates of deposits).

Tomorrow comes today…

Where tomorrow’s technology empowers your business potential…

KBank unceasingly innovates to meet your needs…always a step ahead.

6 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

The choice... that makes you smile

FIRST

FIRST banks and the industry in general.

Despite the lag, Asian consumers are leading the demand for mobile financial services, he adds.

Tom Mouhsian, Financial Services principal advisor for KPMG in Singapore acknowledged the persistent problem of unbanked and underbanked areas, further aggravated by the lack of access to mobile phones.

But financial institutions are not as equipped with the right infrastructures as telcos to resolve the issue. With its lack of capability, Mouhsian believes banks can still make a dent to the problem of a digital glitch.

GUARDS UP, ON

Banks and financial services companies in Singapore are becoming more wary of online threats, and are expecting to increase their spending on cyber security, Of all the institutions, 93% are planning to hire more staff to guard their company’s online accounts. Specialist recruitment firm Robert Half surveyed150 senior Financial Services leaders in Singapore together with 575 others across Australia, Hong Kong, Japan, the UAE, the UK and Singapore.

Administrative measures Robert Firm found that 60% of all banks and financial services companies surveyed are increasing their spending on IT security this year, with Singapore leading the increases.

Stella Tang, managing director of Robert Half Singapore says, “Banks and financial services companies that are not increasing their IT investment are instead hiring additional staff to bring their IT security functions in.”

Larger companies in Singapore are more likely to be hiring permanent staff. According to the survey, 42% of large firms are planning to hire permanent employees to manage cyber security compared to 39% of mid-sized firms and 37% of small firms.

The moves to heighten online security by banks and financial institutions followed a directive from the Monetary Authority of Singapore to heighten vigilance.

“Companies now realize that even the best designed system and most sophisticated software protection can be hacked,” said Tang. “Preventing hacking is a 24-hour job and many teams need to work around the clock in shifts, so having enough manpower is essential if security breaches are to be prevented,” Tang added.

8 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Asians demand most in mobile services

Digital banks and the dare to innovate

G

rowing demand for mobile services in banking has opened up the challenges of innovation and poor bank penetration. With issues hounding the promise of “mobile banking,” banks are faced with engaging customers who find themselves estranged in a connected, digital age.

Digital means real-time services, financial services leader Anthony Elridge of PwC Singapore explains.

“As increasing wealth spreads out over Asia’s bulging population, we expect an increasing drive to develop digital platforms,” he adds.

For instance, Citi Bank’s “smart branches” offers interactive touch panels, video-conferencing capabilities and full-service banking through iPhones and iPads.

Banks are moving from merely transactions to digital cross-selling and online advice, says Jan Bellens, emerging markets leader of EY. However, experts are worried that digital banking is losing its steam in underbanked areas where customers remain out of reach.

Lag in innovation Liew Nam Soon, Asean Financial Services Leader at Ernst & Young (EY), notes that there remains a “lag in digital innovation” among Asian

Digital banking is losing its steam in underbanked aread where customers remain out of reach.

Value-adding For instance, banks can “add value” by putting up free WiFi zones outside their branches.

Mouhsian cites US-based Umpqua Bank, which built “community centers” with WiFi for people to hang out, designed to reach out to customers in an environment where banks are not aggressively pushing a product.

“In the end, though, it’s really not just about mobile phone proliferation.

Providing additional value and usefulness is what banks should strive for in their quest to become more customer-centric,” Mouhsian notes.

Ultimately, going digital is the solution to the problem of “financial exlusion” among consumers, says PwC Singapore’s Elridge. “With the cost of digital ownership continuing to decrease, the ability to transact and operate digitally is opening geographies where traditional branch-based distribution has not penetrated,” he adds.

Clients are leaving branches for mobile banking

Source: McKhsey Personal Financial Services surveys

seeing increasing interest from wealthy families to understand the Western and Asian-based family office concept to create their own models which fit their cultural and regulatory framework.”

As early as 2011, many of the region’s biggest private banks had specialist units catering to family office business in Asia. To cater to ultra high net worth families, UBS has matched highly competent senior client advisors with family offices.

The rich are fast turning to family offices rather than entrusting their wealth to private banks.

A word of caution But Alvin Lee, Head of the Regional Wealth Management at Maybank Singapore throws in a word of caution. “With the growing wealth, there will be more competition amongst the Independent Family Offices Advisors. Advisors need to be careful about competing for clients too aggressively, which will compromise their ability to provide focused advice.”

How big a threat are family offices to private banks?

Private banks vs family offices

M

any of Asia’s rich families have shunned private banks after the financial downturn in 2007, a phenomenon that has sparked ongoing debate over just how big a threat family offices pose. Trends across Asia, however, show the two could coexist, as many top banks in the region have started offering FO services to meet the needs of ultra high net worth families.

“We do not see it as a turf war.

On the contrary, we believe it is complementary,” says Munish Dhall, executive director of Global Family Office for Southeast Asia at UBS. Family offices are investment

structures that manage the wealth of ultra rich families, from day-today administration, investment and management, among others.

While a relatively new phenomenon in Asia, the rich are fast turning to family offices rather than entrusting wealth to private banks.

Dhall says there are at least 200 family offices in Asia, with an increased interest in family office setups, especially from mainland China and Taiwan.

“The centres of choice for family office setups in Asia are predominantly Singapore or Hong Kong,” he says. “In China, we are

Private family offices’ investment alliances

Source: 2012 Wharton Global Family Alliance study

THE CHARTIST: CHINA BANKS China has always been gracing every headline as of late, and its banks aren’t exempted from getting into the limelight. UOB KayHian notes that China’s economy is shifting from hypergrowth driven by investment and exports to steady growth generated by consumer spending and services.

Even the banks’ mortgage loans are catching everyone’s attention. CCB International Securities says mortgage loan growth was 20.1% in March 2014, much higher than ordinary loans (13.9%). The weighted mortgage loan rate has improved steadily since September 2012 reaching 6.7% by end-March 2014, 2.3% above the benchmark loan rate.

Loan growth - China

Source: CEIC

Mortgage loan growth higher than average

Source: PBOC

ASIAN BANKING AND FINANCE | SEPTEMBER 2014 9

FIRST

Is Islamic banking cashing in on faith?

Banks are growing money on trees

D

espite its rising popularity, Islamic banking must be bullish on going mainstream to meet rising demands. For greater access to the financial market, ADB Senior Economist Thiam Hee Ng says the Islamic bond market (sukuk) is increasingly replicating the structure of conventional bonds.

The global sukuk market has risen from $14.8 billion in 2001 to $281.3 billion in 2013. Malaysia is the largest market in the region, followed byIndonesia, Singapore, and Brunei Darussalam. “While this has facilitated adoption because investors are familiar with the structure, potential lies in developing the profit sharing structure such as musharaka, which is gaining wider acceptance among investors,” he says.

Partnering with the government Musharaka, a partnership structure that allows each party involved in a business to share in the profits and risks, can help widen the variety of financing instruments offered by Islamic banks. Sukuk is ideal for financing infrastructure but first, regulations must be streamlined.

“Malaysia has been a leader in

Sukuk increasingly replicating conventional bond structure

using sukuk to finance infrastructure projects. Strong support from the government in terms of ensuring that sukuk are not at a disadvantage to conventional bonds has promoted the development,” saysThiam Hee Ng. Sally Lye, head of Islamic Banking at Maybank Singapore agrees that Islamic finance requires a level playing field in terms of taxation, as well as clarity on regulatory and legal treatment. “The success story of Islamic finance hinges on the ability of the industry to offer value proposition solutions to customers as well as the importance of operating within a conducive regulatory and legal framework,” she said.

Islamic finance requires a level playing field in terms of taxation, as well as clarity on regulatory and legal treatment

SURVEY

How are banks extracting value out of higher revenues?

An abundance of market risks are not threats enough, as Asia’s finance chiefs are optimistic in the region’s business prospects. BAML’s 2014 CFO Outlook Survey finds that 76% of of Asia’s CFOs expect revenues to grow this year but only 60% expect profits to increase. indicating that it is getting tougher to extract value out of revenue growth.

