Asian Banking and Finance by Charlton Media Group

DISPLAY TO JUNE 30, 2013

opportunities in AsiA’s premium cArds mArket

HonG konG BAnks FAce intense competition

BIG BANKS ARE BEAUTIFUL BANKS

BIG ISSUE Is Malaysia’s 10% banking growth target feasible

BIG ISSUE China’s tightening regulation

OPINION Transaction banking is the “new sexy”

SECTOR REPORT Who will win Asia’s wealth management race?

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In this issue we give you a comprehensive report on how the Asian banks have recovered since the 2008 global financial crisis. Interestingly, Asia has become the fastest growing banking market in the world with the Asian bank assets doubling from 15% in 2000 to 31% in 2011.

Tim Charlton

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You will also find three sector reports that investigate the latest market dynamics in retail banking, lending & credit, and cards & payments in Asia. In one of these reports, we found out that Asia Pacific has the highest population of high net worth individuals in the world. Hence, private banks are in for a competitive market to serve Asia’s rich with a whopping wealth of US$10.7 trillion. Lastly, as we were doing this issue, we were alarmed by the HSBC/Hang Seng group’s alarming 4.6% decline in deposit market share in just 9 years, making way for its nearest competitor Standard Chartered to slowly close the gap on it in its home turf. Enjoy the issue!

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

ASIAN BANKING AND FINANCE | MARCH 2013

CONTENTS

ANALYSIS: Asian banks recovering strongly post-crisis

FIRST 08 Hello, smart-banking machine 08 Hong Kong banks face intense competition

09 Big banks are beautiful banks

FEATURE

Massive opportunities in Asia’s premium cards market

Asian banks’competitive financing schemes

OPINION

16 UOB’s new country head for India to prioritize local corporates’ expansion in SEAsia

“The expansion journey of India corporations is only just beginning,” says Mr Ananthakrishnan.

20 Is Malaysia’s 10% banking growth target feasible?

10 Banks to compete with consumer product companies in 2013

28 Why transaction banking is the “new sexy”

30 The key to private banking in Asia’s family office market

Check out two possible factors that can drive the sector’s growth.

24 Are China’s regulations too tight for the banks?

Analysts warn that small banks may suffer from tightened regulations.

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 | MARCH 2013

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

News from asianbankingandfinance.net

The best of asianbankingandfinance.net Bank investment in Asia on the rise

CARDS & PAYMENTS

most read

Hong Leong Bank unveils new Wise credit card

CASH MANAGEMENT

Here’s all you need to know about BofAML’s new CashPro Accelerate It’s now available to treasury management clients in 12 markets in Asia Pacific. Bank of America Merrill Lynch Global Transaction Services recently announced the launch of the CashPro Accelerate reporting solution which is already available in Australia, China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.‬ RETAIL BANKING

OCBC Bank suffered from margin pressure Pressure was evident in Singapore, Indonesia, and China. According to Barclays, while OCBC’s life insurance and wealth management business was strong in 4Q, the banking business suffered from margin pressure and lower marketrelated fee income.

border RMB settlement reached RMB948bn, a 30% market share. Currently, 12% of the bank’s international settlements are in RMB and 15% of its clients have chosen to use RMB as a settlement currency. ISLAMIC BANKING

Malaysia to reform Islamic banking industry Goal is to double Islamic banking’s market share to 40%. Malaysia is implementing regulatory reforms to help its Islamic banking industry expand further. The government originally aimed for 20% market share for Islamic banks by 2010.

TRADE FINANCE

3 reasons why cross-border RMB business is lucrative for BOC trading Its offshore settlement reached RMB948bn, a 30% market share. According to Barclays, BOC has a leading position in cross-border RMB business in China. In Jan-Oct 2012, the bank’s offshore cross6 ASIAN BANKING AND FINANCE | MARCH 2013

BRANCH BANKING

China Minsheng to do investment banking in Hong Kong Internationalization of the renminbi fuels move. Privately owned bank China Minsheng Banking Corporation will open an investment banking unit in Hong Kong after receiving approval from its board of directors. Minsheng is the first non-government bank in China and is based in Beijing. The move to open a Hong Kong branch will take advantage of the wider acceptance of the renminbi in global business.

According to a statement, with Hong Leong Wise Credit Card launched in association with Visa International, consumers now have a choice of 10% cash back benefit from as many as 10 reward categories. “With the Hong Leong Wise Credit Card we wanted to offer our customers the flexibility of choosing categories that will give them maximum rewards any time, every day. By giving customers the power of choice, this card could help them towards saving money every time they spend on the card by providing cash back,” said Ms Moey Tan, Hong Leong Bank’’s Chief Operating Officer, Personal Financial Services.

RETAIL BANKING

Singapore banks’ loan to deposit ratio at its highest level since 1999 Check out what led LDR to rise to 96.6% in January. According to Barclays Research, the MAS monthly monetary statistics showed a rebound in foreign currency corporate loan growth after a slow 2H12, driving system loans to rise by 3% m/m in January.

2012. The non-performing loan ratio, however, inched downward by 0.01 percentage point to 0.95%. In January, China’s banks loaned out US$172 billion, the largest monthly total in the last three years. CARDS AND PAYMENT

Zeus Trojan returns to victimize Japanese banks

The Trojan that began stealing banking information in 2007 reLENDING & CREDIT surfaces in Japan. Zeus was recently spotted Loan growth in Malaysia to slow to during multiple assaults targeting consumers 11% in 2013F in Japan, said Japan’s Rate of compression is National Police Agency. likely to ease as well. The most recent verNomura expects loan sion of Zeus hit five growth to moderate to large Japanese banks around 11% in 2013F with attacks resemgiven their base-case real bling the previous verGDP growth forecast of sions, said security firm 4.3%. LENDING & CREDIT Symantec.

Chinese banks’ bad loans jumped by 39% Stood at US$69 billion in

BRANCH BANKING

Industrial and Commercial Bank of China to open in

BRANCH BANKING

RBS to fire employees at Indian unit Layoffs part of the bank’s plan to wind down its retail and commercial operations in India. State-owned Royal Bank of Scotland, however, did not say how many employees will be cut. The announcement comes after British Prime Minister David Cameron last week said that he wants RBS to speed up its restructuring, making it clear he is keen to return it to private ownership as soon as possible. LENDING & CREDIT

Philippine bank lending still rising New Zealand The world’s biggest bank continues its aggressive overseas expansion. Staterun Industrial and Commercial Bank of China is to set up in New Zealand under the name New Zealand Ltd. It applied for a banking license last year.ICBC’s branch in Sydney, Australia confirmed that preparatory work is under way for opening ICBC’s first branch in in New Zealand. CARDS & PAYMENTS

Vietnam’s banks hesitant to charge new ATM fees Some Vietnamese banks will not charge fees for every ATM transaction. While this is allowed by new central bank regulations, the banks fear they may lose customers.Domestic lenders were granted permission to charge VND1,000 (5 US cents) every time their own cardholders withdraw

cash as of March 1. The fee is set to double one year later, and triple to VND3,000 by 2015. The regulation also allows banks to charge VND100-500 for other services, including transaction printouts. RETAIL BANKING

Vietnam to allow foreign investors to expand ownership in local banks Move is meant to entice foreign investors into its troubled banking sector.

A draft regulation being prepared by the State Bank of Vietnam, the central bank, wants to boost the local banking sector by allowing more foreign investors to expand their ownership in local banks. SBV said that in special cases, the prime minister can let foreign investors own more than a 30% stake in a local bank. LENDING AND CREDIT

2 reasons why Hong Kong banks’ loan growth will decelerate in FY13

Loose monetary conditions in China is one reason. Barclays expects a deceleration of loan growth in FY13 due to: (1) loose monetary conditions in China resulting in less excess loan demand flowing to Hong Kong; and (2) slowing mortgage growth affected by government’s property cooling measures. “We forecast loan growth of 6% and 5% for 2013E and 2014E, respectively.” RETAIL BANKING

DBS and UOB poised to surprise in 2013 An earnings growth of 5.5% awaits. According to OCBC Investment Research, with the cautious mood, most of the negatives have been priced into the stock prices of the local banks, and there is a strong likelihood that the banks could exceed expectations in 2013.

