Asian Banking and Finance

DISPLAY TO JUNE 30, 2014

E-Banking booms generational shift drives digital banking

threats to china banks revealed 2014 a record year for apac m&a hsbc vs Stan chart: who wins?

5 cash management trends troubling asia

indon banks fear capital flow reduction

people profile J.P, Morgan Asset Management’s Steven Billiet

first What can Asian bankers do to thwart security breaches?

OPINION Here’s how FX trading has evolved

people profile DBS Bank’s new regional head Nicole Wong

PAge 24

PAge 14

PAge 32

PAge 28

2 SINGAPORE BUSINESS REVIEW | JANUARY 2014

FROM THE EDITOR Publisher & EDITOR-IN-CHIEF ASSOCIATE PUBLISHER Assistant Editor Art Director

Laarni S. Navida Jason Oliver Jonn Martin Herman

Editorial Assistant

Queenie Chan

Editorial Assistant

Alex Wong

ADVERTISING CONTACTS

ADMINISTRATION Advertising Editorial

In this issue, we bring you a series of comprehensive sector reports on Cash Management and Banking Technology, as well as a China banking country report. Based on our exclusive interviews with several experts and top Asian bankers, we found five emerging trends troubling Asia’s cash management sector - from the emergence of big data as a potential game changer, to the flight towards asset-light models, to the rising cost of regulation.

Tim Charlton

Laarni Salazar-Navida lanie@charltonmediamail.com

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

SINGAPORE Charlton Media Group #06-09 E, Maxwell House 20 Maxwell Road Singapore 069113

Our channel checks also revealed that a generational shift in behavior is driving banks towards new digital channels. With the rise of mobile and internet banking, banks now have lesser customer touchpoints, making it harder for them to get to know their customers’ preferences in banking products and services. Find out from the bankers themselves how they are facing this challenge.

China’s banking sector will take some heavy blows in 2014, no thanks to a decelerating economy. But we found out that the sector does not plan to take these attacks sitting down, with the government racing to rein in the overcapacity and risks that have built up in the system.

Enjoy the issue!

+65 62237660

HONG KONG Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166

www.charltonmedia.com

Tim Charlton

Printing Sun Rise Printing & Supplies Pte ltd 10 Admiralty Street #02-20 North Link Building, Singapore - 757695

Can we help?

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

Editorial Enquiries If you have a story idea or just a press release please Email: editorial@charltonmediamail.com and our news editor will read it.

Media Partnerships please Email: editorial@charltonmediamail.com and put “partnership” on the subject line and it will forward to the right person.

Subscriptions Email: subscriptions@charltonmedia.com Asian Banking and Finance is published by Charlton Media Group.

All editorial is copyright and may not be reproduced without consent. Contributions are invited but copies of all work should be kept as Asian Banking and Finance can accept no responsibility for loss. We will however take the gains. *If you’re reading the small print you may be missing the big picture    

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

ASIAN BANKING AND FINANCE | JUNE 2014 3

CONTENTS

Thai banks brace for rising risks 09 FIRST

INSIGHT 18 FINANCIAL PE in Asia rebounds from

STORY 26 COVER Foreign banks push on in China

2012 beatdown

FIRST

FIRST

REPORTS

08 Wanted: bankers

12 What can Asian bankers do to

20 What could bring the Chinese

08 HSBC vs Standard Chartered:

Who wins?

09 Uncertainty stumps HK banks 09 The Chartist: Hong Kong Banks 10 What dampens Korean

banks’ NIMs?

10 What drives customers to open or

close bank accounts?

10 DBS strengthens its private

thwart cyber security breaches?

banking sector to its knees?

12 NAB extends footprint in

24 Sector Report: 5 cash management

Singapore

14 Indo banks fear capital flow

26 Sector Report: Generational shift

reduction

trends troubling Asia drives digital banking

14 Are bank branches irrelevant

OPINION

in AU?

16 Hang Seng Bank thrives despite

tight liquidity conditions in China

30 Here’s how FX trading has evolved

banking biz

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

4 ASIAN BANKING AND FINANCE | JUNE 2014

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

News from asianbankingandfinance.net Daily news from Asia most read

RETAIL BANKING

Citibank launches two international credit solutions in India Citi Prestige and Citi Ultima Infinite will allow Citi to be even more competitive in India offering greater rewards and associated benefits to card members.

“We are delighted to offer these new value propositions to meet the needs of our clients who want to bank with an aspirational partner,” says Jonathan Larsen, Global Head of Retail Banking and Asia-Pacific Head of Consumer Banking.

LENDING & CREDIT

RETAIL BANKING

You won’t believe how bad Asia’s nonperforming loans are According to Moody’s Analytics, nonperforming loan ratios have been trending lower in Asia for more than a decade, though the trend may reverse in coming years as economic and financial conditions shift.

Some Asian economies are likely to experience an environment of slower GDP growth and higher interest rates in coming years, which will make debt harder to repay.

DBS’ net earnings to drop 8% to $871m OCBC Investment Research expects softer non-interest income to be the main drag, down 16% QoQ, while Net Interest Income is likely to remain flat QoQ. This will be partly mitigated by marginally lower operating expenses and lower allowances.

“However, we are retaining our overall full year earnings estimate of S$3785m for FY14. DBS remains our top pick in the banking sector,” adds OCBC Investment Research.

What Singapore banks need to know to implement MAS Notice 643

BY ASHLEY O’REILLY The MAS 643 requirements are designed to ensure that banks exercise appropriate oversight and control over their RPTs so as to mitigate the risk of abuses arising from conflicts of interest, as well as for alignment with international best practices.

Here’s how the global financial investment scenario looks like in 2014

BY JAMES PATRICK Market experts are saying that the global economy is doing comparatively better than the past few years. It is following the trends of the previous year where there were cautious signs of growth and free liquidity along with the development of financial market.

FROM THE BLOG What threat legacy systems pose to financial institutions

BY PETER HILL Factors such as increased regulation, client demand for transparency, real-time reporting, and the ability to support and take advantage of new growth opportunities have all put increased pressure on IT infrastructure that was never designed to cope with such challenges.

6 ASIAN BANKING AND FINANCE | JUNE 2014

FIRST focus on cost management should help but there seems little scope for credit quality improvement so we expect Group returns to remain broadly flat for the next couple of years and we cut our earnings estimates by 4-5% as a result,” says Wong.

“There has been limited pressure on CIB revenue returns at HSBC and we see continued efforts to improve cost-efficiency and strengthening developed markets credit quality supporting improving returns.”

Wanted: bankerS

If you are a banker and you’re job hunting, now is the perfect time to hand in those CVs as more than half of banking and capital markets CEOs plan to take on more staff over the year, anticipating headcount increases of at least 5%. Professional services firm PwC surveyed 133 banking CEOs in 50 countries and discovered that the buoyant employment outlook comes from 90% of the respondents being confident that their revenues will increase over the next three years.

Most in-demand jobs Toby Fowlston, managing director at Robert Walters Singapore, notes that there has been increased offshoring among foreign financial institutions in Singapore, who are opting for lower-cost shared service centres in places such as China, Malaysia, India and the Philippines.

Restructuring also led to fewer vacancies within foreign banks.

“Finance and regulatory change as well as compliance contractors will continue to be in demand in 2014. The increasing regulatory environment also means those with good Basel III knowledge are in short supply,” says Fowlston.

According to Audrey Neo, senior manager for banking & financial services at Michael Page, as banks and financial institutions continue with cost cutting measures, hiring activity will be largely restricted to roles in highest demand such as Analysts, Associates and AVPs. She adds that as Japanese banks move their operations to Singapore, financial services professionals with language proficiency in Japanese will be sought-after. Meanwhile, PwC’s survey further reveals that limited availability of talent continues to be a concern, with 61% citing it as a threat to growth globally.

8 ASIAN BANKING AND FINANCE | JUNE 2014

Limited pressure on HSBC’s CIB revenue

HSBC vs Standard Chartered: Who wins?

H

SBC and Standard Chartered may be following a similar recovery playbook, designed to get both banks back on track after a challenging 2013, but an analyst argues that sharing strategies does not equate to comparably favourable results.

HSBC is forecasted to outperform Standard Chartered in projected better revenue returns and a stronger capital build, and investors would be wise to take note.

“Both HSBC and Standard Chartered have faced revenue headwinds in 2013 but we identify differences in the trajectory of bottom-line returns and capital build at the two banks, both favouring HSBC,” according to Sharnie Wong, Asia Ex-Japan Banks analyst at Barclays.