More than half of Asia’s CFOs say they will seek to build profitability through the use of technology and automation, such as customer management programmes, better management and supervision of supply chains and forecasting.

The survey also reveals that a substantially higher proportion of multinational CFOs (66%) say they expect profits to grow in 2014, compared to CFOs from local companies (54%). This suggests that local companies will face even tighter margin pressure this year.

10 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

The banking sector is literally heading towards greener pastures.

Brandon Feng, head of Trade and Working Capital at Barclays Asia Pacific, says that international banks are becoming more cognisant of the impact they play in society, both economically and environmentally.

“To attain sustainability it is imperative to bring the mass people under the banking network,” says BRAC Bank head of communication Zeeshan Huq, stressing that traditional concentration on corporates and urban customers makes banks vulnerable. Huq says that Bangladesh has regulators are important in initiating the redesigning of banks toward socially-inclusive lending practices.

World Wildlife Fund’s Commodities Finance Program, the Banking Environment Initiative and the Consumer Goods Forum are now defining best practice standards for banking in the goal to achieve zero net deforestation in CGF’s supply chains by 2020.

CGF is a group of over 650 companies from 60 countries, with annual revenues of $3 trillion and an employee base of 10 million people.

Jeanne Stamp, Asia finance and commodities specialist at WWF, says that Asian banks are well-placed to capitalise on sustainable development opportunities given strong market positions and corporate client network. Stampe says Asian banks are largely exposed to sectors with high environmental footprints (mining, forestry), and that values based banks will be better able to manage these risks.

FIRST

How critical is digital banking to financial inclusion?

M

any find it hard to wrap their heads around why financial inclusion is an economic issue, because they see it as merely social. Some think this misconception frees them of responsibility, but that notion couldn’t be more wrong. The exclusion of a large part of the population from financial services has concrete impact on multiple markets, because greater participation ultimately drives the growth of the financial industry.

MasterCard released a study in light of the recently concluded World Economic Forum in Manila, profiling the financially excluded and underserved so that financial institutions can better understand why they are such a missed opportunity. According to the study, “the financially excluded are those that do not have access to formal banking facilities, and the underserved are those who do not have access to any form of electronic payment.”

The growing usage of smartphones further increases the potential for technology to be part of the financial habits of the excluded and underserved.

Financial inclusion in the digital age “The future of banking, globally, and particularly in Asia, is all about technology.

But are traditional banks really at the

forefront of the technological innovations on which the future of banking depends?

They need to be, or they risk a slide towards extinction,” says Antony Eldridge, Financial Services Leader at PwC Singapore.

Of course, any competent disciple of finance knows that no trend can play itself out on its own. Banks need to take a proactive role in harnessing technology to drive financial inclusion. Leong Kok Keong, head of financial services at KPMG Singapore puts it simply: “The good news is that new and innovative technologies enable customers to get more done with greater convenience. However, for developing countries with a large population of un-banked customers, the simple fact that the technology exists is not enough.

The presence of technology is merely a springboard toward financial inclusion.

Building a network The question now is, in what way can banks take advantage of technology to achieve financial inclusion? Keong suggests the key is “to work with the substantial infrastructure and resource of banks and at the same time, partner with telecoms and Internet companies to accelerate. Banks in Africa and India have achieved success with this approach.”

The future of banking is all about technology A more proactive stance is required as e-banking rises

And banks should not be alone in driving increased financial inclusion. Jan Bellens, Emerging Markets Leader at Global Banking & Capital Markets, underpins the importance of government participation in terms of education and access.

“Government policies and regulations promoting the development of an attractive and profitable mobile banking business can stimulate banks to partner with other institutions in providing education and infrastructure development.”

OFFICE WATCH

Check out OCBC’s new Shanghai branch OCBC marked another milestone in its 89-year history with China as it unveiled a sub-branch in the Shanghai Free Trade Zone, consistent with its strategy of serving customers both in their countries of domicile.

The SFTZ sub-branch involved the relocation of OCBC’s Jiading sub-branch as well as its team of staff and core clients, enough for SFTZ to hit the road running.

Located on the 7th floor of the Shanghai International Trust and Trade Tower, OCBC SFTZ will provide specialised financial solutions to satisfy customers’ corssborder needs including cross-border settlement and financing. Its broad suite of products and services include account servicing, cash management, trade finance, hedging solutions, global investment and tailor-made structured products.

12 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Reception

Customer receiving area

Outdoor signage

OCBC team

FIRST Factors driving digital strategies

Banks are challenged to centralise services across Asia

The treasury wears Prada

A

s the ASEAN Economic Community of 2015 draws ever so near, corporate treasurers or regionalising firms will demand even more for transaction banking services. But transaction bankers need to act fast, or this opportunity will turn to someone else.

“Strategies will require that customer data be converted from one or more system formats to a single, centralised format to rationalise product lines, consolidate back offices, and merge bank operations,” says John Wong, head of transaction banking at Maybank Malaysia.

Creating a seamless service Regional banks need to take advantage and synergise expertise in each area of the region to create a service that is both seamless and responsive. Wong cites Maybank 2E – Regional Cash service, the first regional cash management system in the region, which is accessible across major markets in Southeast Asia and Greater China, with “multi-region connectivity, multilingual capability, and multi-channel accessibility.”

As if the sheer magnitude of demand for transaction banking services weren’t pressure enough, regional banks are also faced with the threat of non-bank competitors.

These refer to software developers, telecom companies, and the like.

14 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

With these having greater expertise in technology, do regional banks stand a chance? “We believe Asian regional banks have the main advantage as being in the industry for the longest time makes us most acquainted with what the market needs,” expresses Isabella Aritonang, transaction banking head at Danamon. Wong suggests regional banks should work with these competitors to create much-needed synergies.

Finally, further expansion into Greater China, which is the goal of many regional banks, entails utilising knowledge of trading innovative financial products like derivatives and asset-backed securities. These are relatively new to Chinese banks, providing a competitive advantage to regional banks. Though Chinese banks may be bigger, their needs are especially tailored to the expertise of regional banks.

Regional banks need to take advantage and synergise expertise in each area of the region to create a service that is both seamless and responsive.

Areas of concern in transaction banking

Source: Celent, Trends in Transaction Banking: A Global Survey

There is still a lot to be done in the banking sector to improve customer interaction and create an omnichannel experience. PwC’s 2014 Global Digital Banking Survey indicates that 30% of respondents cite advancing customer experience as the most important factor for their digital channels strategy for the next two years, a factor second only to market share.

Only 43% of the respondents cite that online and mobile channels are operating on a multichannel platform, instead of the ideal omnichannel experience.

Meanwhile, only 19% of banks report combining online, mobile and social on a common platform.

According to PwC, customers go to digital outlets for simple transactions, whereas branch visits are reserved for complicated transactions and problem resolution. Singapore’s AsiaPac Distribution, an IT consultancy company, is leading in the digital space, with best practices, top-down views and holistic approaches in the offing. The survey reveals that European and American banks discuss digital strategies less, increasing the chances of misalighnment between corporate and digital strategies.

As a response to the misalignment, European banks are expected to make the most progress in their approach to digital channel strategy for mobile banking, social media and production co-creation.

FIRST THE ANALYSTS’ CALL

Why is UOB the best investment bet?

Hang Seng Bank offset compression in Hong Kong

What could be learnt from UOB’s regionalization strategies?

T

he numbers are turning up and analysts are looking at UOB as the benchmark model for regionalization.

Although some Singapore banks are more aggressive in their regional expansion strategies (the Wing Hang Bank acquisition

by OCBC, for instance), UOB is proving that a more conservative approach not only has a place in successful regional expansion, but may just be the best possible tactic.