Growth in January, however, is slower than December’s. Total outstanding loans of Philippine commercial banks less reverse repurchase placements with the central bank grew in January to 15.4% as against a growth of 16.2% in December. M3 or domestic liquidity rose to US$123 billion in December, a 10.8% increase year-on-year. LENDING & CREDIT

Standard Chartered’s wholesale loans in Singapore and Hong Kong shrank But mortgage loans were up 25% and 13% respectively. According to Barclays, loan growth in Asia (ex Korea) in 2H12 was predominantly driven by the consumer business, especially in Singapore and Hong Kong mortgages (up 25% and 13% h/h respectively).

ASIAN BANKING AND FINANCE | MARCH 2013 7

FIRST Hello, smartbanking machine

If you think phones and televisions are the only gadgets that can go ‘smart,’ you better start thinking again. Citi recently launched Citibank Express, a “smart-banking” machine allowing customers to open accounts, apply for loans, cards, and cashier’s checks outside of the branch. It is equipped with an online banking connection, videoconferencing, and biometric capabilities for customer identity authentication. A customer can start a transaction on a computer or mobile device and complete it on Citibank Express - and vice versa. The first Citibank Express machines were unveiled in Citibank branches in Singapore, Malaysia and the Philippines. According to James Griffiths, spokesman for Citi’s consumer business in Asia, Citibank Express marks the first update to the traditional ATM that was pioneered by Citibank in the 1970s. He reveals that these machines use the latest technology and would not look out of place in a sci-fi movie. “They have the wow factor for our clients.” Since Citi launched Smart Banking in Asia this has been rolled out further with over 100 Smart Banking branches across the region. “We have plans to install these machines in branches but also in iconic locations and across shopping malls in Asia,” says Griffiths. 8 ASIAN BANKING AND FINANCE | MARCH 2013

Hong Kong banks face intense competition

ocal banks in Hong Kong are in for a bumpy ride this 2013 as foreign banks up their game by aggressively expanding in the region. The rising number of Chinese banks, in particular, is signalling an intense competition in Hong Kong’s banking industry. Fitch Ratings notes that Chinese banks significantly increased their presence in Hong Kong to about 15% of system-wide assets at end-H112 from 9% at end-2009. Competition pressure Wing Hang Bank, Dah Sing Bank, and Chong Hing Bank are most sensitive to competitive pressure, in light of their weaker market position, customer base and regional connectivity, not to mention their market share fell to 2.4% at end-H112 from 2.7% at end-2009, notes Fitch. The ratings agency adds that the foreign bank-dominated market with significant cross-border exposures also renders the systemwide liquidity vulnerable to stress in other banking systems and economies. The system’s crossborder claims and liabilities, notes Fitch, accounted for 51.4% and

37.7%, respectively of total assets liabilities at end-9M12. Claims on China increased substantially to 13.8% at end-9M12 from 4.3% at end-2008 while claims on Europe declined. “Foreign banks may view the small Hong Kong banks as takeover targets as they look to boost market presence via these banks’ established branch network. Chinese banks will continue to expand their Hong Kong operations and use them as an offshore banking platform to source US and Hong Kong dollar funding.” Defense mode But the larger banking groups HSBC, Bank of China, and Standard Chartered - are still well placed to defend their leading positions and dominate the Hong Kong market, thanks to broad retail deposit bases, strong brand recognition and wide branch coverage. “However, rating upside is limited as competition continues to put pressure on profitability, in turn causing the banks to expand into higher-risk markets, including China via credit lending and minority stakes in Chinese financial institutions,” says Fitch.

Wing Hang Bank, Dah Sing Bank, and Chong Hing Bank , are most sensitive to competitive pressure, in light of their weaker market position

FIRST banks attribute to the change in the deposit market share. Bauer reckons that banks can easily pay up for deposits to increase market share by offering a better price, which is what the Chinese banks in Hong Kong have been doing recently. “HSBC is in the position to defend that market share but it will come at a cost,” says Bauer.

Big banks are beautiful banks

SBC may still be the world’s local bank, but while it has been busy attempting to conquer foreign markets, its nearest competitor Standard Chartered has slowly been closing the gap in its home turf. Barclays analyst May Yan reveals that HSBC is still the largest bank in Hong Kong by deposit market share with 22% of the market in 2011, but this is down from 24% in 2003. Standard Chartered, whilst no threat yet, has steadily crept up from just 6% of the deposit market to 9% over

the same time period. But it gets worse for HSBC, with its sister bank Hang Seng also losing market share going from 12% to just 10% over the same period. In fact the HSBC/Hang Seng group has lost an alarming 4.6% of the deposit market in just 9 years. Increasing competition But Sabine Bauer, an analyst with Fitch Ratings, notes that Standard Chartered has caught up quite well in terms of deposits but that has to do with the additional value both

HSBC/Hang Seng group has lost an alarming 4.6% of the deposit market in just 9 years.

The broader picture The broader picture of HSBC, StanChart and the other large banks is good. One interesting change to the dynamic over the last decade is that Hong Kong’s smaller banks have struggled to grow both their deposit bases and also their customers tend to prefer costlier time deposits. Hong Kong is one of the best markets for banks in Asia in terms of cheap funding, with 59% of deposits held in savings or checking accounts which pay little interest. Barclays’ Yan suggests that higher deposits per branch led to increased deposit market share gains for large banks in Asia ex-China and Japan. During 2007-11, large banks reported 77% more average deposits per branch: USD 222mn vs. USD 126mn for small banks. This indicates that large banks are 77% more deposit/branch efficient than small banks. Hong Kong’s large banks have deposits worth USD697m per branch in 2011, almost twice as efficient as the small banks.

CHARTIST Nomura reckons loan penetration very low in ASEAN, whilst growth has been subdued relative to BRICS countries. Within ASEAN, Indonesia still has by far the lowest loan penetration at 30% of GDP followed by the Philippines at 33%. “Singapore has the highest at 129%. Thailand has seen the weakest loan growth since 2005 (CAGR of 9%) whilst Indonesia has seen the highest at a 21% CAGR,” adds Nomura. The analyst says ASEAN region’s GDP growth will come in at 4.6% for 2013F vs 4.8% in 2012F. The Philippines is expected to see the strongest growth in ASEAN in 2013F, followed by Indonesia.

Thailand has seen low loan growth since 2005

Indonesia and Philippines have low loan penetration

Source: CEIC, Nomura Research

Loan Growth (CAGR) ‘05 -`11

Loans to GDP (%) for 2011

ASIAN BANKING AND FINANCE | MARCH 2013

OPINION

SHEKAR GANESH

Banks to compete with consumer product companies in 2013

by SHEKAR GANESH Former Senior Banker SAS consulting and Learning Solutions

he late management guru C.K. Prahalad defined competing in the future as ‘getting to the customer first for less.’ What are banks doing to get closer to their customers, especially the customers of tomorrow? The banking industry, plagued by continuing economic uncertainties, lack of consumer interest and now erosion of faith has to be content with lower growth for a considerable period in the future. Adding to this woe, the arrival of new generation customers and with that the big shift in consumer behavior, and the extensive use of social media sites for sharing consumer preferences-that is deciding the fate of all products and services including financial services-are other factors shaping the future of the industry. It cannot be business as usual therefore for banks attempting to prosper under these circumstances or record productivity gains through quick fixes. Reducing fixed costs to address the chronic lag in cost-to-income ratio is not a long-term solution either.