Pressure on revenue returns Wong says part of Standard Chartered’s problem is it continues to face pressure on revenue returns in the Corporate and Investment Banking (CIB) business, which has been an increasing focus for both banks. This is despite Standard Chartered’s determined efforts to keep costs under control. In contrast, HSBC has had a smoother ride in galvanizing returns. “Continued

Part of Standard Chartered’s problem is it continues to face pressure on revenue returns in the Corporate and Investment Banking (CIB) business.

HSBC better positioned In the face of uncertainty over capital requirements, HSBC also appears to be better positioned to meet regulatory requirements due to its “slightly better” contribution of retained earnings to capital, as well as corresponding balance sheet reduction and disposals.

Comparatively, Standard Chartered faces a higher potential capital shortfall as a proportion of market capitalization. “Although we see both Standard Chartered and HSBC as adequately capitalised, we expect the pace of capital build to be significantly faster at HSBC and with greater flexibility to deal with potential changes in capital requirements or the operating environment,” says Wong.

Given these arguments, HSBC may seem like a better pick than Standard Chartered, but the former has its share of challenges ahead, particularly in turning out better margins and profits. Maybank Kim Eng analyst Steven ST Chan estimates a lower net interest margin for HSBC, from 2.07% in 2013 to 2.02% in 2014. He also predicts a 10.6% dip in HSBC net profit this year.

Returns and capital progression, 2012-2016E

Source: Company Data, Barclays Research

FIRST Hong Kong banks’ increasing exposure to China remains a key risk.

Slowing trade finance Macquarie analyst Ismael Pili also reports loan growth rising to 17.8% YoY from last year’s 15.9% YoY. The same report projects loan growth to slow and mortgage lending to remain subdued for 2014. “We also believe trade finance will finally slow given concerns of a China slowdown,” he says.

With Hong Kong residential property prices softening, Leung of Standard & Poor’s projects prices to fall by 10% in 2014 with little impact of mortgages on credit quality.

Trade finance to slow given concerns of a China slowdown

Uncertainty stumps HK banks

W

hile financial analysts believe that the banking sector will remain stable for 2014, it still faces substantial uncertainty and risk. Primary credit analyst Joseph Leung from Standard & Poor’s said in his latest ratings report that Hong Kong banks will maintain their credit profiles, and even see a rise in interest margins, but uncertainty lies in external factors such as exposure to China and the US Federal Reserve’s downsizing of its monthly bond buyback.

“Hong Kong banks’ increasing exposure to China remains a key risk,” Leung says, adding that loans outside

Hong Kong reached a 30% share by the end of 2013. While Leung expects a steady Chinese economy with a projected total credit growth of 15% to 16%, a “hard downturn in China” such as GDP growth below 5% will result in severe repercussions.

Massive credit losses “Banks in Hong Kong could suffer significant credit losses on their Chinese exposures. In addition, Hong Kong’s economy could go into a recession, imposing another layer of pressure on these banks’ creditworthiness,” Leung says.

Fitch Ratings analyst Sabina Bauer

also mentions a lack of regulation in relation to “specific China risks” but says “supervision is likely to intensify in 2014.” Nevertheless, it says things are looking good as “new stress-testing requirements on personal loans protect borrowers from excessive debt accumulation, and help insulate banks against a potential interest-rate hike.”

Industry loan growth for H K$, FC, and Total

Source: HKMA, Macquarie Research, February 2014

The Chartist: hong kong banks All eyes are on Hong Kong subsidiaries of Mainland banks as they impressed analysts with very good asset quality metrics, and impaired loans ranging between 0.1% and 0.5% of overall loans. Acording to Moody’s, the five banks’ (Wing Lung, CCB Asia, BOCHK, ICBC Asia, CITIC Bank International) impaired loan ratios on their Mainland exposures also remains sound, partly due to credit guarantees from their third party Mainland banks.

On a more specific note, Barclays said Standard Chartered and Bank of East Asia have been growing nonhousing retail loans most aggressively since the global financial crisis in 2008.

Hong Kong’s non-housing retail loans as % of Hong Kong’s loans exposure

Note: Based on latest disclosure - FY13 for HSB, BEA and WHB and 1H13 for the rest of the banks Source: Barclays Research

Banks’ impaired loan ratios

Source: Banks, Moody’s FM

ASIAN BANKING AND FINANCE | JUNE 2014 9

FIRST

What dampens Korean banks’ NIMs?

DBS strengthens its private banking biz

K

orean banks’ net interest margins remain restrained and will slip further, and there’s nothing else to blame but the Korean government’s borrowerfriendly initiatives to lower lending rates for small and midsize enterprises (SMEs) and households. “We think the government’s efforts to support borrowers will continue to dampen NIMs. It has been pressuring banks’ lending rates for households and SMEs by trimming loan spreads and yields. It has also been pressuring banks on their commissions, fee charges, and credit card merchant fees, and encouraging borrowers to exercise their rights to request lower borrowing rates at banks,” says Hong Taik Chung, Standard & Poor’s primary credit analyst.

Net interest income is Korean banks’ main revenue source, accounting for about 80%-85% of operating revenues and Chung estimates that their average NIM would have declined to about 1.9% in 2013 and it could fall further to about 1.85% in 2014. Sophia Lee, vice president - senior analyst at Moody’s, notes that the banks’ lending income decline reflected ongoing NIM

What’s pressuring banks’ lending rates?

pressure. “System-wide net interest income declined 8.3% to around US$33.1b, mainly reflecting ongoing pressure on NIM from weak credit demand and the Bank of Korea’s (BOK) 25bps reduction in its policy rate in May 2013 in an already low interest rate environment,” she adds.

Measures such as increasing revenue from other sources or cutting costs in 2014 won’t work to offset the declining NIM either, especially given that net interest income has been their primary source of revenue. “We do not expect noninterest income to increase significantly. Regulatory measures have weighed on various fees and commissions,” says Chung.

Net interest income is Korean banks’ main revenue source accounting for about 80%-85% of operating revenues.

survey

What drives customers to open or close bank accounts?

It turns out Asians still value brick and mortar banks despite the availability of online banking technologies, as access to branches and banking service is one of the most-cited reasons for opening or closing bank accounts, according to EY’s 2014 global consumer banking survey. Nam Soon Liew, EY’s Asean Financial Services Leader, notes that the branch will endure as long as transactions that cannot be done online or via mobile exist.

The survey also reveals that customer experience is the main driver of satisfaction, and is also the most common reason that customers open and close accounts. In fact, half (50%) of the respondents in Singapore closed a bank account while 37% opened one because of customer experience. “Over the coming 12 months, 44% of customers in Singapore anticipate opening or closing an account - a pattern of high turnover.”

10 ASIAN BANKING AND FINANCE | JUNE 2014

In hopes of strengthening its wealth management footprint in Asia, DBS Bank recently announced that it will acquire the Asian private banking business of Societe Generale in Singapore and Hong Kong, as well as selected parts of its trust business, for US$220 million.

This represents approximately 1.75% of Societe Generale Private Banking Asia’s (SGPB Asia) assets under management of US$12.6 billion as of 31 December 2013.

The transaction will provide significant revenue synergies as SGPB Asia clients will have access to DBS’ universal banking platform including retail, corporate and investment banking. Tan Su Shan, Group Head of Consumer Banking & Wealth Management of DBS, says, “Over the past three years, our private banking business has consistently grown by about 20% a year. We have now reached a stage where we are ready for inorganic growth.”

Ratings agencies concur that the deal is small relative to the size of DBS and will not affect the bank’s ratings. Ivan Tan, primary credit analyst at Standard & Poor’s, says the transaction has no immediate impact on the financial profile of DBS. It is subject to legal and regulatory approvals, and is scheduled to be completed by 4Q14. Meanwhile, Gene Fang, VP-senior analyst for financial institutions group at Moody’s, notes the deal size is small, relative to DBS’s capital base, and the business should be feeoriented, rather than balance sheet intensive. “There would always be execution risk, but DBS should have the scale to manage these,” he adds.

co-published Corporate profile

Find out how Konica Minolta imprints excellence in advanced imaging

Konica Minolta is revolutionising imaging and networking technologies in Asia.

W

ith over 100 years of imaging expertise, Konica Minolta has established its reputation as a leader in advanced imaging and networking technologies. Since its formation in 1873, the company has evolved into a global company with a presence in more than 40 countries.

Konica Minolta is driven by its philosophy of “Creating New Value” based on its expertise in sensing, focusing, and bending light.

These technologies are at the starting point of value creation at Konica Minolta. The expertise with light that it has developed and refined over the years has given rise to office equipment, optics devices, medical diagnostic imaging systems, and other forms of new value. Konica Minolta has unparalleled advances in security, print quality and network integration brought together through its award-winning line of products.