UOB’s primary business is wholesale and

associated with added exposure to China, especially with indications of a slowdown in place. This is another reason why UOB takes the preferred banking pick. Ng Wee Siang, analyst at Maybank Kim Eng, notes that UOB has the smallest exposure to Greater China, allowing it to be a beneficiary of the recent aversion to Chinese exposure by banks. Additionally, in spite of UOB’s small exposure to China, it still manages to do well for itself as far as an exposure to China is concerned. Koh points out that UOB’s growth from its exposure to Greater China is driven by the bank’s wholesale functions, UOB aims to double its corporate particularly the financing of blue loans to Hong Kong and Chinese compachip companies in Hong Kong nies expanding into Southeast Asia. and the region. Management has revealed to Koh that UOB “aims to double its corporate loans to Hong retail banking. The bank has a presence in Kong and Chinese companies expanding major Asian markets outside Singapore, into Southeast Asia over the next three such as Malaysia and China. Although years.”

Carmen Lee, analyst at OCBC Investment Of course, there are certain risks Research notes that UOB has a market share associated with UOB (it can’t be a perfect of less than 2% in the overseas markets it bet, after all). Lee is less bullish on UOB participates in, these outside operations are (although not necessarily bearish either) still contributing robustly to UOB’s bottom compared with other analysts’ rosier line. For instance, Jonathan Koh, CFA, outlooks. OCBC Research has a HOLD analyst at UOB Kay Hian notes that “growth rating on UOB, citing the likelihood of in Malaysia was driven by retail banking, higher operating expenses as one of the particularly mortgages. Loans for residential reasons for the rating: “We are expecting a properties have grown at a 5-year compound 5-8% increase in total operating income, but annual growth rate of 17% and accounted for this will drop to 4-5% at the operating level a sizeable 37.8% of total loans.” due to higher operating expenses, raising our One of the top concerns looming over cost-to-income ratio to around 45% (from Singapore’s banking sector is the risk 42%-43% in FY11-FY13).”

16 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Macquarie – Thomas Stoegner Outside Singapore, the strategy to focus on selected customer groups and businesses in a manageable number of markets makes a lot of sense to us. We think UOB is unlikely to make OCBC-like acquisitions.

Among the three Singapore banks, UOB has the strongest capital ratio which is a point of increasing importance to us.

We see a good opportunity for UOB is to improve cost efficiency in Indonesia and Thailand over the mid-term. A cost/income ratio in Indonesia and Thailand that is more in line with peers at 45% would increase our earnings estimates by around 5%.

Maybank Kim Eng – Ng Wee Siang UOB’s share price continued to outperform even after posting weak 1Q14 results. UOB’s shareprice outperformance can be attributed to reduced appetite for a more aggressive OCBC, [and its] smallest exposure to Greater China.

The execution risk related to the acquisition of Wing Hang Bank has made investors become cautious about OCBC. This has put UOB in a positive light, reinforcing the perception of it being a safer investment bet. The market’s discomfort over significant Greater China exposure has reduced the investment appeal of DBS, given its largest exposure to that region.

OCBC Investment Research – Carmen Lee Management reiterated that they are still positive on the longer-term outlook of this economy, but prefer to take a more conservative stance in terms of its risk exposure for the near to medium term as the economy undergoes restructuring.

FINANCIAL INSIGHT

FINANCIAL INSIGHT flows and Series B in the second,” says Tachibana. If everything goes according to plan, he believes Singapore will see its first set of IPO darlings by the start of the next decade. “There is too much top-of-funnel, early stage funding focus,” concurs Sangeet Paul Choudary, Director at Platform Thinking Labs.

“The government’s startup grants, while thoroughly laudable, are heavily focused on injecting new ideas with seed capital.

Even some accelerators here are more interested in the number of startups they can get in rather than the number of businesses they can get out of the system.

Too little mid-funnel, growth stage funding, translating into the Series A crunch we all loathe.”

Which startup fits the bill?

The hunt for Singapore’s billion-dollar startup begins Venture capitalists are looking to Singapore for the next Google, but deals like that are still some ways off.

J

ust a few years ago, Singapore may not have even been a blip on the radar of venture capital (VC) firms searching for the next startup with a billion-dollar valuation. Now the country has piqued firms’ interest as a hotbed of innovation and some have poured in investments in the hopes of discovering a Facebookcalibre startup. However, VC firms may have to wait several years to hit the jackpot, argue analysts, because while Singapore has the brains to create such startups, the country still lacks key systems to drive global success.

Singapore has spent the last two decades laying the groundwork for the currently thriving startup scene, says Eric Tachibana, Founder and Managing Director of eXtropia Holdings, who has witnessed the growth of 18 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Singapore has spent the last two decades laying the groundwork for the currently thriving startup scene.

Singapore’s startup industry since the 1990s.

Singapore spent the 1990s developing a core national startup infrastructure. The government supported the startup scene with immigration policies, tax relief, subsidies and university curriculums that helped nurture a budding professional startup VC industry and the first few generations of startup entrepreneurs. But by the end of the decade, it became clear that there was a need for a national funnel to sustain VC portfolios.

“At that time, the funnel looked more like a pipe, with a chokepoint caused by trade sales.

I think primarily because the early VCs and startup entrepreneurs did not have the guts to really shoot for initial public offerings (IPOs), making trade sales too

attractive,” says Tachibana.

Entering the 2000s, Singapore worked to bolster the national funnel by investing in professional incubation and acceleration programs. Co-working spaces were built and government seed programs were established. This strategy proved successful, notes Tachibana, and Singapore began to develop a thick funnel of startups moving from ideation through validation of minimal viable products and into the early phases of traction.

Success beyond early stages Tachibana says Singapore must now spend the next decade turning these rough gems into brilliant, high-value diamonds.

Startups must be given the right tools and funding to successfully grow not just in the local market, but internationally as well. “With the seed portion of the funnel working, this decade is going to be all about building out Singapore’s growth infrastructure. That means a returned focus to Series A in the first half, and then a focus on building investment banking

Outcome-based grants Choudary suggests creating outcome-based grants that reward customer adoption or revenues with greater funding which may help nurture more businesses than experiments. eXtropia Holdings’ Tachibana says we lack a mature Series A ecosystem.

“That said, given the government’s recent announcement to fund 6 VC firms with S$48m, we’re moving quickly to resolve that issue. However, it’s not just about seeding investment funds. Without disrupting the work we’ve done to build the funnel, going forward, we’ll need changes to policy, attraction of foreign talent, and a continuing focus on the Singapore brand abroad. Most importantly, Singapore Inc. must use its procurement muscle to provide revenue sources and credibility for startups,” he adds.

Even though Singapore has fantastic infrastructure to support startups it still lacks a reliable system to rapidly scale businesses without having them burn their VC funding, says Choudary. This is a big weakness that makes the country less likely to attract VCs compared with India and China.

“Most startups trying to go regional face the problems that

they need to solve themselves. If instead, Singapore were to create conditions for rapid regional scaling, it would drastically bring down burn rates and make things more attractive for VCs.” Choudary suggests the government can launch an overseas scaling network that connects local startups with a network of potential regional partners. Funding incentives can also assist startups looking to set up regional operations. “A structured, centralized program to help with regional expansion, that startups could plug into, would reduce much of the repeated friction that every startup encounters while scaling.”

Why regional scaling is a must Rapid regional scaling is imperative for Singapore since the local market is too small to provide the kind of returns that VCs require. From the get-go, Singaporean startup founders looking to secure funding from VCs must envision a business with a regional or, preferably, global business model.

“The 200 million middleclass consumers we will see in Southeast Asia by 2020 will create an enormous demand for products and services, in particular when it comes to information technology, which most VC funds are after,” says William Klippgen, General Partner at Clickstream Ventures.

This is easier said than done, especially for Singaporeans who have to shake off their traditionally conservative and risk-averse attitude, says Jack Wang, partner at Lexico. “The Singapore education system favours scholarship tracks and academic excellence. Risk taking and startups are not the top choice for young talents. Despite the excellent government incentives, startups need to scale up with a global vision to succeed. This is often not easy for young Singaporeans and startups.”

Singapore may have made VCs look its way with the help

Frank Levinson

Hugh Mason

Jack Wang

Sangeet Choudary

of government initiatives such as co-investing schemes. But for it to capture the full attention of VCs, the country must prove that it can consistently produce multibillion-dollar startups through exit deals. Or else, it will just be all potential and no profit. “Long term, the ecosystem must generate significant exits on a sustained and somewhat steady basis.