tomorrow’s customers will having nothing left after spending on fixed expenses like rent, rates, taxes and mortgage as well on compelling consumer products. This means banks will no longer be competing within the banking industry but everyone What do banks need to do? else in the consumer world and that is big call Think beyond conventional strategies; redefine because these consumers are not excited about competition and target market; innovate the seemingly ageless products from banks. One aggressively and add value to customers by reason among others could be that consumers eliminating waste. Actively engage customers, don’t feel connected with banks. Consumer offer a novel experience by looking beyond the industry for value creation. Secure a firm place in product companies on the other hand intensified actions to get intimately connected with their the social media space to stay connected customers and also moved into the banking space The laid back attitude of banks is perhaps the by offering financial engineering structures for main reason for customers defecting in favor of increasing product sales. consumer product companies that are working Surely tomorrow’s customers will be hungry hard to make their offerings simple and constantly for new products, but persuading them to buy endeavoring to improve product quality and banking products will not be easy in the face of introduce exciting new products. Using superior terrific consumer products. And because they data mining capabilities and sophisticated tools conduct research and evaluate options they will like conjoint analysis to understand customer preferences, they co-create products that meet the negotiate hard if they don’t find value. Given the above scenario, the welter of hidden needs of their customers and induce them regulations that grip the banking industry to spend more. should not be the reason for lagging behind the What are banks doing to regain market share? What are they doing to counter the impact caused consumer industry in developing leading-edge products. Authorities don’t spare them either, but by products from companies like Apple, P&G, they don’t stop innovating. Banks should replace Louis Vuitton or Samsung that consume a large products that have lost sheen with new ones that portion of the disposable funds and keep the customers away from banks? Banks that generate can accomplish dual objectives of saving while spending. Products have to be simple and free the bulk of their revenues from retail customers from complicated structures that confuse the will need to develop new strategies for capturing customers, undermining the confidence needed a share of the consumer spending instead of for trusting their money with the banks. merely focusing on savings, as in all likelihood 10 ASIAN BANKING AND FINANCE | MARCH 2013

Fiercer competition looms

CMY

ASIAN BANKING AND FINANCE | MARCH 2013

ANALYSIS: Asian banking

Asian banks recovering strongly post-crisis

The 2008 global financial crisis brought the banking industry to its knees, but Asian banks are heading to 2013 with notable resiliency.

n the past four years following the 2008 crisis, Asia has been the fastest growing banking market in the world, doubling its slice of total assets in the recent decade, based on data from Bank of America Merrill Lynch (BofAML). “The total assets of the Asian financial industry are estimated at US$60 trillion, of which Asian banks hold about US$40 trillion. Asian bank assets, as a percentage of total assets in the global financial industry, doubled from 15% in 2000 to 31% in 2011, making Asia the fastest growing banking market in the world,” said BofAML research analyst Bryan Song. Song said Asian banks have stepped up to the plate as the EU and US regions are undergoing significant deleveraging. Booming bank penetration and loan growth Asia’s total loans/GDP ratio – a key indicator of bank penetration 12 ASIAN BANKING AND FINANCE | MARCH 2013

“Asia has rapidly approached developed market (DM) levels of financial industry penetration, with some countries providing solid growth momentum.”

– averaged at 105% between 20082011. This ratio is up from just 89% in the mid-2000s, which BofAML said reveals how Asian banks have gained importance in their individual economies. “The overall Asian financial industry has outgrown GDP growth over the past decade, as its role and function – that of being a financial intermediary – has developed,” said BofAML’s Song. But Song warned that with the region crossing the 100% loans/ GDP ratio threshold, Asian banks are reaching a maturity milestone that may moderate loan and asset growths due to market saturation. “Compared globally, the Asian financial industry has a loan/GDP ratio similar to the US and many EU countries – at 100-110%. This implies that Asia has rapidly approached developed market (DM) levels of financial industry penetration, with some countries providing solid growth momentum,” said Song.

While Asian banks have indeed reduced their loan/GDP ratio gap with DM banks, we note that since balance sheet control via loan securitization has been popular in DM, looking simply at the loan/ GDP composition may overstate the stage of development that the Asian financial industry is at.” That said, as the financial industry saturates in Asia, the sustainable pace of loan and asset growth should eventually be slightly above the nominal GDP growth levels, in our view.” Loan growth in Asia has been booming post-crisis on the back of greater monetary easing and economic stimulus globally. The Asian banking industries have, on average, achieved a loans CAGR of 11.9% from 2008-2011, which BofAML notes is “far higher” than the region’s nominal GDP CAGR of 7.5%. Deteriorating margins One sore spot though for Asian banks is their plummeting net interest margins or NIMs across the board, a trend that may potentially pummel their bottom lines. “Asia as a whole has witnessed deterioration in NIMs post the 2008 financial crisis, affected by monetary

ANALYSIS: Asian banking easing actions. Most countries that managed to achieve high loan growth also reported margin dips, even as the rapid loan expansion actually raised the loan-to-deposit ratio and eventually yielded solid interest income growth,” said BofAML. “Since interest income accounts for around 70% of gross operating revenues in the Asian banking industries, the rapid drop in NIM could eventually lower their power to generate earnings,” warned BofAML. 2013 outlook Looking forward to 2013, Moody’s Investors Service acknowledged the relative resilience of Asia Pacific banks and gave the region a “stable” broad credit outlook in its most recent report titled “Asia Pacific Banking Outlook 2013” on the expectation that the region “will remain largely insulated from the negative credit pressures affecting their peers in many Western economies.” “We consider that this stable outlook is driven mainly by the region’s economic resilience; its relatively accommodative monetary policy; and the banks’ own strong liquidity when compared to global norms, as well as their relatively robust capital buffers,” said Stephen Long, Managing Director for Moody’s Financial Institutions Group in Asia Pacific. Of the 14 banking systems in the region, Moody’s gave a stable outlook to 11, a positive outlook to the Philippines, and a negative outlook to India and Vietnam. “For the region, in terms of specifics, we consider that the economic recovery from the troughs reached in mid-2012 will continue in much of the region in 2013. At the same time, interest rates will remain low, making an asset quality shock unlikely during this year in most Asian countries,” said Long. Key themes Moody’s listed the key themes for Asian banks in 2013: First is the expectation that the modest cyclical deterioration apparent in asset quality should fade by mid-year. Second, there is growing consideration that the region’s very low interest rates, while providing further reassurance against an asset quality shock are also creating longer-term risks. Third is anticipation that Chinese banks

will avoid a hard landing, but that their longer-term issues will remain unresolved. Basel III adoption Another big theme for 2013 is the implementation of Basel III. Banking regulators will be eager to adopt the new global regulatory standards, but the stance will not be so tough that it exposes creditors to losses, argued Moody’s. “The vast majority of Asian banks are ready to adopt Basel III capital standards, which are being implemented in much of the region in 2013, even though some Asian regulators have announced delays,” said Moody’s Long. “Asian banks are well-placed to meet the capital standards of Basel III; the banks will carry on with their overseas expansion, though at a more moderate pace than that evident in 2012. And while the region’s regulators will focus on ensuring that new-generation capital instruments meet Basel III requirements, they will still refrain from seeing any urgency in pressing ahead with broader resolution tools that could impose losses on creditors,” said Moody’s. Three research firms – BofAML, Moody’s and CLSA – also contributed their outlooks for banks in individual Asian countries, the highlights of which are posted below. China and Japan: Leading the pack While Asian banking is surging as a whole, two countries have been leading the charge in particular: China and Japan. BofAML data show

“Of the 14 banking systems in the region, Moody’s gave a stable outlook to 11, a positive outlook to the Philippines, and a negative outlook to India and Vietnam.”

that China and Japan combined hold 44% (US$18tn) and 27% (US$11tn) of Asia’s bank assets, respectively. But in 2013, Chinese and Japanese banks face weaknesses and risks that could hurt their growth prospects. “We believe margins in China may remain under pressure, reflecting nearer term the improved liquidity of domestic Chinese banks and the continued soft loan demand. Medium term, further interest rate deregulation may also squeeze both lending and deposit yields of banks in China,” said BofAML’s Song. Moody’s was a bit more positive with its China outlook: “With the Chinese banks, the risks of a systemic crisis materializing in 2013 are low. And while loans to real estate developers and to local government financing vehicles (LGFV) will remain sources of long-term asset quality concerns, Moody’s sees the risks of significant distress in 2013 as contained, respectively by a recovering real estate sector and the Chinese government’s active management of the LGFV refinancing process.” Meanwhile, for Japan, Moody’s said an aggressive expansion strategy will keep banks chugging along with stable credit. “The credit conditions for its banks will remain stable despite a generally weak economic outlook. The major banks will continue to take advantage of their relatively strong financial profiles and the retreat of European banks by expanding overseas, both in terms of their loan books and in terms of strategic investments.”