Key business solutions In the financial services industry, the key business solutions require security, sustainability, operationality, mobility and effectiveness. With the ubiquitous presence of network-connected devices, proliferation of smart devices and mobile workforce, financial institutions are scrutinising their policies as well as their

security and document integrity. Konica Minolta helps financial institutions explore the full possibilities of digital technology and enhance their document workflow, maintain security standards and ensure confidentiality.

Furthermore, with attention of reducing carbon footprint, a lot of companies are looking for measures of reducing paper usage. It is important to look into how the devices in the office environment can help manage cost whilst maintaining a greener environment. For

“Konica Minolta is driven by its philosophy of Creating New Value.”

global financial corporations, reducing the business impacts and costs of operating MFPs, printers, and other office equipment at business sites across the globe is a critical management issue.

To address this need, Konica Minolta provides Optimized Print Services (OPS), a globally uniform service set in which we undertake the comprehensive operation of the customer’s office equipment and deliver printing environment optimization solutions that result in the best technology deployments for the conditions at hand and increase operating efficiency. Konica Minolta identifies issues and devises and implements solutions on an office-by-office basis, while employing network resources to centrally managing, and monitoring operating data for, the customer’s worldwide office equipment.

Paper-based processes can also be transformed into a convenient digital workflow through Konica Minolta’s products.

With easy built applications, users are enabled to index, store and retrieve electronic documents scanned directly on MFP. Our advanced solutions for information logging, document capture, processing and distribution help establish workflows in the financial sector that transform paper-based documents into processready data, which can be edited, stored and securely archived.

FIRST

What can Asian bankers do to thwart cyber security breaches?

T

here’s no question that banks are vulnerable to online hackers out to steal their valuable financial data, but awareness has not yet translated to action. Industry analysts note that many banks are satisfied with just complying with the minimum regulatory requirements on cyber security. Despite recognizing the large risks associated with a cyber security breach – more than 70% of banking industry leaders see cyber insecurity as a threat to their growth prospects, according to a PwC survey – the majority of banks still lack a comprehensive prevention and action plan.

“Compliance is still the biggest driver for information security spending in Financial Services,” says Robert Sullivan, Global Leader, Banking & Capital Markets at PwC. “But by simply following regulatory rules, institutions are never going to be able to keep pace with the constantly growing and changing cyber threats.” Sullivan adds that many still see cyber security as primarily a matter for IT rather than the business as a whole.

Identify and focus resources Sullivan believes that if banks are really serious about protecting themselves against cyber security breaches, they need to focus on identifying and focusing resources on the

‘crown jewels’ most in need of protection.

“Institutions also need to carry out more frequent risk assessments to keep pace with the ever changing threats. Clearly, it’s not possible to protect against everything, so a clear response and mitigation plan needs to be in place,” says Sullivan.

Operational and analytic techniques Data analytics can also be a powerful tool to thwart cyber security breaches, according to Lawrance Lai, Fraud Investigation & Dispute Services Partner at Ernst & Young.

“As banking consumers become increasingly reliant on e-banking for speed and convenience, in addition to the regulatory framework, it is imperative for the Asian banks to have robust cyber security policy compliance and use data analytics to protect its consumers,” says Lai. “Banks can consider adopting the latest operational and analytic techniques to reduce fraud instances across emerging threat vectors such as e-banking. With the increasing volume of e-transactions, specific anti-fraud controls and improvement in risk controls and processes should be designed and installed. The use of analytics can also help banks understand individual changes in customer behaviour to track fraud incidents more accurately,” he adds.

A more proactive stance is required as e-banking rises

Beside shoring up their protection policies, Lai says banks should plan for the fallout following an actual cyber security breach.

This means involving the legal teams to create what is effectively a crisis response to help mitigate reputational damage after an incident.

“Traditionally, the Chief Information Security Officer has focused on information security attacks and compromises due to their damaging and potentially public nature,” says Lai.

office watch

NAB extends footprint in Singapore

Boosting its Asian presence and targeting the region’s growing market, National Australia Bank unveiled its latest Singapore branch. The opening was spearheaded by NAB Asia CEO Daryl l Johnson. NAB was the first Australian bank to establish a presence in China back in 1982 and since then it has increased its footprint in the region. Over the past 12 months, NAB saw 50 new hires which translate to almost 500 people on the ground supporting its customers.

From its first branch in Singapore way back in 1971, NAB moves to new larger premises which will boost its products and services including trade finance, relationship banking, working capital and markets solutions. Currently, NAB has eight branches/representative offices in key Asian cities which are well placed to support its customers across the region.

12 ASIAN BANKING AND FINANCE | JUNE 2014

Reception

NAB’s launch party

Cocktail area

The bankers’ crowd

Goals

Knowledge

Insights

GLOBAL BANKING | WEALTH STRUCTURING | INVESTMENT MANAGEMENT | GLOBAL REAL ESTATE | GLOBAL DEAL SOURCING

For a private appointment with our Wealth Advisor, please contact +968 24768640 or privatebanking@bankmuscat.com

Our private banking offering is structured to protect, preserve and grow your wealth globally. Whether your need is to finance a personal acquisition abroad or re-structure your wealth at home, our advisors are your trusted local partners to develop and implement those strategies working with a global network of professionals in investments, real estate, trust, legal, commodity and forex.

For your very own journey through wealth

Trusted Advice

Global Opportunities

www.bankmuscat.com

FIRST Are bank branches irrelevant in AU?

Major Indonesian banks’ core profitability to remain healthy

Indo banks fear capital flow reduction

W

eaker economic growth could punch holes in their strong performance armor. For all the strength and sturdiness that Indonesian banks possess, they will still feel the pinch as macroeconomic headwinds bear down on the local economy.

Triggered by the US Federal Reserve’s planned tightening of its monetary stimulus, Indonesia may see a reduction in capital flows and a consequent decline in economic growth, which in turn may trigger asset quality deterioration among local banks.

Threats to asset quality Rising interest rates, a depreciating currency, and a slowing economy do not bode well for Indonesian companies’ performance, saysCheul Soo Cho, Credit Analyst at Standard & Poor’s. “These factors could weigh on the asset quality and financial profiles of Indonesian banks, especially given banks’ history of rapid lending growth in a context of low income and weak payment culture and rule of law.”

Still, some analysts insist that even though the Indonesian economy is slowing down, the country’s banks are fortified with exceptionally strong financial fundamentals, which will help them shake off the drag and remain as one of the most profitable in the world. “The country’s banks 14 ASIAN BANKING AND FINANCE | JUNE 2014

will continue to report strong financial fundamentals, including high profitability and capital levels, despite an economic slowdown that will put some pressure on asset quality,” says Srikanth Vadlamani, Vice President – Senior Analyst at Moody’s Investors Services.

Indonesia’s GDP growth is expected to fall to 5.4% in 2014, from 5.8% in 2013.

Major Indonesian banks should see their core profitability remain healthy in 2014, concurs Julita Wikana, Director at Fitch Ratings, continuing the sector’s solid financial performance last year. “The potential increase in banking stress should be comfortably buffered by robust interest margins and profitability.

Both of these remain among the highest in Asia, and should limit the risk of any capital impairment,” says Wikana.

The country’s banks will continue to report strong financial fundamentals, including high profitability and capital levels, despite an economic slowdown.

Impact of the Fed’s announcement on interest rates, yields, and currency

Source: Standard & Poor’s

Banks in Australia thinking of investing heavily in their branches should think again, with the latest research from East & Partners, a specialist business banking market research and analysis firm, showing the branch already lacks relevance to business customers.

East interviewed 984 businesses ranging from Micro enterprises turning over between $1-5 million annual to the largest Institutional businesses turning over $725 million or more. The businesses were asked to rate the importance of the branch channel to their banking and financial management on a scale of 1 to 5, where 1 is extremely important and 5 is not important at all.

According to East & Partners, unsurprisingly, the smaller the business the more important they said the branch channel was. The average importance level for Micro businesses was 2.42 on the 1 to 5 scale, and the importance declined across SMEs and Corporate segments with the branch channel only ranked at 3.24 for importance

by Institutions.

Across much of East’s research, importance ratings come in very close to 1 for many service attributes, so at 2.42, the branch is even marginal for Micro businesses. Of all the businesses interviewed, 87.5% reported that they did not set foot in a bank branch for business banking purposes.

Only 1.8% of the total said they were in the branch for a consultation with a relationship manager or product specialist.

“In its current format, the branch channel is struggling for relevance in the business banking market, and only remains marginally relevant – in any way at all - to businesses at the smaller end of town.”