Then the system becomes selfreinforcing,” says Frank Levinson, founder and managing director of Small World Group.

Choudary, for his part, notes that the last couple of years have seen important exits, most notably Viki. There has also been increased buying activity by larger North Asian buyers, which has raised the likelihood of exits for investors. New VCs should also play a big role in taking the Singapore startup scene to its explosive next stage of growth.

Levinson cites Jungle Ventures, Golden Gate Ventures, and TNF as a few new entrants that have proven themselves well.

For Hugh Mason, CEO at JFDI. Asia, local funds like Monk’s Hill Ventures and Northstar Groups’s Hia Goh and Shaneee Chesson, who have evolved into the role of operator VC, have great potential.

“They have physically moved in with us at JFDI to be closer to the powerhouse of startup creation because they recognise that it’s only getting close to startups at an early stage and helping us to ‘farm’ future talent that they will have a sustainable source of great, de-risked businesses in which to invest.”

Venture-capital investment in tech sector, in millions of USD

Source: Asian Venture Capital Journal Research/Wall Street Journal

ASIAN BANKING AND FINANCE | SEPTEMBER 2014 19

COUNTRY REPORT: INDONESIA

COUNTRY REPORT: INDONESIA inflation. For instance, these massive subsidies institutionalized by the government comes at the expense of more infrastructure investments.

Key rates are the benchmark for other market rates. Banks with large government bond holdings are especially affected by further tightening of monetary policy. Not to mention the fact that an increase in key policy rates, as common economic sense suggests, stifles growth by increasing the cost of borrowing, prohibiting corporations from venturing into profitable growth initiatives that need to be leveraged.

Indonesian banks’ risk management practices superior to others

A more challenging mid-term horizon is in store

Indonesian banks not out of the woods yet

Find out why analysts warn of a more turbulent second half of 2014.

T

he first half of 2014, where macro trends seemed to have been taking a turn in favour of the banking system, became a mere breather rather than the start of a smooth ride for Indonesia’s banking system.

Major indicators are pointing to a more turbulent second half for the banks. “Previous sentiment tailwinds on stabilizing macro data points that fuelled Indonesian [banks] – largely due to an improving Rupiah – during [the first half] appear to be unwinding,” notes Jayden Vantarakis, analyst at CLSA. As far as the indicators go, a relatively more challenging midterm horizon seems to be in store for the banks – more so for midsized banks than for the larger ones. Nevertheless, the economic environment in Indonesia remains favourable to banks in the long 20 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Indonesia’s population of 238m people, low per-capita GDP, and very low credit penetration make it one of the key growth systems in Asian banking.

term. “Indonesia’s population of 238m people, low per-capita GDP, and very low credit penetration make it one of the key growth systems in Asian banking,” says Derek Ovington, analyst at CLSA. A fragmented sector Little has changed in the country’s fragmented sector. The top four banks in the country are Bank Mandiri, Bank Rakyat Indonesia, and Bank Negara Indonesia, which are government owned, and Bank Central Asia (private). These four alone account for around half of the sector’s total loan assets, illustrating the nature of the sector’s fragmentation. “The large tail of subscale banks struggle to compete effectively against the top tier of four national banks that dominate the system and achieve oligopolistic returns,” notes Ovington.

One way in which this competitive environment is making itself felt is in the increasing trend of industry time deposit rates. As Vantarakis illustrates, “BCA’s decision to pay above deposit insurance capped rates for large deposits (the LPS cap stands at 7.75% per annum) has had an effect on other banks’ pricing, with several opting to lift counter rates at recent fortnightly ALCO meetings.” Vantarakis further cites the example of BRI, BNI and Btpn’s decision to raise rates by 50-200 basis points.

The effect? “Those banks under [our] coverage with the lowest estimated blended time deposit rate are seeing the fastest increases in pricing to remain competitive.

Smaller or more mid-sized banks will find it harder to respond to competition in this way because their top line is more vulnerable to decrease.

Despite the imperfections in the sector, headline numbers continue to be upbeat. Tuuli McCully of Scotiabank notes that “Indonesia’s banking system is well-capitalized, with Tier 1 capital adequacy ratio at 18.3% at

the end of 2013, according to the International Monetary Fund.”

McCully adds, as a summary of the sector’s core numbers, that asset quality of banks is still quite favorable, with the sector’s overall ratio of non-performing loans accounting for only 1.7% of total loans. As a word of caution though, “fast credit growth warrants continued vigilance by Indonesian authorities.” McCully notes that lending grew by 19% year on year in March.

Rupiah’s weakness The sector started the year with quite a positive sentiment, with a market optimistic about the Indonesian Rupiah’s (IDR) strength. The Indonesian economy began the year with a narrow trade deficit of USD444 million, and proceeded to register trade account surpluses for the remaining months of the first quarter. This led to a much celebrated strengthening of the currency.

The strength of the IDR was short-lived as the second quarter saw a complete reversal.

Sentiment turned sour after the month of April registered a large trade deficit of USD1.96 billion, along with a corresponding ramp up in the exchange rate.

However, banks may not be the biggest victims in this particular case, relative to the rest of the economy.

Cheul Soo Cho, CFA, analyst at Standard & Poor’s Rating Services, believes that the risk management practices by the

banking sector are superior to others’, as far as foreign exchange exposure is concerned.

“Indonesian banks’ general practice of matching their foreign currency assets and liabilities should largely absorb the impact of the rupiah depreciation and higher rates.”

Cho says that banks’ foreign currency liabilities account for “only about 10% of banks’ total liabilities.”

Meeting foreign developments Early last year, the US announced that it would begin to taper stimulus as signs of recovery.

Shortly after, many emerging markets saw a massive outflow of foreign portfolio investments, confirming that emerging markets are no longer in vogue. Despite the taper being a hot button issue, Indonesia is in a good position to withstand it. “We believe that the Fed will taper its bond purchases gradually, which will provide enough time for Indonesia’s real economy to adjust,” says Cho. Inflationary pressures are not expected to abate in the near future, with government commodity subsidies being one relevant factor. Accelerated inflation is likely to heighten the tightening bias of Indonesia’s central bank. True enough, CLSA’s economist is projecting an increase in key rates of 25 basis points.

These subsidies, although necessary, may hurt overall growth prospects for the economy in more ways than just accelerated

Despite the taper being a hot button issue, Indonesia is in a good position to withstand it.

Still set for long term growth In spite of the concerns surrounding major Indonesian economic indicators such as foreign exchange rates and inflation, the country’s fundamentals are still in place to prime the Indonesian banking sector for long term growth.

As Ovington points out, the country’s per capita GDP levels and credit penetration rates are at comparatively low levels.

This suggests that there is plenty of room for future growth of the banking sector. The only question is how fast and to what extent these levels will ramp up. Cho notes that “the Indonesian banking sector grew at a compound annual growth rate of about 23% in 2006-2012, a period in which the central bank significantly lowered its benchmark interest rates after they peaked at 12.75% in 2006.”

Indonesia trade balance

Source: Bloomberg, CLSA

ASIAN BANKING AND FINANCE | SEPTEMBER 2014 21

PEOPLE PROFILE

DBS Bank’s chief innovation officer has his eyes on customer centric non-traditional competitors Neal Cross focuses on defining the innovation strategy of the bank’s digital banking initiative across its key axes of growth. tion roadmap for DBS to enhance customer experience and better engage the bank’s customers in the digital landscape.

Cross brings with him over 20 years of experience and extensive knowledge in technology, innovation and financial services. Before joining MasterCard, he was the Financial Services Industry Director for Microsoft in Asia, providing banking and financial services expertise to strategic partners and enterprise customers in the region.

Neal Cross Chief Innovation Officer DBS Bank

D

BS Bank recently announced the appointment of Neal Cross as Managing Director and Chief Innovation Officer, Technology and Operations.