ANALYSIS: Asian banking Singapore and Hong Kong: Fairly high growth rates Singapore and Hong Kong, despite having relatively mature banking markets in Asia, have surprised positively by maintaining “fairly high” growth rates. They have done so by leveraging on their strong reputation as the region’s financial hubs, and their superior infrastructure. Singapore has been and will continue to be buoyed by strong consumer lending, offsetting the marked slowdown in business loans, which has slowed to 15% yoy in November 2012 versus 19% the month before. “The latest monthly banking statistics for Singapore highlight that although total domestic loan growth is decelerating, consumer loans remain buoyant. Deposit growth has rebounded off the weak October figures but this is mainly being driven by fixed deposits. These trends suggest that further intervention in the property market is likely,” said CLSA analyst Asheefa Sarangi. “Both housing and other personal loan growth remained resilient with yoy growth of 16% and 18% respectively. Despite the government’s most recent effort in early Oct to cool the residential property market, housing loan growth has actually accelerated. Housing loans were running at an annualised mom rate of 24% in Nov,” added Sarangi. But Sarangi expects MAS to intervene in 1Q13 to reduce this rampant bank lending to the property market, which will dampen the profitability of Singapore banks. Hong Kong banks, for their part, will be looking at stronger margins due to a breadth of growth drivers. “Margins in Hong Kong may hold up thanks to some pick up opportunities in domestic commercial banking (offshore RMB), treasury (higher investment yields) and for smaller banks, retail banking (lower time deposit cost),” said BofAML. Korea: Modest NPL recovery In Korea, Moody’s expects loanto-deposit ratios to continue to decline. For banks in export-related economies such as Korea, Moody’s also said macroeconomic recovery in 2013 will mean that any cyclical rise in non-performing loans (NPLs) will be modest. 14 ASIAN BANKING AND FINANCE | MARCH 2013

Philippines and Indonesia: Huge growth opportunities BofAML picked the Philippines and Indonesia as the two countries with “huge growth opportunities in their financial sectors” due to their relatively low loans/GDP ratios of 32% and 28%, respectively, compared with the aforementioned 2008-2011 regional average of 105%. Philippine and Indonesian banks, as well as Indian banks, have been benefiting from hyper margins resulting from insufficient competition and an under-penetrated banking environment, said BofAML. Both countries also share a positive credit outlook from Moody’s, but with more risk attached to Indonesia. “With the positive outlook for the Philippines, Moody’s says its banking system will remain relatively immune to global shocks and continue to benefit from steady credit growth. Indonesia shares many of these positive attributes, but Moody’s stable system outlook includes more policy uncertainty, as well as greater risk of asset quality pressures due to relatively rapid recent loan growth.” Vietnam and India: Negative outlooks At the other extreme, Vietnam and India garnered negative outlooks, noted Moody’s. “The Vietnamese system is in much worse shape than India’s and there is a reasonably high probability that the government will

“BofAML picked the Philippines and Indonesia as the two countries with ‘huge growth opportunities in their financial sectors’”

need to step in and take measures to address the issue of high NPLs, or face the negative economic consequences of a banking system that cannot support credit growth,” said Moody’s. And in India, impaired loans are yet to peak among public sector banks. While the government is likely to remain supportive, relatively high inflation and modest fiscal capacity mean that policy options are constrained.” BofAML observed though that India has defied the region’s declining NIM trend with banks seeing NIM rise by almost 40 basis points over the past four years despite strong loan growth. Australia and New Zealand: Rosy for the near-term The outlook for Australian and New Zealand banks has brightened recently with a burst of investments and reconstruction efforts, respectively. “The outlook for banks in Australia and New Zealand remains stable as these economies continue to exhibit good growth prospects in the nearterm, driven by ongoing resourcessector investments in Australia and earthquake reconstruction in New Zealand,” said Moody’s. Australian banks also currently boast some of the most stable credit costs in the region, having dropped from their financial crisis highs, said BofAML.

Credit Card Initiative of the Year - MALAYSIA OCBC Bank (Malaysia) Berhad

OCBC Al-Amin reaching out through Xpres branches

slamic Banking is gaining popularity among not only Muslims but nonMuslims as well in Asia. On its part, OCBC Bank sees this as an opportunity to offer an even broader array of competitive and innovative financial products and services to consumers and businesses. And it recently started doing so through the Xpres branches of its Islamic banking subsidiary, marking a milestone in the four-year journey of OCBC Al-Amin Bank Berhad. When OCBC Bank (Malaysia) Berhad unveiled OCBC Al-Amin in December 2008, the company already had thirteen years of Islamic banking experience under its belt, having previously offered such services through a “window” since the midnineties. After the first OCBC Al-Amin branch opened at Jaya One, Petaling Jaya, the network quickly expanded to five. Three more branches would soon be added but not before a shift in strategy. Prior to the opening of the last three Muzir Kassim, Head of Consumer Financial Services, OCBC Al-Amin and Syed Abdull Aziz Syed branches, referred to as Xpres, research was Kechik, Director & CEO of OCBC Al-Amin at the newly-opened Bukit Bintang branch in Malaysia. carried out to determine what customers wanted from their Islamic bank. and provide a convenient touch point closer Account and i-Great Bakti Takaful. This gave rise to a new to where existing and potential These products are also available at all approach that catered customers work and live. 31 conventional OCBC Bank branches specifically to those wishing These Xpres branches hold nationwide. “We are working to perform their banking towards providing on strongly to OCBC Al“We expect our approach to resonate transactions closer to where quick access and Amin’s new brand essence of with the younger set, especially working they work/live/play. ‘fresh and simple banking’ professionals, who are looking for simple yet effecSo, in 2012, the three tive Shariah bank- derived from the insight that simplicity and convenient locations at inaugural Xpres branches ing solutions to our “simplicity” in language, which to do their banking even outside were opened, becoming the processes and documentation regular banking hours. We are working customers.” country’s first standalone puts customers at ease and towards providing quick access and simple seven-days-a-week Islamic gives them control over the situation as yet effective Shariah banking solutions to branches. Open daily from 10am to opposed to just hopping on for the ride. our customers. Our target is to be top-of10pm, the three new branches, at the This is important for OCBC Al-Amin as mind among young working professionals Bukit Bintang monorail station, Balakong it tries to broaden its appeal from OCBC and ultimately become their one-stop and Taman Melawati, are part of a larger Bank’s traditional strength in the older, banking partner,” says Syed Abdull Aziz strategy to expand the Islamic bank’s reach more affluent segments to the younger, Syed Kechik, Director & CEO of OCBC new-to-the-workforce customers. Al-Amin. These branches thrive on a self-service OCBC Al-Amin is planning to open ten platform where customers are empowered more Xpres branches at locations that are to perform banking transactions relevant to the target segment in the next themselves. They come equipped with phase of the re-launch strategy. ATMs, cash deposit machines and an on-line application process with lean and effectively trained personal financial CONTACT assistants to help in all matters. In addition, OCBC Bank (Malaysia) Berhad there is round-the-clock security as part of Menara OCBC, 18 Jalan Tun Perak, the OCBC value proposition. 50050 Kuala Lumpur Among the products available are the General Enquiries 1300 88 5000 attractive Manarat Home-i Financing, www.ocbc.com.my Cash-i Personal Financing, Wafi-i Deposit The Xpres Branch in Balakong, Malaysia ASIAN BANKING AND FINANCE | MARCH 2013

PEOPLE PROFILE

UOB’s new country head for India to prioritize local corporates’ expansion in SEAsia “The expansion journey of India corporations is only just beginning,” says Mr Ananthakrishnan. ing lending, treasury and trade finance products, to corporates and financial institutions. Asian Banking and Finance interviewed Mr Ananthakrishnan to learn more about his plans following his appointment.