Burgan Bank Group

opportunities through diversity

The Burgan Bank Group is a solid regional powerhouse offering complex financial services across 8 countries, through 5 subsidiaries and a network of more than 232 branches. The group’s main structure combines innovative business strategies, prudent risk architecture and diversification across all levels, supported by a body of leading talented strategists and professionals.

Burgan Bank Group:

Kuwait - Jordan - Turkey - Algeria - Iraq - Tunisia - Lebanon For more information please call Burgan Bank on (+965) 22988400, or visit www.burgan.com

FIRST The Analysts’ call

How did Hang Seng survive last year?

Hang Seng Bank offset compression in Hong Kong

Hang Seng Bank thrives despite tight liquidity conditions in China

S

insurance +1bp, lower deposit cost +2bp and free funds +1bp all contributing.

CCB International Securities says key downside risks for the bank continue to be prolonged margin pressure due to competition and a prolonged low interest rate environment beyond 2014; a significant correction in real estate given the larger relative size of mortgages and property-related loans (approximately 60%) as a proportion of the total loan book; management taking an overly conservative stance in conserving dividends as Hang Seng Bank’s very income-oriented shareholder The margin in Hang Seng Bank’s may react negatively; and a business in mainland China compressed as base disorderly default in the Eurozone funding cost rose. causing contagion to spread from periphery nations to stronger Eurozone members given the deposits rose 9 %), especially in the event of bank’s European bond holdings. system liquidity tightness caused by tapering On the upside, however, CCB believes and tightening,” says Sharnie Wong of there could be a possiblity of a sustained rise Barclays. in the Hong Kong Inter-bank Offered Rate The margin in Hang Seng Bank’s business (HIBOR), as the bank has the highest net in mainland China compressed as funding interest margin to rising HIBOR given its cost rose during the tighter liquidity large retail deposit base. “Hang Seng Bank conditions onshore. Net interest margin in may ride the steepening US dollar yield the mainland business was under pressure curve to improve its asset yield in 2014. due to impact from interest rate deregulation, We raise our net interest margin forecast according to Nomura. to 1.95 percent from 1.84 percent for 2014.

The tighter liquidity also intensified However, loan growth moderated to 1.1 competition for deposits. However, the percent h/h in 2H13 in order to reduce bank’s Hong Kong business managed to its loan-to-deposit ratio to 70.5 percent in offset the compression. Barclays says the rise December 2013. We lower our loan growth in the Hong Kong margin was broad based, forecast to 9.6 percent from 10.1 percent for with loan yield +2bp, treasury yield +3bp, 2014,” says Steven ST Chan of Kim Eng. urprising analysts, Hong Kong’s second biggest bank, controlled by HSBC Holdings Plc, managed to maintain its strong position in the administrative region despite a number of challenges last year.

“Solid underlying trends in 2H reflected Hang Seng Bank’s strong position in Hong Kong, benefiting from upward loan repricing and lower funding costs. We are positive on Hang Seng Bank as one of the price leaders with a strong deposit franchise (2H CASA

16 ASIAN BANKING AND FINANCE | JUNE 2014

Nomura - David Chung FY13 net interest margin was reported at 1.89%, up 4bps y-y.

2H13 net interest margin improved by 9bps h-h despite rising composite rate during the half. Management attributed the h-h expansion to enhanced loan yields, higher treasury yields, contributions from the insurance portfolio assets, improved deposit spreads and fee fund contributions, despite much slower loan growth in 2H13 (up 1% h-h vs 8% in 1H13).

Barclays - Sharnie Wong Hang Seng Bank’s margin rose sharply by 9bps h/h to 1.93% in 2H led by the Hong Kong business, while Hang Seng Bank China’s margin compressed as funding cost rose during the tighter liquidity conditions onshore. Hang Seng Bank China accounted for 10 percent of group loans. The rise in Hong Kong’s margin was broad based, with loan yield +2bp (led by term loans while trade margins still under some pressure), treasury yield +3bp, insurance +1bp, lower deposit cost +2bp and free funds +1bp all contributing.

CCB International - Adam Chan Hang Seng Bank reported FY13 earnings per share of HK$13.95/ share (+38% YoY), which was ahead of consensus of HK$13.60/share but slightly behind our HK$14.25 forecast. Core trends were strong as 2H13 pre-provision operating profit of HK$9.8b was well ahead of our HK$8.5b estimate driven by strong margins and non-interest income. These were offset by lowerthan-expected revaluation gains on investment properties and a loss on reclassification of an investment in Yantai Bank.

FINANCIAL INSIGHT

AsiaPac M&A will be increasingly defined by bigger-sized deals

What could make 2014 a record year for APAC M&A? China could play a key role in the resurgence of AsiaPac M&A, with cash-flush PE houses taking advantage of selling opportunities.

A

siaPac M&A dealmakers might have been a bit spooked in 2013, but 2014 is poised for a strong, possibly even record-breaking, rebound.

Analysts have noted the more buoyant outlook, especially among larger firms. “Based on the conversations we are having with our clients it will be a strong year for M&A with Asia’s corporate champions continuing to pursue transformational transactions,” says Farhan Faruqui, Head of Corporate and Investment Banking, Asia Pacific at Citi.

“We believe we will see a record year in 2014,” says Bob Partridge, Managing Partner, Transaction Advisory Services Asia Pacific at Ernst & Young, noting that the positive outlook for AsiaPac M&A is “quite strong” based on feedback from private equity (PE) 18 ASIAN BANKING AND FINANCE | JUNE 2014

Farhan Faruqui

Bob Partridge

houses across AsiaPac as well as major market surveys conducted by his firm at the end of 2013. He said PE houses and corporate have large amounts of available capital and hold the belief that the capital markets will return in 2014.

The role of China China could play a key role in the resurgence of AsiaPac M&A, with cash-flush PE houses taking advantage of selling opportunities among state-owned enterprises (SOEs) and buying opportunities among private sector companies, says David Brown, Transaction Services Leader, PwC China and Hong Kong.

“SOEs are being told that they have to specialize, which will involve, for example, spinning off non-core businesses, which will be a source for opportunity for PE

investors,” says Brown. “Private sector companies in China need capital to grow and private equities are a source of capital.

We’ve seen a doubling of PE-led transactions in the past couple of months,” he adds.

Aside from PE-led M&A, outbound M&A will also flourish this year as Chinese companies use acquisitions abroad to obtain expertise and technologies, which they can then in turn use to galvanize growth in the slowing domestic market. Analysts expect to see Chinese companies considering targets in the North America and Western Europe regions. “Well-capitalized, large companies are continuing to transact at strong levels, and we see robust outbound interest into North America by Asian acquirers,” says Rob Sivitilli, Head of M&A, Asia (ex-Japan) at J.P. Morgan.

AsiaPac M&A inbound activity also has rosy prospects.

“AsiaPac will continue to attract strong interest from America and Europe,” says Matt Leong, Executive Director, Corporate

FINANCIAL INSIGHT Finance Advisory at Deloitte Singapore.

Bigger is better The tale of mergers and acquisitions in 2014 will see the bigger corporates stepping up as the main protagonists. Larger firms are set to drive most Asia Pacific M&A deals this year, according to analysts and industry insiders, leading the charge with their higher capitals and stronger deal-making confidence. In contrast, smaller companies will adopt a more cautious stance, waiting for the market uncertainty to subside further before braving the M&A arena – an arena that will be increasingly defined by bigger-sized deals.

AsiaPac M&A totalled US$510b in 2013, falling 3.3% from the previous year to hit its lowest level since 2009, based on Thomson Reuters data, as dealmaking jitters dragged down activity in the region. “There were a lot less deals in 2013, as small and mid-sized companies in Asia became more conservative with the increased volatility more broadly across emerging markets,” says J.P. Morgan’s Sivitilli.

“The decline in volumes in 2013 was caused by the impact of global uncertainty regarding the strength of economic recovery. In addition, many Asia Pacific emerging economies were affected by talk of US Federal Reserve tapering in the second half of 2013. This created a degree of cautiousness on the part of deal makers and it also meant that deals generally took longer to complete,” says Massimo Borghello, Director, M&A Consulting – Asia Pacific at Towers Watson. The AsiaPac region was also kept on tilt by various challenges in 2013, including currency, stock market and political volatility, and swings in raw material input prices, according to Deloitte’s Leong.

“Global M&A also fell, so [the decline is] not isolated to Asia Pacific. To some degree it has been attributed to continued valuation gaps between seller and

buyer expectations, particularly as some of the global capital markets reached new record hires,” says Partridge.