Cross joins DBS from MasterCard, where he was responsible for driving innovation as Vice President of MasterCard Labs in the company’s Asia/Pacific, Middle East and Africa regions. As the face of innovation at MasterCard Labs, Cross was a strong advocate for innovation culture and thinking, both as a spokesman for the company and in the execution of engagement programmes for its diverse base of employees. Based in Singapore, he was also charged with creating and managing innovation programs spanning ideation to commercialisation of new innovative payment solutions.

At DBS, Cross will drive the bank’s innovation agenda across its key axes of growth, namely, Greater China, Southeast Asia and South Asia. Working with internal stakeholders and external collaborators, he will chart a next-phase innova22 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

ABF: What three goals are you focused on?

My primary focus in this role will be to define the innovation strategy for our digital banking initiative as we roll this out across our key regional markets. The sudden acceleration and focus on digital has led to a realisation that nontraditional competitors are moving into the financial services space and are approaching it very much with the customer at the centre of what they do.

The insights that some of these technology behemoths have on their customers enable them to have a highly relevant engagement based on their clients’ current needs and the leading banks are now pushing towards this high level of engagement.

Secondly, I want to engage the whole bank in the business of innovation: identifying, activating, engaging and rewarding staff for helping to transform the bank. This is critical to our future success as our people are not only our greatest asset, they are the ones that are closest to the day-to-day lives of our customers.

Thirdly, to power the above initiatives I will bring leading

edge innovation practices to bear to improve the experience that customers have with DBS as we put customers at the very centre of everything we do.

ABF: What changes are you planning for?

I am constantly looking towards the tech and e-commerce mega vendors as they start to become more engaged in the world of financial services. These non-traditional competitors have the ability to compete more aggressively and have the scale to execute at speed, unlike financial institutions which need to take into account many more factors, including regulation requirements.

The 9 Asian Banking and Finance Awards th

ABF: What are your key business philosophies?

Always hire smarter people than yourself and empower them. Be prepared to take calculated risks especially if they fly in the face of conventional thinking. Assume nothing – test everything.

Non-traditional competitors are moving into the financial services space and are approaching it very much with the customer at the centre of what they do.

ABF: What previous positions prepared you for this one?

When I was in high school, I was a commercial games developer and I learnt valuable lessons about how to design highly engaging digital experiences. Microsoft is the one company where I learnt the most in a single role about how to drive a scale business. The way they approach role structuring, licensing and partnerships is second to none in my opinion.

At MasterCard I refined my understanding of innovation processes and how different processes could be combined to go from ideation through to commercialisation and beyond.

Awarding ceremony

July 10, 2014 Marina Bay Sands Singapore

For more details Julie Anne Nuñez julie@charltonmediamail.com +65 62237660 ext. 221

SECTOR REPORT 1: CARDS & PAYMENTS

SECTOR REPORT 1: CARDS & PAYMENTS improve their online banking platform “in terms of the gamut of services offered and security protocols implemented in order to make onboarding more convenient and attractive.”

Clients are increasingly signing up for mobile services

Banks eye ubiquity in a paperless future Financial institutions adapt to changing lifestyles and pioneer technological change as they jostle for top brand status.

I

n the cut-throat world of business and finance, the ability to be succesful is becoming increasingly dependent on who holds the technology of the future. In the case of banking, the future is a world without paper, a world where big data takes centre stage as consumers seek products and services customized for their preferences, lifestyles and needs.

Today, the region’s top financial institutions are jostling to become pioneers of this new world, heaving their technological weight and data prowess to capture a sizeable segment of the population.

Jonathan Larsen, Citigroup’s head of consumer banking in Asia Pacific and head of retail banking worldwide, says their use of technology is guided by three things – speed, simplicity and ubiquity. Speed is second-nature to finance where a push of a button should automatically dictate the flow of money. On the consumer side, simplicity means ease of access, which in turn encourages more transactions.

24 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Jonathan Larsen

Cynthia Liaw

Both are crucial to company promotion and expansion, as in the case of Citibank where 98% of transactions are already being conducted through non-bank and mobile channels. In their bid for ubiquity, Larsen says they are “leveraging technology and infrastructure to shape the development of mobile payment systems.”

Like other banks racing to introduce a new and effective technology to a large market, Citibank recently promoted mobile or e-wallet features in Latin America, to be followed by Asia in the near future.

Noppawan Jhermansa, Kasikornbank’s First Senior Vice President of Retail Business Division, says they are doing the same in Thailand by giving customers the option to engage in money transfer through convenience stores, “enabling money transfer coverage far and deep into any small towns.”

Cynthia Liaw, Maybank Singapore’s

Virtual Banking & Payments Head, says, “Advancement in technology has made possible instant gratifications in many areas – including banking and payments.” This has made the mobile channel an important distribution and delivery platform for banks.

Building a digital customer experience From a branch-centric approach, banks are now expanding through their mobile offerings. For Indonesia’s PT Bank OCBC NISP TBK, the push is towards a “seamless experience” that includes convenient mobile and internet banking.

“We are working with our Telco partner to build a digital customers experience by combining mobile, vast amounts of data, analytics, digital marketing, and moment of truth,” says OCBC. Noel Tagaza, SVP and Head of Bank of the Philippine Islands, Electronic Banking Group, agrees, saying banks should continuously

Security demands But because of the risks brought about by new technology, multiple encryption and authentication have become common requirements in banking applications. Like other leading banks, Tagaza says BPI only implements solutions that adhere to the highest global security standards.

Steffano Ridwan, PT Bank DBS Indonesia’s Consumer Banking Group director explains, “Security is a default key item in every step of the business.” In the case of Alliance Bank Malaysia Berhad, Group COO Raymond Leung says the company has invested heavily “in intrusion protections, DDOS, access protections, authentication and credential identification besides improving internal operational controls to identify fraud.”

OCBC uses a hardware security module to generate passwords, which are then securely encrypted every time the passwords are transmitted to the back-end system of the bank.

Jhermansa says Kasikorn bank, on the other hand, has a “triple lock security” system that encrypts data “throughout its journey, from the user to the Bank.”

Upon transacting, customers are sent a one-time password through their mobile phone and a verification code displayed online that must then be matched against each other.

Both Maybank and OCBC have a daily transaction limit to protect clients from fraud and theft.

Yeoh Beng Hooi, head of group retail banking and retail distribution at RHB Bank Berhad, says they deploy the same measure as per online banking through 2-way Authentication/ Mutual Authentication. “We have adopted the multi-factor authentication (MFA) to verify transaction. With the MFA implementation, consumer authentication mechanism upon signing-on and performing high risk transaction was enhanced through the introduction of stronger authenti-

travel packages and overseas spend, and five per cent cash rebate on groceries.”

cation methods,” says Yeoh.

Lifestyle cards As financial transactions shift towards paperless, wireless systems, consumer trends are also being influenced by changing lifestyles. When it comes to credit cards, banks are now focusing on creating lifestyle-centric products and services appropriate to market segments.

Hooi says RHB Bank particularly positions their cards towards customer needs at various life stages.

“We have a credit card product that is skewed towards daily needs that gives attractive cash back for groceries and petrol,” he says. Alliance Bank has the same strategy, with the youth segment being offered cards that provide immediate cashback, evergreen rewards, or lower interest rates.

As with every marketing strategy, the challenge is to reach and connect with the target market.

On the other hand, banks have been generous in doling out perks to encourage more customers to sign up. Siddharth Baidwan, HSBC Indonesia’s Head of Retail Banking & Wealth Management, says exclusive privileges are key to attracting and retaining customers. “For example, while travelling, we are exposed to many risks and being in a different country doesn’t make it any easier,” he says, adding that HSBC provides an emergency cash advance service across more than 30 countries worldwide for lost wallets and identity.”

Jhermansa says Kasikornbank has always invested in promotions that have a “wow factor” or is the first of its kind. A free cup of coffee or a free meal can do wonders for a bank’s promotion, he says.

He reveals that their recent campaigns have resulted in Kasikornbank securing the biggest market share in Thailand when it comes to credit card spending.