Mr. P.V. Ananthakrishnan Country Head for India United Overseas Bank

r P.V. Ananthakrishnan has been appointed as United Overseas Bank’s new Country Head for its India operations. Mr Ananthakrishna replaces Mr Lourdes Premkumar Sinnappan, who has taken up a new role as General Manager of UOB Labuan Branch in Malaysia. Mr Ananthakrishnan will draw on his more than 30 years of experience to develop and expand UOB’s Corporate Banking, Trade and Treasury businesses in India. On his appointment, Mr Ananthakrishnan said, “With UOB’s extensive network across Asia and its deep understanding of the local business landscape, the Bank is in a strong position to partner with Indian corporations aspiring to grow domestically or into the region.” Before taking on his new role at UOB, Mr Ananthakrishnan was the Country Head and Chief Executive Officer of Mashreq Bank India. Prior to Mashreq Bank, he held various senior roles with HDFC Bank, BNP Paribas, Corporation Bank and Andhra Bank in India. UOB opened its maiden branch in Mumbai, India in 2009. UOB Mumbai Branch currently provides wholesale banking services, includ16 ASIAN BANKING AND FINANCE | MARCH 2013

ABF: What makes you excited about your new position? This is an exciting time to be part of UOB. With UOB’s strong franchise and network of more than 500 branches across the region, the bank is well positioned to help Indian companies access opportunities in Southeast Asia through cross-border banking solutions, such as trade financing, crossborder loans, investments and deposits. ABF: What three goals are you focused on? As India prepares to sign an enhanced Free Trade Agreement in services and investments with ASEAN, there will inevitably be more business flows between India and Southeast Asia. My top priorities are to help Indian corporates, MNCs, and government enterprises expand in Southeast Asia as well as to support more Southeast Asian companies’ expansion plans in India. This goal is aligned with UOB’s regional strategy of facilitating cross-border investment and trade flows. In October 2011, UOB became the first Singaporean bank to set up a Foreign Direct Investment (FDI) Advisory Unit to facilitate investment and trade flows within the region. The FDI Advisory Unit provides assistance ranging from company incorporation, access to UOB’s full suite of corporate and personal banking products for borderless financial services through the Bank’s long established regional network. I am looking forward to ensuring our local companies take advantage of the services the FDI Advisory Unit offers. ABF: What changes are you planning for?

What are your key business philosophies? UOB has built long term relationships with its customers over many generations, supporting them through the good and bad times. This commitment to customers is a business philosophy I strongly believe in and will strive to demonstrate to my customers. The expansion journey of India corporations is only just beginning. With the balance of power shifting to Asia, there are many growth opportunities in the region for Indian companies looking to expand beyond their home market. I want UOB to be there for our customers, right from the start of their business expansion and regionalisation journey. I see our role as supporting customers with financial solutions and access to funding, as well as helping them navigate business challenges. To be successful in expanding into Southeast Asia, it’s important for Indian businesses to understand the region’s diverse cultures, regulatory landscape, and to have the right connections. UOB will be able to help through its regional network in Singapore, Malaysia, Indonesia and Thailand. ABF: What previous positions prepared you for this one and how? I will draw on my more than 30 years of banking experience to develop and expand UOB’s Corpo“My top rate Banking, Trade and Treasury priorities are to businesses in India. Before taking on this new role at UOB, I was the help Country Head and Chief ExecuIndian tive Officer of Mashreq Bank India. corporates, Prior to Mashreq Bank, I held variMNCs, and ous senior roles with HDFC Bank, government BNP Paribas, Corporation Bank enterprises and Andhra Bank in India. Having gone through several expand in market cycles, I understand deeply Southeast Asia the financial and business needs of as well as to Indian corporations, state-owned support companies and MNCs. I will be more Southeast working closely with the UOB Asian companies’ team in the region to bring the expansion plans capabilities, knowledge and experience of UOB to Indian businesses. in India.”

ASIAN BANKING AND FINANCE | MARCH 2013

SECTOR REPORT: Cards & Payments

Massive opportunities in Asia’s premium cards market

It’s an exciting market as Asia Pacific beats North America with the largest number of HNWIs.

s the ultra high net worth individuals (HNWIs) flock into Asia, the premium cards market offer extensive growth opportunities as well as challenges to retail banks. But are banks innovating enough to serve this increasingly competitive market? Renzo Viegas, group deputy CEO and head of consumer banking at CIMB, reckons that there is a tremendous opportunity in Asia to grow the premium cards segment given the rapid growth of mass affluent and high net worth consumers across the region. He cites a study conducted by Cap Gemini that reveals that Asia Pacific hosts the largest number of high net worth individuals, surpassing North America and this trend is anticipated to continue over the next few years. Banks can then leverage on the increasing opportunities to provide premium card level offerings to further boost market share. 18 ASIAN BANKING AND FINANCE | MARCH 2013

“In the cards segment, innovation in terms of marketing and technology is key.“

Serving Asia’s rich Amidst all this, Viegas notes it is crucial for service providers to maintain a high standard of customer service as their customer base grows and customers’ expectation increase. Financial institutions, he adds, also need to expand their propositions, covering beyond just credit card and they need to crystallize an integrated value proposition for customers to also include asset management and other attractive credit products. “In the cards segment, innovation in terms of marketing and technology is key and many banks have been pushing this in full force,” says Viegas. CIMB has been, for example, providing its premium regional customers in Malaysia, Indonesia and Singapore free access to golf courses, premium dining privileges, shopping, travel and hotel stays. These attractive offerings are seamlessly available across all the three markets. “In the payments space, significant innovation is already underway

in contactless payments such as in mobile phones via the Near Field Communications technology. There is also potential in the growth of e-wallets to support online or internet purchases,” adds Viegas. But Jeremy Soo, managing director and head of the consumer banking group at DBS Singapore, notes that while there is a growing number of affluent in Asia, they behave differently from the HNWI of the past or from their Western peers. DBS offers the first card to offer a credit limit starting at $1 million. “DBS Insignia Visa Infinite cardholders are using the card for down payments on cars, travel and luxury items,” says Soo. In the Philippines, though, RCBC’s senior executive vice president for the retail banking group Ismael Sandig reveals that there remains to be a huge market for cards and payments owing to the big gap between the population and ATM cardholders. “While banks are doing their best to keep innovating, the challenge lies on the merchants’ capabilities to adopt new technologies,” he adds. Credit card clash Given that the premium cards market proves to be an exciting market for banks, the next question is, how can

SECTOR REPORT: Cards & Payments the banks stand out enough that customers choose their card? An affluent person may have three to four cards in his wallet. On which basis should he decide which card to use? How can a bank set itself apart from competitors? According to Sandig, customers want more of instant gratification for promos and privileges, while efficiency of service can be the game changer as customers are willing to pay for good service. On the other hand, CIMB’s Viegas reckons top tier premium customers will typically choose a credit card which provides him the best personalised services - like having a relationship manager assist the customer in his credit card needs and total banking solutions. For the mass market segment, however, he notes that users are often value-seekers and will use the credit cards they believe will provide the most value to suit their lifestyle. “Banks that aim to succeed in the cards business will need to utilise the available data and research such as customers’ spending behaviour, demographic and credit data to develop targeted attractive offerings. These offerings are more likely to prompt consumers to favour one credit card to another as it is specifically targeted and highly relevant to their consumption needs,” adds Viegas. DBS’ Soo, on the other hand, says customers should select a card that offers him both convenience for day-to-day transactions such as contactless payment for micro payments if he prefers to go cashless and rewards that matches his lifestyle.

According to Sisi Liao, senior financial researcher at the Lafferty Group, the revolution in consumer payment behaviour is evidenced by recent Lafferty research that predicts the billed volume on credit cards will exceed $1 trillion by the end of the year and for debit cards, the figure is likely to approach $5 trillion. Liao adds that in the developed world, debit cards have flourished as some issuers and consumers refocus away from riskier credit cards. Payments space Meanwhile, in the payments space, banks are increasingly adopting mobile payment systems such as Near Field Communications. But how can they maximize this technology? CIMB’s Viegas says NFC will open up a new market for payments as it will make micro payments viable and contribute towards the growth of card payments. “With this technology, small businesses will be able to accept card payments instead of cash as the NFC technology will allow funds to be transferred from one phone to another by simply tapping them. Banks that are able to leverage on these technological capabilities will be in a good position to capture a larger market share of the payments space,” adds Viegas. RCBC’s Sandig, however, says the use of mobile and NFC is very merchant-sensitive. “While Philippine banks can innovate and enable this technology, the

“NFC will open up a new market for payments as it will make micro payments viable and contribute towards the growth of card payments.”

merchants have yet to catch up and embrace the new POS terminals that will be required.” Given this challenge, expanding its merchant partnerships and widening the contactless acceptance network may be of help to the banks, says DBS’ Soo. It is important to work with partners on NFC transactions and rewards to make it more rewarding for credit card users to go cashless. Holistic banking services But ultimately, how can cards and payments directly or indirectly affect the performance of the branch. DBS’ Soo notes that other than contributing to revenue growth, the card offerings form part of the holistic banking service a bank provides to its customers as it helps to establish deeper relationships. RCBS’ Sandig, on the other hand, says there are business models where card payments are used as a value add for customers. “It’s a good source of fee-based income. Historically, the more cards are used, the higher the average balances on the accounts,” he adds. And of course, we can never disregard the fact that the timeliness of credit card payments can significantly impact a portfolio level. “The provisioning that a bank puts aside to take into account potential credit losses may increase if a large number of customers within the portfolio delay their payments,” says Viegas.