2013 advisor rankings Goldman Sachs topped the list of AsiaPac M&A advisors in 2013, based on the Thomson Reuters M&A League Table 2013 rankings, with US$70.1 billion in total deal value, representing a commanding 18.4% market share in the region, across 91 deals.

Morgan Stanley came in at second with US$55.1 billion (51 deals) in total deal value to capture a 14.5% market share. Citi placed third in the 2013 rankings with total deal value of US$43.2 billion (43 deals). Citi performed well advising landmark deals in Asia, including the largest completed deal in Asia in 2013: CNOOC’s acquisition of Nexen Inc (US$17.7 billion), which is also noted as the largest ever outbound deal by a Chinese company. Citi also advised the largest deals in India and Taiwan.

Meanwhile, J.P. Morgan rose to fifth place as a result of a stronger M&A team dedicated to the securing deals in the region. “During 2012, J.P. Morgan formed a dedicated M&A team for Asia (ex-Japan), and I believe our improved standing in 2013 reflects the fruits of this initiative,” says Sivitilli. While AsiaPac M&A deals might have slowed in 2013, Thomson Reuters reveals that the average M&A deal value for disclosed deals significantly grew to US$81 million from just US$73 million in 2012 – a trend that could be explained by the prevailing valuation gaps, and one that might define 2014. “It suggests that the quality of the deals has increased as investors are trying to find larger (more scalable) businesses,” says Partridge.

Key trends, hot sectors in 2014 Analysts have named several industry sectors that will become prime hotbeds for AsiaPac M&A activity, ranging from financial

Rob Sivitilli

Manish Nigam

David Brown

Matt Leong

Massimo Borghello

services to consumer products to manufacturing. “Towers Watson expects to see continued activity by Japanese acquirers in South East Asia. More generally in South East Asia, we expect continued interest in completing intra-regional deals, especially those targeting consumer-related sectors such as financial services and food and beverage. Overall, we expect that by the end of 2014 we will observe a more buoyant M&A market in Asia Pacific,” says Borghello.

“Some industry sectors that are likely to be hot are financial services (which tend to have larger deal sizes), agricultural, consumer products and industrial products (‘old school’ core manufacturing businesses, where many markets in Asia continue to provide cost advantages),” according to Partridge. Deloitte’s Leong notes there has been on-going consolidation in the alcoholic beverage segment too, and hence it would be reasonable to expect that we will continue to see further M&A within that segment. Meanwhile, Manish Nigam, Research Analyst at Credit Suisse, points to banks and insurance as likely to remain active in terms of consolidation and also larger Internet companies expanding their presence through acquisitions. He also says to look out for potential M&A activity in the gas sector in Cooper Basin in Australia, the palm oil sector in Malaysia and Indonesia, and in the Asian transport and Marina sectors.

Over the last 10 years financial investors were already involved in 30% of all larger deals

Source: the BLOOMBERG PROFESSIONAL service, Thomson Reuters, Credit Suisse research

ASIAN BANKING AND FINANCE | JUNE 2014 19

country REPORT: China

Taming the credit boom is the core challenge in 2014

What could bring the Chinese banking sector to its knees?

A sluggish economy and lower profits could pummel Chinese banks.

C

hina’s banking sector will take some heavy blows in 2014, smacked by a decelerating economy, gutted by likely lower profits, and hobbled by what analysts see as looming liquidity and shadow banking crises. But the sector does not plan to take these attacks sitting down, with the government racing to rein in the overcapacity and risks that have built up in the system.

China’s gross domestic product (GDP) growth fell to a six-month low of 7.7% in the last quarter of 2013 – albeit full-year growth remained steady at 7.7% from 2012 – but Barclays predicts 2014 could see annual growth slide to 7.2%.

Addressing rising risks This slower economic growth path has prompted the People’s Bank of China (PBOC), the country’s central bank, to adopt a less hawkish and more flexible stance, says Jian 20 ASIAN BANKING AND FINANCE | JUNE 2014

It has become increasingly difficult for banks to keep their loans-todeposits ratios within the very conservative regulatory ceiling of 75%.

Chang, Director, China Economist at Barclays Capital. “We think the bias in monetary policy likely has already shifted from tightening to neutral.

Liquidity injections to smooth out seasonal cash demand ahead of the Chinese New Year are evidence of a more flexible PBoC, in our view,” said Chang in a research report in early February. “The shift reflects changing economic conditions, as growth continued to moderate and inflation surprised to the downside on the back of higher interest rates and slower money growth. The pace of capital inflows has also slowed.”

Chang said the central bank’s core challenge in 2014 is to tame the credit boom and deleverage the economy while preventing a growth crash that plunges the country into a financial crisis; by no means an easy balancing task. Standard Chartered estimates put the total credit, on- and offshore, at 231% of GDP, up 20 percentage

points from 2012. The credit boom has been particularly explosive in the past four years; in 2009, the total credit was equivalent to just 150% of GDP. The rising credit has led to a buildup of risks in the system. And while analysts note that Chinese banks have been maintaining sound funding and liquidity ratios so far, they are running into mounting difficulties.

“It has become increasingly difficult for banks to keep their loans-to-deposits ratios within the very conservative regulatory ceiling of 75% when financial disintermediation is becoming common,” says Qiang Liao, Senior Director at Standard & Poor’s. “Many Chinese banks have dealt with the problem by resorting to off-balance-sheet lending or accounting tricks such as booking credit exposures as nonloan assets such as debt investment. Nonetheless, the sector’s aggregate loans-todeposits ratio still increased to 71.6% at the end of 2013, from 71.3% a year earlier.”

Liao warned that rapidly growing interbank exposures might be putting smaller banks in danger. “In our view, contagion risks stemming from the banks’ expanding

country REPORT: CHINA

Noticeable repercussion in the banking sector looms

interbank businesses are growing.

Some national banks and a growing number of small regional banks have aggressively stepped up interbank lending and borrowing to maximize profits. This has not only stretched their own capitalization and liquidity management but has also exposed a large number of smaller banks to significant counterparty risks,” says Liao. In the worst case scenario, Liao expects “noticeable repercussion” across the Chinese banking sector if and when severe credit losses and ensuing depositor runs hit banks with heavy interbank financing exposure.

Strengthening liquidity To strengthen liquidity management, the China Banking Regulatory Commission (CBRC) enacted recent measures to bring standards in line with Basel III norms. This include landmark guidelines on banks’ liquidity cover ratio (LCR), or the amount of liquid assets to cover for cash outflows in a stressed situation. The new CBRC regulations will require LCR to reach 100% of cash outflows by 2018, and also compel commercial banks to keep their liquidity ratio at a minimum of 25% on top of their obligations not to exceed the loan/ deposit ratio of 75%.

The credit benefits from these measures, which includes an enhanced liquidity profile and improved system-wide stability, will take time to take effect though, and more measures may be needed ensure their effectiveness, says Jonathan Cornish, Managing Director, Financial Institutions at Fitch Ratings.

“We think it is too early to

conclude whether strengthened liquidity regulations will address the ongoing mismatches evident among off-balance sheet exposures and obligations (explicit and contingent).

The regulations do not specifically target off-balance sheet items per se, and it is unclear how the new rules in themselves will significantly reduce such activity. Additional administrative measures - or regulatory controls - may therefore be necessary,” says Cornish.

Challenges ahead Despite government intervention, there is palpable risk that the Chinese banking system will still plunge into a liquidity crisis, according to analysts. Barclays’ Chang says the liquidity crisis could be triggered by a credit event. Should developments turn south, the PBOC might even be forced to cut the banks’ reserve requirement ratio (RRR), or the amount of cash banks must hold as reserves. Additional factors such as the US Fed tapering and reduced capital inflows should put further strain on liquidity management efforts.

The Chinese banking sector’s asset-quality pressures are likely to persist in 2014, adds Liao, and bank profits to lower from 2013, but government efforts should provide a positive mitigating impact. “After flying high and fast for the past several years, China’s banking sector may be entering a danger zone,” says Liao. “Nevertheless, we expect the credit profiles of major banks that we rate to remain adequate this year. In our view, the government’s pragmatic approach to addressing shadow

It is likely that the problem of failed investments will rear its ugly head once again—and possibly soon.

banking risks and fine-tuned policies toward refinancing of local government debt could mitigate downside risks of severe credit losses.”

Liao believes, however, that loan quality will continue to deteriorate “noticeably” this year as banks remain heavily exposed to debt-laden local government financing platforms and manufacturers, particularly those steel and cement producers that have been hard-hit by the construction slump. The sector also has to watch out for the threat of a shadow banking crisis, which recently came to the fore after the ICBC threatened to default on a wealth management product (WMP). The threat of default and panic among investors who have long viewed WMPs as guaranteed investments shook the market – and will likely repeat in the near future, analysts warn.