At the same time, Karen Low, Maybank’s Head of Cards & Unsecured Lending, points out that the promotional campaign’s “value propositions should be straightforward and easy to remember, such as 5X points on

Steffano Ridwan

Yeoh Beng Hooi

Choong-Wai-Hong

Khun Noppawan

Unique experience In the case of affluent clients, financial institutions are relying on customer experience and comprehensive packages to keep them loyal. Hooi says RHB’s premium cards “are aimed at a broader base of customers who seek more premium and value added offerings in cards and payment services such as unlimited cash back for overseas spend, travel, leisure and dining experience.”

For Kasikornbank, Jhermansa says, “Both the high-net-worth segment manager and the credit card business manager work together to ensure that not only is a super-premium credit card program in place, but also all customer experiences and touch points for high-net-worth customers are articulately designed to correspond with customers’ wealth, social status, recognition and lifestyle.”

Banks believe that affluent customers seek not only good deals and packages, but an overall experience that is appropriate for their status. These are “unique and memorable experiences that they enjoy which will hopefully help create a strong and lasting bond between the customer and the bank,” Low says.

She says “product bundling” is essential and should address the overall needs of the client, instead of being one-dimensional. In the end, financial institutions not only need to be at par with technological advances but should also have one foot forward when it comes to products and services.

ASIAN BANKING AND FINANCE | SEPTEMBER 2014 25

ANALYSIS: LOCAL VS INTERNATIONAL BANKS an issue in Asia.

If HSBC and StanChart don’t get their cost base under control, their profitability levels will very likely remain depressed and below the level of the Singapore banks. The consequence could be a gradual decline in competitiveness, with potential losses in market shares.

HSBC and StanChart should get their cost base under control

Can Singapore’s banks take on rivals in Asian market?

The may be cost efficient, but repeating the mistakes made by their rival.

U

nfocused expansion into too many new markets and too many new businesses can be damaging to banks’ profitability, risk profiles and share price. OCBC’s recent acquisition and the hopes for the China growth opportunity point to the risk that some Singapore banks may be tempted to repeat the mistakes made by the multinational banks.

To be fair, Singapore banks have so far been relatively disciplined by focusing on a manageable number of priority markets and customer segments. This has paid off. At the moment, Singapore banks look in a much better position than most multinational banks appear to be and should be able to take advantage of the current situation.

Given the outlook for rather moderate growth (particularly in property-related lending) in Singapore, the presumed benefits 26 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Before the Global Financial Crisis, HSBC and StanChart traded at a premium relative to Singapore banks, which was a result of a higher ROE.

of earnings diversification and high volume growth potential in overseas markets, Singapore banks may decide to go for expensive acquisitions to expand into new markets, new businesses and into new customer segments.

A tale of two banks Before the Global Financial Crisis (GFC), HSBC and StanChart traded at a premium relative to Singapore (and Asia) banks, which was a result of a higher ROE. This has reversed.

Western banks like to blame the tougher regulatory environment for their declining profitability. However, adjusting for too-high leverage, a too-low risk weight on assets with little correlation to underlying risks and often inadequate compliance and risk management standards pre-GFC suggests that previous ROEs were simply artificially inflated for many Western banks. This has been less of

Challenges of expansion At least on a relative basis, the Singapore banks have done a better job of expanding than the multinational banks and are now in a strong competitive position.

Disciplined overseas expansion and remaining focused on the core business and customers is a positive, while expensive overseas M&A and an uncoordinated expansion into new businesses and customer segments is a negative in our view. In this context, UOB stands out strategically given its disciplined approach towards overseas expansion.

Hong Kong and Taiwan are two markets that probably don’t need more banks, and in mainland China it is virtually impossible for a foreign institution to achieve scale in many businesses – particularly in retail banking.

Cost inefficiencies as a result of internationalization Earnings diversification, network synergies, cross-selling opportunities and connectivity are the bull arguments used by the multinational banks to defend their global franchise. However, one question emerges: where do all these positives show up in profitability numbers?

The problem is that they don’t. Most of the benefits of a large multicountry network get diluted by cost inefficiencies, regulation and increased complexity.

It is a cost problem – and not an income problem – that multinational banks have. A poor cost/income ratio can either be the consequence of a high cost base or a result of weak asset productivity.

Banking is all about scalability We prefer banks that have a decent market position in a few selected markets or businesses over banks

ANALYSIS: LOCAL VS INTERNATIONAL BANKS with a sub-scale position.

It is pretty much the same across the world: if a bank is sub-scale in any given market or business, the result is most often sub-par profitability over the cycle.

In Hong Kong, HSBC is very cost-efficient given its leading market position. Hong Kong is by far the highest profitability market for HSBC and a very profitable business for StanChart.

The good cost efficiency of UOB and OCBC in Malaysia is mainly a result of a clear focus on defined target groups of customers and not trying to compete in every business with the local banks. Return on Total Assets in Malaysia for UOB and OCBC is above group average.

A bank does not need to be the market leader across all businesses to achieve high profitability in a country.

If a bank is strong in a few businesses and/or in a few customer segments, it can achieve good cost efficiency and good profitability, in our view. This is the case for UOB and it is now also the case for DBS in Hong Kong.

The market share of each foreign bank is below 5% in Indonesia and the top local banks have a clear cost advantage. In order to make the cost efficiency numbers work and to increase profitability, a higher market share in the core businesses is probably needed.

In our view, it would be a positive for the profitability profile of UOB

and OCBC to increase market share in their core businesses in Indonesia rather than entering new markets, new businesses or new customer segments.

For Thailand and Greater China the picture is similar to that in Indonesia: foreign banks have a low market share and are cost-inefficient.

DBS shows that you don’t need to have a large presence in all kind of markets (like StanChart) to be successful in trade finance. DBS has become a very strong competitor in Asia Transaction Banking for the multinational banks.

The reasons for DBS’s success are past investments in its platform resulting in industry leading cost efficiency of 38% cost/income ratio in Transaction Banking, down from 47% in 2010.

Cost efficiency is a point where HSBC and StanChart are struggling, which is an increasing risk for their competitiveness, in our view.

Chasing high top-line growth and forgetting about profitability Most often international expansion is all about the top-line growth story but it rarely improves the banks’ profitability profile. Shareholder value is created by getting both the profitability and growth numbers right - not by building an empire.

Multinational banks are now paying the costs for uncoordinated expansion in the past and OCBC is at

In order to make the cost efficiency numbers work and to increase profitability, a higher market share in the core businesses is probably needed.

risk of being the next.

Recent deals such as the Wing Hang Bank bid by OCBC or the attempted Bank Danamon acquisition by DBS are a red flag to us. However, compared with the multinational banks, the Singapore banks have been relatively more disciplined (or were a bit more lucky) with overseas expansion and are now in a strong competitive position in our view.

Apart from some expensive acquisitions, the expansion strategy of Singapore banks has actually been quite sensible. After the sector consolidation, all three banks have a strong position in their home market and a manageable number of priority markets.

For the profitability profile we would see an organic increase in market share in the existing core markets as a positive, while, in our view, any expensive acquisitions or new market entries would be a risk.

Lessons from the consolidation of the Singapore banking sector The consolidation of the Singapore banking sector took place during 1998 to 2001, followed by overseas acquisitions, mainly in ASEAN and Greater China. DBS clearly benefited from the pressure to consolidate, with the merger with POS Bank benefiting their funding costs even today.

DBS’s bid for OUB, a smaller Singapore bank, however, failed.

OUB was eventually acquired by UOB instead. Post the consolidation within Singapore, the focus turned to overseas markets. Given the rather small size of the Singapore market, banks had to expand overseas to keep the growth story alive. Leveraging Singapore’s positioning as a financial hub, the banks expanded mainly into ASEAN and Greater China, enjoying varying degrees of success.

Domestic consolidation made a lot of sense and was a net positive for the three major banks in our view.

Some of the overseas acquisitions have however been less successful.

This was partially due to the lack of scalability, too-high premiums paid and too-optimistic synergy assumptions. By Thomas Stoegner, Analyst, Macquarie Research ASIAN BANKING AND FINANCE | SEPTEMBER 2014 27

SECTOR REPORT 2: RETAIL BANKING

SECTOR REPORT 2: RETAIL BANKING

I can see the big data from here but it looks scary

Banks under attack from .com startups Bitcoin-type competition, financial exclusion and digital banking top their strategic agenda.