Debit cards Asian banks have recently been launching new debit and credit cards that target different clients with various offerings. Malaysia’s Hong Leong Bank, for instance, recently unveiled its Wise Credit Card, giving consumers a choice of 10% cash back benefit from as many as 10 reward categories. On the other hand, Maybank Singapore’s Maybankard Visa Superman Debit aims to promote debit as a mode of payment within the context of young adults’ lifestyle needs as well as adopting good financial management practices. Debit cards are equally gaining the spotlight as credit cards do. ASIAN BANKING AND FINANCE | MARCH 2013

BIG ISSUE 1

Is Malaysia’s 10% growth target feasible? Check out two possible factors that can drive the sector’s growth.

n a report, OSK Research said it anticipates a moderate earnings growth of 8-10% for Malaysia’s banking sector. So we asked banking analysts, is this target achievable? And what will drive this growth? The Malaysian banking sector should show good growth in 2013. Malaysia’s GDP grew by a relatively strong 5% in 2012 and leading economists predict that it will grow at a similar pace in 2013. Adil Ahmad, former CEO of Kuwait International Ban, notes that strong local spending in both consumer and government is expected to be equally strong in 2013 as it was in 2012. Ahmad reckons that the growth in Malaysia’s economy will drive strong growth in its banking sector. Two additional factors which will further aid the banking sector’s growth are the strong position Malaysian banks enjoy in the booming Indonesian economy, especially CIMB and Maybank, and the expected strong growth in Islamic finance, especially in the Sukuk segment where Malaysian banks are dominant players. “The new initiatives undertaken by Malaysian regula20 ASIAN BANKING AND FINANCE | MARCH 2013

“Loan growth moderated to 10.9% in 2011, about half the government’s target of 20%”

tors will also help the growth of the Malaysian banking sector,” he adds. Loan growth On the other hand, Ivan Tan, director of financial institutions at Standard & Poor’s, expects loans growth to be in the high singledigit range, slightly lower than the 11% annualized growth recorded in 2011. “We believe Bank Negara Malaysia’s responsible lending guidelines, implemented in early 2012, would lead to some further

moderation in consumer loans growth as part of the regulator’s efforts to rein in the country’s high household debt to GDP of over 70%. Consumer loans account for about 55% of total banking system loans,” says Tan. DBS Vickers analyst Lim Sue Lin says Malaysia’s loan growth is likely to moderate in 2013 to 10% and this would be led by both retail and business loans. Though CIMB missed DBS’ 2012 loan growth target, Lim notes it will catch up in subsequent quarters given its strong loan pipeline (especially business loans). On the other hand, Public Bank Berhad delivered the most consistent loan growth in 2012 and kept its lead in mortgages, commercial properties, and passenger vehicle financing, with a market share of 19%, 33%, and 26% respectively. But according to Lim, personal and credit cards loan growth fell due to Bank Negara Malaysia’s tighter retail lending guidelines effective January 2012. He reveals that all the banks will get to play a role if business financing picks up. Earnings Most banks have rebalanced their portfolios towards higher-yielding loans and are now focused on growing low-cost deposits. Competition for loans and deposits will continue to drive down NIMs in the near term, but Lim expects it to be less severe. “We expect earnings growth to be capped by NIM compression and moderate loan growth, and forecast 12% earnings growth for 2013.”

Malaysia Banks Sector earnings growth

Source: Companies, DBS Vickers

ASIAN BANKING AND FINANCE | MARCH 2013

SECTOR REPORT: LENDING & CREDIT

Asian banks’competitive financing schemes

Also find out how banks can overcome the growing pressure of regulations and deteriorating margins.

s Asia becomes one of the busiest business hubs in the world, entrepreneurs flock into the region to explore opportunities and start their own ventures. So what are the options available to small and medium enterprises (SMEs) in Asia? Since SMEs are everywhere in Asia, many financial institutions have been engaging in this segment over the past few years and birthed a wide spectrum of financing options such as trade, factoring, business overdrafts and term loans to asset-based financing covering commercial property, machinery and equipment. Linus Goh, head of global commercial banking at OCBC, adds that in Singapore, government agencies such as SPRING, IE Singapore, and the Action Community for Entrepreneurship offer a comprehensive range of grants, equity/ debt funding and financing assistance schemes to support SMEs 22 ASIAN BANKING AND FINANCE | MARCH 2013

“Malaysia’s SME Master Plan 2012-2020 aims for SMEs to achieve an average GDP growth of 8.7% per year until 2020.”

across different stages of growth and industries. Lending to SMEs OCBC recently launched the Business Overseas Loan to address SMEs’ needs for simpler and faster access to cross-border financing. Even without any collateral, eligible SMEs enjoy a loan of as much as $500,000 to fund their regional expansion across Malaysia. The bank also supports various government loan schemes, including the Local Enterprise Finance Scheme, Loan Insurance Scheme, Internationalisation Finance Scheme and Micro Loan Programme and have also been lending to businesses as young as one year old through such programme-based lending. “We are the first bank to offer same-day corporate account opening at all our branches island-wide since 2007, with immediate cheque book issuance so customers can

conduct and transact business immediately,” adds Goh. SMEs are growing not only in Singapore, but also in Malaysia. In fact, SMEs are considered one of the key drivers of economic growth in Malaysia as attested by the government’s SME Master Plan 2012-2020 that aims for SMEs to achieve an average GDP growth of 8.7% per year until 2020. Renzo Viegas, group deputy CEO and head of consumer banking at CIMB Bank, notes that new start-ups can access various special government funds/financing schemes through the Development Financial Institutions which offers specialised financial products and services to suit the needs of the targeted sectors. He adds that commercial banks including CIMB Bank can assist in intermediating government special funds such as the Fund for Small and Medium Industries 2 and New Entrepreneur Fund 2. To assist SMEs without collateral or with inadequate collateral to obtain credit facilities from financial institutions, Credit Guarantee Corporation Malaysia Berhad provides guarantee cover to financial institutions. “We are constantly looking at developing a wide range of financial products and services, both

SECTOR REPORT: LENDING & CREDIT conventional and Islamic, catering to the varied needs of SMEs. SMEs requiring long-term capital to sustain and grow their business can approach CIMB for private equity or venture capital partners to provide support and advice,” says Viegas. To promote green technology, he adds that a CGC guarantee scheme called Green Technology Financing Scheme is available for the relevant SMEs or social enterprises to obtain financing for investments in production of green technologies or investments in utilisation of green technologies. But whilst there are a number of loan products available already for the SMEs and the social enterprises, RCBC’s senior EVP for the retail banking group Ismael Sandig notes that the best bank really is the one that can effectively package or bundle the products for these customers. Risks and margins While banks are encouraged to start granting loans not only to SMEs but also to the growing middle income population in Asia, it also increases the risk of higher non-performing loans. While risks will definitely be present all the time, the key to mitigating them is to educate the frontliners, says Sandig. “Gone are the days when retail bankers must be confined only to deposit generation. It has come to a point that business managers must learn to be well rounded to know financial intelligence entirely,” he adds. Joseph Wong, group chief credit officer, consumer credit risk management, group risk management at OCBC Bank, notes that while there is a growing middle income population in Asia that banks could possibly offer their financial services (including granting of loans) to, it is important for them to have a robust risk management framework in managing their risk exposure. “An effective risk management programme is a prerequisite for any financially sound institution. All risks must be properly understood, monitored, controlled and managed, with processes closely aligned with the bank’s business strategies.” says

Wong. But CIMB’s Viegas does not see the middle income group as having a higher risk for lending although he is conscious that any rapid growth in a bank’s asset book can lead to higher impairments at a later date. “Historically, we have always been a prudent lender. Furthermore, the introduction of Bank Negara Malaysia’s Responsible Lending Guidelines has been positive in dampening the potential overheating and speculation in the market and is expected to help manage default risk in the medium term.” Apart from risks and NPLs, banks are mired in challenges as the margin between borrowing money and lending out deteriorates and regulatory requirements like Basel III put further pressure on banks. What alternatives are available to maintain a financially sound business? Could offering fee-based services like priority banking or wealth management be of help? Viegas notes that while they are keen to grow their preferred customer base and wealth management product book over the coming year, there are increasing opportunities to cross-sell their product offerings to customers. “We have built up a commendable customer franchise over the last few years and efforts are underway to consolidate our attractive offerings. Growing the share of wallet

is key and it is an important way to grow our revenue at relatively low cost and mitigate against the effects of margin compression.”