“It is likely that the problem of failed investments will rear its ugly head once again—and possibly soon.

At some point, a large bank will decide that it cannot afford to cover such losses, and the govern­ment will have to decide if it wants to avoid another such event,” says Dr. Ira Kalish, Director of Global Economist at Deloitte.

Still, efforts to shrink overcapacity and a balanced approach to regulations just might help the sector squeak through 2014 with minimal bruises. “Authorities have to be careful not to trigger a crisis with a tooaggressive tightening agenda. It is an extremely complicated path to walk.

But we still believe they can muddle through without triggering the crisis that many fear,” says Stephen Green, Head of Research, Greater China at Standard Chartered.

All the credit in China

Source: CEIC, Standard Chartered Research

ASIAN BANKING AND FINANCE | JUNE 2014 21

PEOPLE PROFILE

J.P. Morgan Asset Management Singapore’s new CEO says clients should “re-risk” their portfolios Steven Billiet plans to take advantage of the demographics and long term wealth management opportunities that South East Asia offers.

Steven Billiet Chief Executive Officer J.P. Morgan Asset Management

B

eing a relatively new entrant to the Singapore market in 2010, Steven Billiet, J.P. Morgan Asset Management Singapore’s newly-appointed CEO, has set his eyes on the firm’s growth in Southeast Asia. Billiet will have overall responsibility and oversight for the investment management business in Singapore and day-today management responsibility for the Funds business. Billiet shared his insights and future plans with Asian Banking and Finance in this exclusive interview: ABF: What three goals are you focused on?

The first goal is business development.

Our key focus for 2014 continues to be building our business in Singapore and establishing it as a hub for Southeast Asia. We are already working in partnership with many of the key sovereign wealth funds and institutions in South East Asia.

I am keen to explore more strategic partnership opportunities with asset managers and distribution partners in South East Asia. To do this effectively, we plan to increase resources from 22 ASIAN BANKING AND FINANCE | JUNE 2014

51 (out of which 15 are investment professionals) to 55 by end 2014.

The second goal is to focus on investor education. Investor education is key to our mission of helping clients secure a stronger financial future. Our Guide to the Markets (Asian edition) is an unbiased set of tools to equip investors to make more informed investment decisions. Data on the economy, financial markets and asset classes are updated quarterly and organized in a manner to explain trends and performance clearly and concisely. It has also been extremely well received by our distributors whose product specialists especially appreciate our effort in customizing the Guide for Asian advisors. Over 1,400 clients now receive copies of the guide electronically and in hard copies.

The third goal is to focus on investment themes like equities and multi-asset funds. We are positive on equities in 2014, supported by the global economic recovery led by developed markets, a rise in investor risk appetite and an investment landscape that favors risk assets such as equities. Even though there is a growing consensus over the improving world economy, there will undoubtedly be some unexpected events during the year. We believe equities are the key engine for growth over the longer term and the need for clients to consider “re-risking” their portfolios.

ABF: What will you do differently in this position?

There is a strong foundation that has been established in the past few years and my focus for the next phase of the business will be deepening relationships with distributors over the next two years. This means establishing more of a partnership model with distributors,

frequent interaction, understanding their market views, identifying the right gaps and needs in their product offerings and localizing these offerings with more Singapore dollar or Singapore dollar hedged share classes.

ABF: What previous positions prepared you for this one?

My previous positions have put me in good stead for my current position. I have had extensive industry experience managing clients and business in Europe and Asia. I joined from ING, where during my 19-year tenure, I have held a number of senior roles, including CEO of Investment Management Asia Pacific (Singapore), CEO of Investment Management Australia, CEO of Investment Management Taiwan, India Country Head of Private Banking and Wealth Management, and Head of Product and Sales for Investment Management Belgium. During my last 12 years in Asia, I have not only been responsible for managing large local Asset Management businesses but also led acquisitions and divestments in various Asian markets.

ABF: What are your key business philosophies?

J.P. Morgan’s philosophy of helping our clients to do first-class business and providing a long-term approach to client solutions is a business philosophy that I firmly believe in. This means deliverI am keen to ing top-tier client service across explore more all touch points and functions. strategic Teamwork is crucial to achieving partnership successful coordination across opportunities all functions. It is essential that with asset employees are equipped with the managers and highest quality training to grow to distribution partners in South their full potential and contribute to the business.

East Asia.

CALL FOR NOMINATIONS LIST OF CATEGORIES Domestic Retail Bank of the Year International Retail Bank of the Year Domestic Finance Company of the Year Best Branch Innovation Best Advertising Campaign Best Website Best Online Securities Platform Best Credit Card Initiative Best Corporate Social Responsibility Program Best Core Banking System Initiative Best Online Banking Initiative Best SME Bank Best Employer Award Nominations are accepted until May 16, 2014 Winners will be announced on July 10, 2014 For Nominations Julie Anne Nu単ez julie@charltonmediamail.com +65 62237660 ext. 221

SECTOR REPORT 1: cash management

There’s a mad rush to take advantage of big data

5 cash management trends troubling Asia Find out which banks cen best leverage on the opportunities from the ASEAN Free Trade.

A

sk Asian bankers about their plans for their cash management services, and they’ll be breathless. That’s because the sector is caught in a whirlwind of change – from the emergence of big data as a potential game changer, to the flight towards asset-light models, to the rising cost of regulation. Those that survive the dizzying ride may end up developing innovative new products and processes that propel them ahead of their rivals, but the unlucky ones may crash into obscurity.

Trend 1: Tap into big data Banks have access to a large volume and variety of customer data – a trend known as big data – which is largely untapped for now. But banking heads and analysts are racing to analyze this mountain of information to learn more about their business customers’ profiles and transactions.

Bank executives believe this will help them understand their customers better and offer more attractive cash 24 ASIAN BANKING AND FINANCE | JUNE 2014

Amos Ong

Bess Basa

management solutions. “In cash management, big data will greatly help in coming up with product solutions that are relevant to our customers’ needs. Given that solutions are commoditized, it would give banks an edge if they come up with services which target what the customer needs based on these data,” says Bess Basa, Vice President & Transaction Banking Head at the Bank of the Philippine Islands (BPI).

“Most banks are in possession of massive amount of customer data that reside in data warehouses and archives. These contain valuable information that, when properly analyzed, can provide the bank and its customers with powerful analytics to help a company to analyze their working capital needs better and enable them to improve on their business performance,” concurs Amos Ong, Head, Client Coverage at Maybank Singapore.

According to Axel Boye-Moller, Head of Global Transactional Ser-

vices for Asia at Westpac, while there are many data-driven opportunities for banks – ranging from process efficiency initiatives like automation of reconciliation activities, to generating insights to help clients identifying new revenue opportunities – the key is to be able to extract the data and apply it in a flexible way, tailored to specific client needs.

The mad rush to take advantage of big data shows the increasing importance of client optimization in the face of growing cost to acquire and serve customers, says Mohit Mehrotra, Executive Director at Deloitte Consulting. Big data provides additional insights on market, client, products and pricing, which translate to better returns, he adds.

Trend 2: ASEAN Free Trade Another golden opportunity for Asian banks is to leverage on the ASEAN Free Trade agreement. “The establishment of ASEAN Free Trade Area is a boon for trade and cash

SECTOR REPORT 1: cash management management businesses. Banks that have a strong ASEAN footprint and established trade finance capabilities will be able to tap onto the free trade zone to boost trade business and capture cash management flows arising from it,” says Ong. Asian banks best positioned to tap into this vein of potential are those that can align themselves with the global standards, as well as those that engage in network banking. “A local financial institution can leverage on the ASEAN Free Trade if it prepares early enough and aligns itself with the global standards” in channels and payment files to facilitate cross-border transactions,“ says Basa.

Meanwhile, according to Thomas Tan, Head of Global Sales, FX and Transaction Banking at CIMB Investment Bank, “a local financial institution can best leverage this through ‘network banking’, capturing both the buy and sell legs of transactions.”

With growing intra-ASEAN trade, Navinder Duggal, Managing Director, Global Transaction Services at DBS Bank, argues that Asian banks and other financial institutions will be able to offer more trade finance solutions to their domestic clienteles, especially small and medium enterprises.

Trend 3: Ramp up productivity Faced with more intense competition and thinning margins, cash management bankers are also exploring productivity and automation initiatives.