A

sian retail banks are currently caught in an arms race to develop the most innovative, cost-effective solutions for a trio of challenges facing the entire industry.

First, the rise of Bitcoin and other non-bank financial alternatives have pushed banks to differentiate their services or risk a shriveled market share and margins in the booming micropayments sector. Second, banks are under immense pressure to provide banking services to more than a billion people that their traditional structures cannot reach or are simply ill-fitted to address. Third, banks are grappling with soaring demand for digital banking services, ushering in a drastic repurposing of their branches and substantial technology investments.

Retail bank executives who now have their backs against the wall have responded to the pressure by putting on their creative helmets and whipping out clever schemes -- and so far, with surprisingly promising results.

28 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

Jonathan Larsen

Choong-Wai-Hong

In the fight for transactional revenues from digital payments, retail banks are now attracting heated competition from Bitcoin, PayPal and money remittance services. Banks like Maybank are differentiating themselves by offering integrated services that these non-bank rivals cannot.

Maybank, for instance, has greatly expanded its remittance services to any Visa or MasterCard in the world for up to S$3,000 daily. Remittance transactions can be made via online and mobile banking, effectively giving customers a breadth of delivery options for optimal convenience depending on their preference, says Choong Wai Hong, head, consumer financial services at Maybank.

For Noel Tagaza, SVP and head of electronic banking group at BPI, this emerging threat from non-bank rivals should be seen as a golden opportunity to work with them instead of against them. “The emergence of non-bank players, especially cryptocurrencies and alternative payment

networks, has not gone unnoticed.

These non-traditional alternatives are often seen as more innovative because they are not hindered by stringent banking regulations and restrictions on money transfers. As such, they are able to offer lower transaction fees and faster settlement.”

“Therefore, a healthier perspective would be to focus on how to work with these non-bank entities instead of directly competing with them.

They are obviously more nimble than banks, which belong to a highly regulated industry. Working with these entities will allow us to tap into that strength.”

Fighting financial exclusion Another dilemma for Asian banks is the issue of financial exclusion, wherein people with low or no income do not have easy access to financial services and tools such as credit cards and bank accounts. Some banks are exploring partnerships and investing in technology to provide

services to this huge untapped segment for new retail banking customers.

PT Bank OCBC NISP in Indonesia, for example, has been forming strategic alliances with telecommunications companies to develop e-money and full financial services, and teaming up with mini-mart chains to extend their retail banking reach faster and more efficiently, says PT Bank OCBC NISP [Need source name].

This strategy provides at least two tactical advantages to OCBC NISP: First it helps the consumer bank provide retail banking services at a micro level currently not supported by conventional distribution channels, and gives the bank the opportunity to provide necessary education to the unbanked segment, and in turn become one of the first movers that will convert the segment into accepting banking services.

Meanwhile, rival PT Bank DBS Indonesia is taking a big bet on gamification as a means to educate the unbanked and introduce them to financial services. “In line with the digital era whereas smart phone are more affordable nowadays, we will launch the first mobile financial education through gamification which intended to give financial education for young people to understand about banking products and also give them the opportunity to grow their investment on line,” says Steffano Ridwan, director, consumer banking group at PT Bank DBS Indonesia.

Citi has also been actively running financial education programs for years now, targeting the approximately 1.5 billion people living in Asia that do not use formal financial serves to

save or borrow money.

One particularly program zooms in on mature women between ages 40 and 60, which helps this particularly vulnerable group become financially capable, according to James Griffiths, director, corporate affairs, Asia Pacific at Citi. Initially launched in Singapore back in 2008, the program has since been replicated in Indonesia, Malaysia and Japan.

Meanwhile in Thailand, Kasikornbank is implementing a mobile banking strategy to penetrate the millions of primarily prepaid mobile users living in small towns and rural areas with no access to traditional banking services, according to Noppawan Jhermansa, first senior vice president of retail business division at Kasikornbank. “For organic network expansion, we have expanded our own physical network extensively and rolled out a new simple mobile banking service that fit with the underbanked target group.” Its socalled Speed Top-Up Mobile Banking service, a simplified version of mobile banking tailored for airtime top-up via non-smart phones, has signed up over 1.1 million customers in less than two years due to having no service charges and ease of use.

Jhermansa says Kasikornbank has also followed the partnership model with business operators like 7-Eleven with extensive nationwide network in small towns and villages in lieu of building a traditional banking network from scratch. Customers in these areas primarily require simple deposit, loan, withdrawal and fund transfer services from relatives working in more developed provinces. To cater to their needs, it has rolled out

money transfer services from ATM machines to 7-Eleven and the Thailand Post Office.

Steffano Ridwan

Yeoh Beng Hooi

Cynthia Liaw

Khun Noppawan

Evolving to digital banking The clamor for digital banking services is another source of confusion for retail banks that must now figure out how to expand their online delivery without diminishing their brick-andmortar presence. It’s a tricky balancing act for sure. Closing branches and investing on digital systems may seem like the obvious solution, but executives agree that they must play it by ear or risk failing in both fronts.

“Branches are still important and relevant. We will continue to open branches at vibrant areas while also relocating existing branches to good locations,” reveals Yeoh Beng Hooi, head of group retail banking and retail distribution at RHB Bank Berhad.

Other banks agree with this assessment, believing that branches will need to become hubs for new customer acquisition and financial advisory. Banks that fail to evolve will be thrown to the wayside, while those with superior security, wider platform coverage, better streamlined services and more tailored experiences will capture a larger share of the online transaction pie.

Guided by these factors, HSBC has been offering customers access to Global View, a feature which lets a user view the balance of all linked HSBC international accounts on one screen, with free and real-time account transfers. HSBC also has a Wealth Dashboard, which is a unified online wealth management solution platform that gives a unified overview of all of a user’s HSBC holdings plus access to performance analysis, transaction history and other control features. Transactional security is also ensured through verification processes, irregular transaction tracking and two-layer passwords when transferring funds.

“We understand that the other side of the technology coin is security, and it is indeed one of HSBC key priorities to create a transactional experience that is convenient and secure for our customers,” says Siddharth Baidwan, head of retail banking & wealth management at HSBC Indonesia.

ASIAN BANKING AND FINANCE | SEPTEMBER 2014 29

EVENT COVERAGE: ABF RETAIL BANKING FORUM 2014 will compromise face-to-face transactions which are more effective for customized banking services.

But in Manila, bankers noted that branch banking will still be part of their strategies over the next five years. “The challenge in the Philippine market is financial exclusion and this is where branch banking will continue to be a part of,” said Joven Hernandez, Head of Retail Banking Group, Philippine National Bank, adding that 1,611 towns out of 1,634 are unbanked.

The ABF Retail Banking Forum will now be held yearly, with the ABF team visiting Jakarta, Kuala Lumpur, Bangkok, and Manila each year.

200 bankers attend the ABF Retail Banking Forum 2014 Digital transformation and silver tsunamis were among the topics discussed in Jakarta, Kuala Lumpur, Bangkok, and Manila in April.

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sian banks should not only be on the lookout for what their rivals are doing because the competition today is not only between banks. The rise of nonbank competition such as Google, Paypal, and Bitcoin poses significant threats to banks with more customers beginning to prefer the comfort of e-payments rather than going to the branch. According to a survey conducted by Asian Banking and Finance among top bankers in March 2014, non-bank competition is the top 2 threat for retail bankers, beating regulation which only came in as the top 5 threat. Micro issues, which include competitive margin & pricing, diluted NIM, interest compression, deposit drift & asset quality, remain the top threat to Asian retail bankers.

In an effort to inform the discussion and continue the debates, Asian Banking and Finance organized the 30 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

“Non-bank competition is the top 2 threat for retail bankers, beating regulation which only came in as the top 5 threat.”

inaugural Retail Banking Forum in April this year, which was held in four key cities - Jakarta, Kuala Lumpur, Bangkok, and Manila. The events exceeded the targeted number of participants with nearly 50 senior decision makers, retail bankers, and industry experts attending the forum in each city.