Renzo Viegas

Ismael Sandig

Credit functions Under normal circumstances, lending is a function of a centralized group. But do branches really need to have credit functions? RCBC’s Sandig reckons that in the interest of adapting to the demands of customers for speed in processing, branches must have credit functions but should have minimal exposures. On the other hand, Viegas notes that some banks are exploring offering lending services in branches as branch-based credit functions can provide a more personalised lending decision for customers. “However, in the case of CIMB, our current credit model has delivered excellent results in terms of NPLs as well as delivering improved efficiencies. We also believe that it is important for our branches to focus solely on serving customers rather than dealing with lending decisions,” he adds. But CIMB does approve some products at branches. The bank will also introduce instant approvals and disbursements at branches and other customer touch points. This, reveals Viegas, is mainly targeted for consumer products that have sophisticated scorecard engines and other interfaces to help credit decisions happen.

ASIAN BANKING AND FINANCE | MARCH 2013

BIG ISSUE 2

Are China’s regulations too tight for the banks? Analysts warn that small banks may suffer from tightened regulations.

t is not surprising for a rapidly expanding sector such as China’s Wealth Management Product or WMP market to receive closer scrutiny from financial regulators. Since 2009, the market has grown nine-fold from RMB800bn to more than RMB7.6trn, according May Yan, China banks analyst with Barclays. However, the fast expansion of the market, little transparency of the asset allocation, as well as the recent troubled cases of agent investment products distributed by Huaxia/ICBC/CCB have raised market concerns on WMPs, Yan notes. In December 2012, the China Banking Regulatory Commission or CBRC set up a committee of senior banking executives to oversee the burgeoning category of WMPs, shortly after the failure of a PE product that was sold through one of Huaxia’s sub-branches in Shanghai. In the same month, CBRC also released an urgent internal circular ordering banks to check sales of third-party products made through their branches, mainly insurance, trust products and invest24 ASIAN BANKING AND FINANCE | MARCH 2013

“Regulators might raise the WMP market standards in mid-2013.”

ment funds to ward off potential risks. “We believe regulators might raise the WMP market standards in mid-2013, particularly after new heads of the regulatory body come on board in March,” warns Yan. So what does the tightened regulations say of China’s wealth management sector? Implications While the failure of a few highprofile agent bank private equity fund and trust products have alerted the incoming head of the CBRC to the potential risks such products pose, Yan believes the government remains in favour of creating a liquid and diversified non-bank funding base to help develop a heavily bank-dependent capital market. Therefore, she believes any tougher regulatory controls will likely be directed towards containment, including lower-risk investment parameters, improved issuer and third-party selling accountability, fewer non-principal guaranteed products (which we estimate account for up to 70% of all new WMP sales) and better

duration matching. Alicia Garcia Herrero, chief economist for emerging markets at BBVA, reckons that the tightened regulation demonstrated the authorities’ awareness of potential risks associated with wealth management products. Herrero also recognises that tougher regulations was enforced in response to the outbreak of Huaxia case, which has exposed some irregularities in the wealth management sector including the misleading descriptions in selling and the bank’s lack of internal control. The tightened regulation, she adds, can reduce the operational risks in sales of wealth management products and better protect the interest of general investors. Although it might slow down the growth of wealth management sector in the short run, it is a positive development for the long-term outlook of the sector. Market slowdown But where would money flow if the WMP market slows? Barclays’ Yan estimates a potential increase in trust AUM and bank-issued WMP AUM without regulatory tightening would be RMB 4.4trn in 2013, versus a net increase of RMB 2.1trn with stronger regulations. “In this case, we believe the difference of RMB 2.3trn would naturally flow to other asset classes, including deposits, securities (equities and bonds), property, and insurance,” says Yan. But Herrero still believes that wealth management products will continue to appeal to investors as long as the deposit interest rates haven’t fully liberalized. “This is why, if the Chinese authorities, want to reduce the risk inherent to the development of the shadow banking, it seems important to take additional steps towards interest rate liberalization,” she adds. Meanwhile, Maybank Kim Eng analyst Ivan Li says the mainland banks need deposit, and the hunt for deposit has been fierce, especially among the smaller banks. “If China is going to tighten the regulations on these products, we are likely to see the small banks to suffer, as it would be even harder for them to gather deposits,” warns

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SECTOR REPORT: RETAIL BANKING

How banks can win Asia’s wealth management race Check out the possible challenges and opportunities in this market worth US$10.7t.

rivate banks are in a fierce competition to serve Asia’s rich which have whopping wealth of US$10.7 trillion. According to banking research and advisory firm East & Partners, for the first time, the Asia Pacific has the highest population of high net worth individuals (HNWIs) in the world. “In a year when the number of HNWIs fell by 1.7%, and India’s market slump saw the country fall out of the global top 12, the number of HNWIs in the Asia Pacific expanded 1.6% to 3.37 million, with estimated private wealth of US$10.7 trillion,” said the report. As the market segment for high net worth individuals grows, competition will no doubt become even more intense. So how can banks attract more clients and win Asia’s wealth management race? What are possible challenges as well as opportunities for this growing market of high net worth individuals? Wealth management According to Jeremy Soo, managing 26 ASIAN BANKING AND FINANCE | MARCH 2013

“The amount of loans made by shadow banking entities amount to 25% of all the loans made in China.”

director and head, Consumer Banking Group (Singapore) at DBS Bank, it is important to realize first that Asian HNWIs are different from their peers in the west as the wealth of the Asian HNWIs is usually closely inter-linked with their business. “They have varied portfolios and want a more proactive investment strategy. There is also the need for succession planning as wealth flows to the next generation,” says Soo. RCBC’s senior executive vice president for retail banking Ismael Sandig notes that what will be most critical is relationship and a more simplified process. Private banking customers become more demanding and will want the banks to go the extra mile to make the difference. Asia’s wealthy have a set of needs that must be met by the banks such as a reliable and personalised service, a wide suite of financial and wealth products and a strong financial advisory support to help them make investment decisions, notes Renzo Viegas, group deputy CEO and head of consumer banking

at CIMB Bank. Hence, building a competent network of relationship managers is also key. Apart from wealth management, another key trend in Asia’s retail banking sector is the rise of new generation channels like social media as this affects the client’s preference and expectations of the bank. How do the banks use social media not for making revenue, but for connecting with customers? As DBS’ Soo notes, customers do not want to be marketed to on social media platforms. Instead banks need to set out to share banking insights on social media to add more value to their customers and to deepen relationships with them. Social media Marged Lloyd, head of online communications at Standard Chartered, notes it is inevitable that people will talk about the bank online so they have made a conscious decision to participate in these conversations in a meaningful way. Lloyd reckons that this may simply involve responding to customers when they approach the bank through social channels such as Facebook and Twitter but on the other hand, it entails using social media to reach out and speak to people about the topics that are important to them. “In some of our markets, we are also taking a more local approach to ensure that the conversations we are having really