DBS, for example, invests in technology and regional processing platforms to drive greater cost efficiencies. It also focuses on strategic enhancements in key payment products and enriched reporting to deliver higher margin, value-added services. “As cash management is a technology-led business, the fundamentals of running a successful cash management franchise entail cost management through process improvement, scalability and straight-through processing,” says Duggal.

Meanwhile, CIMB Investment Bank used innovation and efficiency initiatives to cope with the Malaysian central bank’s decision to drastically lower GIRO fees to RM2 to RM0.10 last year. “In order to stay competitive, we focus on innovation to differenti-

ate our offerings and create valueadded propositions for our customers. At the same time, we also invest resources into improving our existing products and processes, for instance, extending cut-off times, quicker processing times, faster on-boarding, etc.,” says Tan. Trend 4: The asset-light model Efficiency is such a powerful concept in cash management right now that Asian banks are switching to the asset-light business model, especially when it comes to scaling up their cash management solutions to serve customers on an international scale.

“To thrive in the competitive cash management space in Asia, banks are beginning to adopt more asset-light business models to support cross border expansions through the use of centralized, shared service technology and customer service models,” according to Ong. Ong says it is all about leveraging on economies of scale, citing how asset-light models can centralize middle and bank office processes, also allow banks to respond faster to technological chances.

Some banks like BPI are also riding on the asset-light model trend by striking up partnerships with Asian and global banks, and opening up a lucrative new sales stream. “It also gives us access to corporates who normally deal with global and Asian banks to provide local service which the regional and global banks are unable to provide. As our local customers expand regionally and globally, we can use the same asset-light business model by partnering with selected banks.”

The asset-light model helps support Asian banks in their cross-border transactions as shown by the likes of CIMB’s SpeedSend, a global remittance service. According to Tan, CIMB was able to focus on minimizing in-house resources – in terms of lowered expansion and transaction costs – while still maximizing outsourcing opportunities. In explaining the popularity of the asset-light model among banks, Mehrotra says: “Disruptive business models which are focused on specific sub-segments are increasingly becoming popular in the market. Largely, these are tech-

nology-led models by non-financial institutions and help the banks focus on specific cross-border issues faced by sub-segments.”

Michael Lim

Mohit Mehrotra

Navinder Duggal

Thomas Tan

Axel Boye-Moller

Trend 5: Increased regulations Besides ensuring their processes are as efficient as possible, Asian banks looking to turn out a solid profit in cash management also need to factor in the climbing cost of regulation in the sector. “Regulation is indeed a big cost of running a cash management business nowadays,” says Michael Lim, Head of Group Transaction Banking at RHB Bank. “With increased regulation, all banks will face increased regulatory and regulatory compliance-related costs.

Apart from the increasing cost of compliance brought about by the regulations, Boye-Moller says it is creating an important imperative to be absolutely clear on customer segmentation and the cost efficiencies of the services banks provide.

But some banking heads argue that some regulation could actually help Asian banks in the long run. “It is not difficult to understand the underlying rationale behind the new regulatory requirements, especially in the areas of know-your-client policies, antimoney laundering, data confidentiality, terrorist financing and sanctions screening. While this makes client onboarding and transaction processing more complex, the requirements do help banks to mitigate certain risks,” says Duggal. If anything, banks should be prepared to quickly adapt to constantly changing regulatory requirements, although sometimes the sheer pace of change can be enough to unbalance even the most consistently compliant banks.

ASIAN BANKING AND FINANCE | JUNE 2014 25

PEOPLE PROFILE

DBS’ Nicole Wong dead set on enabling SMEs to build stronger business relationships with MNCs The new regional head of supply chain financing will place special emphasis on driving cross-sell opportunities across the bank.

Nicole Wong Regional Head of Supply Chain Financing, DBS Bank

A

s the new Regional Head of Supply Chain Financing at DBS Bank, Nicole is responsible for commercialising and building up DBS’ portfolio of supply chain financing solutions, developing product scalability and a multi-bank model. She also works towards enhancing DBS’ end-to-end suite of open account working capital solutions.

Wong joins DBS from Deutsche Bank, where she was Asia Business Head, Financial Supply Chain. During her tenure, she spearheaded the team that oversaw clients’ supply chain financing needs across the region, winning and delivering a sizeable number of large supply chain finance deals in Asia. Prior to that, she was vital to the development of the supply chain finance business in Asia for JP Morgan, where she achieved significant revenue growth over three years. Before joining banking, Wong also spent close to 15 years with multinational corporates like SGS and BP Singapore, where she built up an in-depth under26 ASIAN BANKING AND FINANCE | JUNE 2014

standing of the mechanics of trade finance and trade-related corporate strategy.

with their MNC partners while helping MNCs meet their business objectives.

ABF: What three goals are you focused on?

My three goals are to build out and fortify the bank’s supply chain financing capabilities and offerings across our key markets, to commercialise and scale up our deal mandates and to leverage the bank’s technical expertise and network across Asia to implement supply chain financing solutions that will better serve our clients, as well as their suppliers and distributors.

ABF: What are your key business philosophies?

My key business philosophies are to constantly keep abreast of new business models and market movements so that we can continuously offer in-depth market insights to our clients to help them increase the profitability of their businesses.

I also believe that in order to take the transaction banking relationship with our clients to a higher level, it is imperative that we not only provide products, services and solutions to our clients, but that we also seek to understand their businesses and advise them on industry-best practices that will help their businesses grow.

ABF: What will you do differently in this position?

I intend to place special emphasis on driving cross-sell opportunities across the bank’s suite of products and services to more comprehensively address our clients’ needs.

ABF: What changes are you planning for?

Currently, there is a growing interest in supply chain financing as a new approach to working capital management in the face of evolving business models across the world. Our MNC clients, who partner with suppliers and distributors in the SME space, are increasingly requiring their banks to not only provide holistic solutions to them, but also to their SME partners, in order to strengthen their supply and distribution chains.

By enhancing our supply chain financing capabilities, we will be able to energise this connectivity between MNCs and SMEs by enabling SMEs to grow and build stronger business relationships

ABF: What previous positions prepared you for this one and how?

Previously, I oversaw clients’ supply chain financing needs across the region, and brought to market large regional supply chain finance deals. I also worked with multinational corporates where I built up an in-depth understanding of the mechanics of trade finance and trade-related corporate strategy.

Having been based previously in three of DBS’ core Asian markets, China, Indonesia and India, my I intend to place special emphasis experiences have equipped me to on driving cross- understand and assess our clients’ sell opportunities supply chain finance needs, as well as to structure holistic solutions across the and actionable steps to meet these bank’s suite of requirements. This allows me to products and services to more support our clients’ agendas for comprehensively regional growth while meeting their local business objectives in address our individual markets. clients’ needs.

ASIAN

BANKING&FINANCE WHOLESALE BANKING AWARDS

14

CALL FOR NOMINATIONS LIST OF CATEGORIES

Cash Management Trade Finance Project Finance Technology & Operations Foreign Exchange Nominations are accepted until April 18, 2014 Winners will be announced on July 10, 2014 For Nominations Julie Anne Nu単ez julie@charltonmediamail.com +65 62237660 ext. 221

SECTOR REPORT 2: banking technology

A generational shift in behavior is driving to new digital channels

Generational shift drives digital banking

With 5 billion mobile phone users worldwide, banks need to start thinking of ways to widen their market.

W

hen the mobile phone was first sold in the market four decades ago, its only function was to receive and make calls. Today, users can deposit money and pay their bills through their smartphones, which boast a hundred and one functions. Many things are now going mobile, including banking.

But while some banks see opportunity and expansion, others remain wary, shunning technological progress. For the trendsetters, however, to reach a larger client base, there is nowhere to go but forward, not just with the adaptation of mobile banking but a number of other innovations.

While older customers remain comfortable transacting in person through their bank’s branches, financial institutions are starting to realize that a large number of their new clients belong to a generation that is open and even yearning for smart commerce services. Vincent Hui, general manager and personal banking division head of The Bank 28 ASIAN BANKING AND FINANCE | JUNE 2014

Vincent Hui

Renzo Viegas

of East Asia, says they believe Hong Kong may have already passed a “tipping point” when it comes to digital banking.

“A new generation of customers has grown up with the internet as an integral part of their daily lives, and this has only been exacerbated by the growing prevalence of smartphone technology in Hong Kong.

As consumers become increasingly tech-savvy, and increasingly comfortable with using technology to engage in financial transactions, a new way of banking is emerging,” he says.

Adept at using technological devices and appreciative of the fact that many things may now be easily done with a click of a mouse and in the comfort of one’s home or office, these young professionals are very much interested in new bank technology.