The ABF Retail Banking Forum was led by our thought leadership partner Mohit Mehrotra, Regional Head of Financial Services, Strategy & Operation, Deloitte. Mohit talked about the implications of the silver tsunami and digital business models for the retail banking industry. Tim Charlton, Editor of Asian Banking and Finance moderated the discussions.

The discussions in Jakarta revealed that banks are looking at reducing branches in favor of online banking.

However, some argued that doing so

Panelists and attendees The Forum kicked off in Jakarta with more than 40 attendees from CIMB Niaga, Bank Mandiri, Citi Indonesia, DBS Indonesia, HSBC Indonesia, and others. The panelists are Hery Gunardi, Managing Director, Retail Banking, Bank Mandiri; Steffano Ridwan, Managing Director, Head of Consumer Banking Group, DBS Indonesia, and; Siddharth Baidwan, Head of Retail Banking & Wealth Managment, HSBC Indonesia In Kuala Lumpur, the panel was joined by Raymond Leung, Group COO, Alliance Bank. The attendees were from Alliance Bank, Hong Leong Bank, Maybank, Public Bank, RHB Group, among others.

The panel in Bangkok was joined

by Kris Chantanotoke, EVP, Wealth Management, Consumer Banking Group, Bank of Ayudhya and Noppawan Jermhansa, First Senior Vice President, Retail Business Division, KASIKORNBANK PCL. There were around 50 attendees from Bank for Bank of Ayudhya, Citi, Siam Commercial Bank, and UOB (Thai).

The last leg of the forum was held in Manila with over 60 bankers from Security Bank, East West Bank, Metrobank, Philippine National Bank, Bank of the Philippine Islands, RCBC, and many others. The panel was composed of Mark Perez, Head of Retail Banking Group, Metrobank; Joven Hernandez, Head of Retail Banking Group, Philippine National Bank (PNB), and; Anthony Thomas, Retail Bank Director, Citibank.

EVENT COVERAGE: NETEVENTS GLOBAL SUMMIT

Panelists from Jakarta with Tim Charlton and Mohit Mehrotra

Mohit Mehrotra delivers his presentation

The panel from Kuala Lumpur

Panelists from Manila with Tim Charlton

Panelists from Bangkok with Tim Charlton and Mohit Mehrotra

Tim Charlton with attendees in Manila

Tim Charlton addresses the attendees in KL

Over 60 bankers in attendance at the Manila forum

The Asian Banking and Finance team

OPINION

SUBHASHISH BOSE

Is the fraud strategy of Asian banks ready for the football fever?

Credit card fraudsters just might score a goal

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s hordes of travellers descend upon Brazil to enjoy the once-in-a-lifetime festivities of the World Cup, many of them will be blissfully unaware that fraudsters are already putting into action new ways to steal their credit card details.

Brazil’s ministry of tourism predicts that the 3.7 million people travelling in the country will collectively spend more than USD 3 billion during the World Cup this year. It is estimated that the average international tourist will attend at least four matches and spend at least USD 2,500 during their stay in Brazil.

Like other emerging markets, Brazil faces a future characterized by just as many challenges as opportunities. Fraud in particular is a huge problem, and Brazil has experienced its fair share of ATM and counterfeit payment card fraud issues, which directly led to the accelerated adoption of EMV within the country.

In fact, reports by Kaspersky Lab have already uncovered rampant cyber-attacks dubbed “World Cup Malware” which specifically target card and internet banking customers looking to buy tickets or browse for match information.

So how will this impact issuing banks and processors in Asia Pacific? Numerous European clubs from the likes of Manchester United to FC Barcelona have reported that the increasing affluent and connected Asian fans are their key

32 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

BY SUBHASHISH BOSE Senior Consultant Prevention of Financial Crimes ACI Worldwide

supporters, and at the last count, the English Premier League alone had an estimated 820 million fans in Asia.

These tourists will be using cards issued by local and regional banks and browsing for information on their laptops and mobile phones, potentially exposing themselves to fraudsters via skimmed terminals or infected wireless ports.

Banks should encourage cardholders to notify their destinations and travel dates in advance.

These educational campaigns can be more relevant, by considering some level of filtering on demographics, frequent travel, and the type of card.

Some of our clients have even made this easy by digitizing the function, allowing customers to report their whereabouts via the internet and mobile banking apps.

While it is natural to increase the level of defence on the usual strategies of detecting skimming, point of compromise, phishing, malware etc, we advise our clients to also put in place strategies to reduce the likelihood of a disgruntled customer.

Profiling can dramatically reduce the false positive rate by providing a sneak peek at the customer’s behaviour. For high transaction amounts, behaviour and revenue scores can also provide a good measure of the risk and opportunity cost of losing share of wallet in the long run.

Considering that Brazil is almost half a day behind the Asian time zones, a banks’ operating hours and the customer’s normal hours are unlikely to overlap. An effective and eventtriggered two-way communication strategy for customers should underpin any fraud prevention strategy to minimize the likelihood of a disgruntled customer.

It can be the medium for the customer to keep the bank informed of their travel plans. This is best practice for financial institutions at any time of the year, as globalization and increasingly dynamic populations mean consumers and their money are always mobile, and always on.

A quick exercise to validate and refresh fraud strategies against the events that will dominate the world’s attention for the next month or so will not only protect the interests of banks and their customers in the short run, but also make it healthier and ready for the future.

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OPINION

RAJESH YOHANNAN

Applause for the MAS’s new securities trading rules

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ast October’s penny stock crash that wiped out an estimated S$8 billion and rattled Singaporean investors’ confidence prompted the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) to develop new guidelines designed to bolster the strength of the local stock market.

This joint initiative will improve investor protection while repairing the reputation of Singapore’s securities market and ensuring it remains among the world’s best.

In a joint consultation paper published last February, the three key areas the SGX and the central bank proposed enhancing are: promoting orderly trading and responsible investing, improving the transparency of market intervention measures, and strengthening the process for admitting new listings.

By establishing independent committees dedicated to addressing each of these measures, as well as a number of others implemented by the SGX such as establishing “circuit breakers”, retail investors in Southeast Asia’s largest equities exchange will benefit from the greater transparency and clarity around their instruments.

Short-term pain, long-term gain Market participants had until early May to provide feedback on the proposals. Upon hearing that transparency remains a concern for many with respect to secondary listings, the SGX proposed a new methodology for how these companies will be classified.

If a company is listed on any of the 23 developed market exchanges like the Australian Securities Exchange, the SGX will make it easier for that company to create a secondary listing in Singapore to access a wider pool of investors.

This move is also an attempt by the SGX to boost its trading volume and attract larger initial public offerings.

Though the bourse may “feel the pinch” with respect to these changes in the short term as it might affect liquidity, the long-term benefits the SGX and investors will realize far outweigh any temporary pain. That’s because the proposed improvements are designed to diminish the short-term mindset that some investors trade with on the SGX. Singapore is considered to be a barometer 34 ASIAN BANKING AND FINANCE | SEPTEMBER 2014

for Southeast Asian economies. As the SGX makes necessary changes and the MAS increases oversight of how securities are listed and traded here, it will fuel growth and inspire investor confidence in all asset classes.

In defence of investors We applaud these new measures. The MAS is assuming a leadership position with the implementation of these changes that will help protect investors.

Regardless of asset class, it takes time and patience to learn to trade smartly and to achieve your investment goals.

A simple, three-step guide to do-it-yourself investing I always r ecommend is this: keep it simple, avoid fees, and never buy anything you don’t fully understand. To that end, education is key to investing in anything; be it a stock, commodity, or forex.

Fair retail trade practices for any instrument are underpinned by transparency and treating your clients fairly and with the respect they deserve. That’s been our perspective – and practice – from the firm’s earliest days.

High performance global economies demand robust regulatory oversight. The stricter regulations proposed by both the SGX and MAS are indeed welcome and required.

BY RAJESH YOHANNAN CEO and Managing Director OANDA’s APAC

Repairing the reputation of Singapore’s securities market

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