SECTOR REPORT: RETAIL BANKING are relevant to our audiences. For example in Singapore, Hong Kong and the UAE, amongst others, we are building strong follower bases on Facebook and/or Twitter,” she adds. The main impact of using social media, notes Lloyd, is that banks are compelled to review how their various internal teams work together. “As a consumer, when you speak to your bank through social media, you don’t care whether you’re speaking to customer service, human resources, marketing or communications. As far as you’re concerned, you’re simply talking to your bank. You expect them to give you the right answer quickly.” Increased integration and teamwork between relevant departments across the globe therefore prove to be pivotal in social media activities. But apart from the positive feedback a bank can get from social media, RCBC’s Sandig takes note of its sensitivity to negative comments as well. “The bank must be ready to invest on such because every opportunity in social media may equate to cost in such a way that the bank must have enough infrastructure in place to support these channels,” says Sandig. The virality factor of social media must indeed be handled with a careful strategy. The challenge behind this form of engagement, says CIMB’s Viegas, is essentially the ability to add value to the customers as users of social media want to connect with banks only if the bank is able to bring value to their lives. This value can be in the form of providing useful content, answering queries, giving them a chance to participate in a contest or building a community of like-minded people to connect with. “We can understand more about what our customers want and what we can do for them only by engaging with our community of customers,” Viegas adds. So in today’s highly digitized banking environment, what is the role of the branch? With the internet and with the concept of mobility in terms of payments and connecting with customers rising in Asia, is the branch still considered a profit center?

role of branches have changed to one which provides more value added service such as loans and investment related services as customers migrate to self-service banking and online banking for basic transactions such as cash withdrawal/deposit and funds transfer. RCBC’s Sandig concurs and says customers will still want to go to the branch although low value transactions can be migrated to electronic channels. “The branch’s role really is to accommodate queries and to build the relationship. For RCBC, it is considered a profit center,” adds Sandig. The advent of internet banking and other digital channels have not marginalised the branch as an important channel and profit centre especially for an effective face-to-face interaction with customers, according to CIMB’s Viegas. In Malaysia where services are becoming the main differentiator in an extremely competitive market, the traditional brick-and-mortar structures of the branches are the “welcoming faces“ which represent a bank’s values. The ability to create this exceptional first impression can be one of the contributing factors for a bank’s excellent turnaround. However, Viegas still notes the importance of investing in other channels like internet banking. With household broadband penetration reaching 62.9% as at the first quarter of 2012 from an estimated 6.7 million households in Malaysia, Viegas believes internet banking will become the channel of the future. Mobile

Renzo Viegas

Ismael Sandig

banking will also feature dominantly especially with the country’s cellular phone subscriptions having breached 35.7 million at the end of 2011 or over 124% penetration rate. “Going forward, we see all channels complementing each other and creating its own niche, with branches as the shops that provide the advisory services and internet and mobile banking as the transaction platforms. The challenge for banks is to provide the same exceptional customer experience,” says Viegas. Profitability check In all aspects, however, banks need to be even more innovative in the way they increase customer touchpoints. Keeping profitability in check amidst the uncertainties in the market is of course of utmost importance. While on a mission to expand across Asia, banks need to focus in delivering excellent cross border services, enabling customers to look cross border, to invest wider and to trade more with one another. “In the midst of our expansion quest, we are always mindful of the need to reap clear synergies when we enter into a new market or acquire a new business. These synergies will help mitigate any short term profitability pressures as we would typically need to incur set-up or integration costs at the onset,” notes Viegas. Ultimately, a bank needs to be very clear on its plans and objectives from the start when setting up a new business or entering a new market.

Role of the branch DBS’ Soo reckons that branches will continue to be an important customer touchpoint. However, the ASIAN BANKING AND FINANCE | MARCH 2013

OPINION

Christina Ng

Why transaction banking is the “new sexy”

by Christina Ng Associate Director Banking & Financial Services division at Robert Walters Singapore

illions of transactions are made around the world everyday. Transaction banking may be the process of transferring from one place to another, but transaction banking is critical to any business in Singapore – and around the world. Therefore every bank is involved in transaction banking. Transaction banking isn’t just about moving cash but also entails the security requirements that come with it. Once a hardly talked-about area, transaction banking has been termed the “new sexy” in recent times. Before the global financial crisis of 2008, transaction banking had yet to pick up popularity amidst those in the know. Transaction banking: Talk of the town Today, it has quietly become the talk of the town. It has gained popularity because of its ability to stay afloat and generate revenue during difficult times. While transaction banking has become an area of focus for many banks, how exactly does it compare with its more glamorous siblings - investment banking and sales and trading? Trade finance and cash management products - once deemed necessary tools for corporations to execute their daily business smoothly- are now even more significant. As investors exercise more caution against an unstable economic backdrop, we have witnessed a surge in the amount of bank guarantees and letters of credit being issued. Rather than betting against the market, we see more regular flows of non-speculative deposits and foreign exchange taking place. This is in comparison to buying into equities or structured notes – products that generate a higher return but accompanied with a potential huge downside, like failed products from certain banks. The safety of transaction banking is why this division can boast of year on year returns while other areas have struggled in recent years. However, one might be surprised to realise that the transaction banking division still accounts for less than 20% of the profits generated from most banks’ sales and trading 28 ASIAN BANKING AND FINANCE | MARCH 2013

or investment banking divisions. In an industry where one’s remuneration and key performance index are pegged to the bottom line, the transaction banking division still remains as a less attractive option. Small but stable Likewise, from the bank’s perspective, it can promise stable, but hardly stratospheric returns. Ironically, to accelerate these returns, banks are introducing more complex products into the transaction banking fold, contrary to the plain vanilla nature of its products. Nevertheless, the steady growth of this division has caught the attention of the finance industry. Transaction banking, often termed as the “bread and butter” of banking, is displaying the resilience the industry expects of it. Slowly, but surely, the tide is shifting. As the banking sector continues to shrink globally, we can expect the business to go back to basics. While investors choose to hold on to what is certain and banks vying for a larger share of this pie, transaction banking looks certain to be one of the few bright lights of banking in the near future.

Transaction banking an underdog

CALL FOR NOMINATIONS LIST OF CATEGORIES Domestic Retail Bank of the Year (per country) International Retail Bank of the Year Domestic Finance Company of the Year (per country) 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 3, 2013

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OPINION

Dennis Phua

The key to private banking in Asiaâ&#x20AC;&#x2122;s family office market

by Dennis Phua Executive Director Azione Capital

atalysed by an upsurge of generational transition of assets and control in Asia, the region is emerging as a lucrative arena for wealth management institutions to compete for wealth structuring opportunities on behalf of ultra high net worth Asian families. Acknowledging the growing sophistication of the family office (FO) market in Asia, private banks have established dedicated FO divisions and are moving to more client service-based approaches where wealth management has become a fundamental component of their advisory scope. Client families A large part of advice from private banks is structural, as they discuss issues of legacy and asset protection, assist with governance and investment policies, and provide financial services. Upon establishment of the FOs, private banks aim to produce consolidated reports on the assets and liabilities of their client families. Private banks also support investment performance and reporting, where their systems measure risk and governance processes. They have economies of scale, can provide robust, cost effective, and independent platforms, and also possess access to alternatives such as hedge fund management. In the complex financial environment, their global workforce can help perform thorough due diligence. For client families that have begun managing their wealth, banks can enhance the relationships and arrangements they have in place with other advisers by extending investment banking and asset management expertise and solutions. They are learning to work collaboratively with all parties for the benefit of their clients. Whether a client chooses to seek for and develop a direct arrangement or deal with the banks via their own external asset managers, private banks can and should facilitate the clientâ&#x20AC;&#x2122;s access to their full product range and services. 30 ASIAN BANKING AND FINANCE | MARCH 2013

Asset allocation In Asia, most of the family wealth is tied to family businesses and corporate empires. Clients tend to be conservative where capital preservation is their priority. Banks have been pressed to diversify concentration risk and adopt a prudent asset allocation philosophy in managing their wealth for the long term. Most Asian FOs opt for a balanced or defensive approach, and banks have been offering products and mandates that allocate assets across a multitude of asset classes. In the face of volatile markets, they strive to establish optimal portfolios and maintain real returns for FOs. Across different asset classes and jurisdictions, developed market equities and emerging market stocks are top choices for FOs working through private banks. Banks can advise on territories to invest from the legal and tax perspectives, and they can assist FOs in attaining above average investment returns to balance low or negative returns from non-productive assets and investments. Perhaps the most important role for private banks in the growing FO market is the skills and professionalism they bring. Ultimately, private banks can look forward to primacy in the Asian FO market.

Serving Asiaâ&#x20AC;&#x2122;s rich

CALL FOR NOMINATIONS LIST OF CATEGORIES

Cash Management Trade Finance Project Finance Technology and Operations Foreign Exchange Nominations are accepted until April 5, 2013

For Nominations Julie Anne Nu単ez julie@charltonmediamail.com +65 62237660 ext. 221