In fact, banks now need to compete for their attention by flaunting their transaction innovations.

Jonathan Larsen, Citigroup’s head of global retail banking and consumer

banking in Asia Pacific, reinforces the idea. “Consumer preferences are changing and a generational shift in behaviour is driving to new digital channels,” he says.

Booming smartphone technology With nearly 5 billion mobile phone users across the world, a number twoand-a-half times the number of bank accounts, Larsen says the prevalence of mobile technology has a huge impact on consumer franchise. “We not only see a generational shift in how consumers want to access financial services, but we’re also seeing the development of highly digital consumer banking in markets which are already predisposed to using mobile technology rather than bricks-and-mortar branches,” he says.

It is not surprising that Citibank has been generating increased traffic from its “smart branches” in Japan and Hong Kong, which are installed with interactive touch panels and iPhones and iPads capable of

SECTOR REPORT 2: banking technology full-service banking. “Rich digital technology is being deployed at an ever-increasing rate and lower costs: the widespread adoption of tablets and smartphones is one example. Financial applications on these devices are becoming mainstream and banks need to exploit these platforms to deliver innovative solutions that not only exceed customer expectations but can be monetized,” says Liew Nam Soon, Asean Financial Services Leader at Ernst & Young (EY).

Cynthia Liaw, Maybank Singapore’s head of virtual banking and payments, points out that it is essential for banks to ‘digitize’ in light of such trends. “Consumers can no longer live without their digital devices...Therefore, not just the customer facing front-end channels need digitization, the bank-end processes also need digitization,” she says.

Ease of transaction Easier and simplified transactions are the bottom line of such efforts. People register for mobile and online banking so they may have the information they need instantly and at their fingertips. Bess Basa, vice president and transaction banking head of BPI, says technology allows them to be closer to their customers. “The bank caters to people on the go and with time constraints through its mobile banking channels without sacrificing security,” she says. The trend forces banks to adjust and evolve, says Renzo Viegas, consumer banking head and deputy chief executive officer of CIMB Bank. “Banks will have to transform themselves by providing high quality customer interaction, fast and secure processing, fair price with transparency and easy to understand products,” he says.

In the Bank of East Asia, customers can easily open a new account in less than 15 minutes with the use of touch-screen technology and optical character recognition, says Hui. Meanwhile, BPI has been using what it calls BPI Express Assist or BEA to manage customer traffic and long bank queues. Citibank pushes the envelope further by launching “the next generation ATM” in South Asia. The new ATMs are now able to provide all services offered in a

normal branch. “Most of the industry still relies on the paper format. All of that is unnecessary now—our new branches are paperless and wireless.

We’re in the process of getting rid of the forms and putting them all online.

You can now apply for a credit card online without any paper forms—this was unthinkable 10 years ago,” Larsen says. But Liew warns that “more and more non-banks are encroaching into the financial services industry in search of new revenue growth.” They use digital solutions to capture parts of the banking value chain that may result in “disintermediation,” resulting in banks becoming back office utilities.

David Gledhill, DBS Head of Technology and Operations says, “Many banks already realise that the competition will increasingly be coming from non-traditional players such as Google, Ali Baba, and Paypal.” This has prompted DBS to invest SGD200 million over the next three years in their “digital banking initiative.”

“Banks should come up with their own digital propositions and go beyond that to be more intimately involved with their customers buying decisions. This can be done by applying intelligence to the large amounts of data banks have on their customers,” he says.

Consumer analysis “Through the use of proven big data technology, we are able to integrate and process data collected from a wide range of online sources including inbound enquiry logs, external blogs, social media platforms, vendors of aggregated news, and reviews of banking products. This data gives us insight into consumer behaviour, and also aids in fraud detection and mitigation,” Hui explains. This allows them to develop new products and services that meet customer needs and preferences and address deficiencies that may cause customer attrition.

Gledhill agrees that tapping into big data to derive insights and future buying needs is crucial. “With Asia creating wealth faster than anywhere else in the world, coupled with increasingly sophisticated and digitallysavvy customers, banking relation-

Bess Basa

Liew Nam Soon

Jonathan Larsen

David Gledhill

Cynthia Liaw

ship managers need to be empowered with sophisticated and intuitive tools that enable them to respond more speedily with insightful and tailored solutions,” he says.

Liaw, however, reminds of the importance of data security to keep their clients’ trust. “While banks want to provide seamless customer experience across all channels and platforms, they have to ensure that attending staff are provided with customer data/information on a needto-know basis to ensure quality and efficient customer service, and yet not too much information that customers may feel that their confidential information is easily revealed to everyone in the bank,” she says.

Limitless possibilities In the end, it is impossible to ignore the limitless possibilities that technology can offer. While some see the smart commerce as a threat, innovative banks see it as an opportunity for convenience and simplicity for consumers, says Hui. In developing countries like the Philippines, banks like BPI are partnering with telecommunication firms to offer mobile phone-based microfinance-focused savings banks. “This partnership promotes financial inclusion for the country’s “unbanked”. It is pioneering the delivery of formal financial services through its network of partner outlets which serves as the link to communities and remote locations in the countryside. BPI is at the forefront of using technology to further widen its reach, improve customer experience and provide flexibility in transactions,” Basa says.

But while Larsen admits that 98% of Citibank’s transactions in Asia are done through non-branch channels and electronic means, he says, “We do though understand that many clients still want to bank in a branch and that is why we will continue to invest in our physical footprint.” Rest assured, trusty bank branches will continue to exist, at least in the near future. Although less floor space is needed, Hui points out that “many customers still have an emotional connection to the branch experience.” Upgraded with the new innovations, bank branches remain important – “just different.”

ASIAN BANKING AND FINANCE | JUNE 2014 29

OPINION

RAJESH YOHANNAN

Here’s how FX trading has evolved

Keep your mind on your money, and your money on your mind

C

ross-border shoppers may revel in their purchasing power when their home currency is stronger than the currency of the country they’re shopping in. When the opposite unfolds, cross-border shopping becomes less appealing. The same goes for travel: large swings in exchange rates can make travelling abroad on vacation either a very affordable or a brutally expensive affair.

Foreign exchange trading can help to serve as a hedge against fluctuating currency rates. In recent years, the FX market has seen a steady rise in individuals trading. To these self-directed investors, online trading is as common as online banking. People who actively direct their own portfolios are the ones you will find trading FX, equities, commodities, or other instruments through accounts with online brokers.

A legitimate asset class The FX market is the world’s oldest and most liquid, with an estimated US$5.3 trillion traded daily in 2013, up from $4 trillion in 2010, according to the Bank for International Settlements’ (BIS) preliminary “Triennial Central Bank Survey.” In 2013, Singapore overtook Japan as Asia’s biggest FX centre for the first time, as the average daily FX volume increased by 44% to $383 billion. In general, Asia has enjoyed tremendous FX growth at all levels. As the BIS

30 ASIAN BANKING AND FINANCE | JUNE 2014

BY RAJESH YOHANNAN CEO and Managing Director OANDA’s APAC

survey highlights, Asia has gone from being one of the drivers of retail FX expansion, to having the Chinese Yuan as one of the top traded currencies.

Regulation in Asia has adapted to that growth and regional governments are more involved with the industry as a result. Less than two decades ago, speculation in the FX market was strictly the domain of institutions and high net-worth individuals where the professional trader reigned. Individual retail investors had no market entry point: real-time streaming currency rates were tough to find, orders less than $1million were uncommon, and transaction costs prohibitive. Self-directed online FX trading became well established in the early 2000s with the advent of online brokers. Realtime rates, online trading platforms, leverage, risk management tools, and vastly reduced transaction costs were introduced. Global interest in retail FX sky rocketed with highspeed Internet access becoming commonplace, the lightning-fast speed of transactions borne of automation, and the rise of mobile computing.

As a result, retail trading volumes increased from $6 billion in 2001 to $313 billion in 2010, an Aite Group 2011 study found.

FX is a long-term journey To be clear, FX trading is not a get-rich-quick scheme. Just like any other asset class, it requires education, discipline, a sound trading plan that suits your personality, and partnering with a regulated market-maker that operates in a transparent and accountable way. Moreover, you need to understand what impacts exchange rates, learn the FX basics, and access the right risk management tools such as a Value at Risk calculator and using stop-loss orders to automatically close an open position and restrict any losses you incur if the exchange rate moves against you.

Another important ingredient for trading FX smartly is money management. No matter what aims you may identify when determining what you wish to achieve by trading FX, the first priority must be preserving your capital. To that end, copy trading -- where available -- could potentially be a worthwhile venture for investors as it gives them a view of how more experienced traders execute their trades.