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Greek Tragedy a double edged sword for Asia’s banks Europe’s unfolding sovereign debt and banking crisis is a bit of a double edged sword for Asia’s banking industry. On the one side sit cashed up domestic banks who are starting to win business from the European banks as the latter withdraw credit from the market.

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There has already been considerable loan growth by domestic Asian banks to other corporates and this is set to continue as strained European banks continue to be wary or unable to lend (see our story on Singapore banks on page 12). On the other and more worrying side of the banking divide sit many banks who rely on overseas wholesale funding of their loan books and who may now find it more difficult to wither raise new cash or roll over existing loans. India in particular comes to mind. Country by country, the situation is different, but even more stable markets may not be immune from the unfolding Greek tragedy. In Hong Kong , 17 % of the local banking sector is dependent on funding from banks in the US, UK, Japan, China and Singapore. But by June 2011 a mere 8 % of Hong Kong banks total liabilities came from Western European banks, noted Fitch. And if Hong Kong banks did see their funding from Western European banks come under pressure they would probably ease loans to China first before Hong Kong. Still, a liquidity crunch should not be underestimated especially in other Asian banking systems more dependent on international wholesale funding. All the best

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

ASIAN BANKING AND FINANCE | DECEMBER 2011 3

CONTENTS

feature: Rcbc’s passion for innovation

FEATURE

FIRST 08 Will the last bank to stop hiring please turn the lights out

09 Asian Banks worry FACTA goes too far

10 HK banks’ China lending has analysts worried

12 SG banks step in where US

06 Most Read 34 Last Word

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 | DECEMBER 2011

why retail lending origination excellence is important in asia

OPINION

14 RCBC’s passion for innovation From their humble beginnings, it is now one of the fastest growing banks in the Philippines offering wide ranged services

20 How does Hong Kong fare as

international financial center Comparing Hong Kong with Singapore: Which one is larger? Hard to tell

banks fear to tread

REGULAR

hong kong banks’ china lending has analysts worried

26 Reinventing the bank, one branch at a time

Banks in Singapore are redesigning their branches to cater to ever changing behavior and needs of its customers, reports Isabelle Ulanday

16 Why retail lending origination

excellence is important in Asia

18 Hiring hotspots in Asia 24 Will cash survive beyond the 21st century?

30 How regulation can boost Asia’s

role in the international financial scene

32 Top five mistakes junior banking professionals make in job interviews

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

Strong Breakthrough

www.techcombank.com.vn

VIETNAM TECHNOLOGICAL AND COMMERCIAL JOINT STOCK BANK 70-72 Ba Trieu Street, Hoan Kiem District, Hanoi, Vietnam Tel: +84(4) 39446368 Fax: +84(4) 39446362

News from asianbankingandfinance.net

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

Retail Banking

most read

DBS to slash SG dollar deposits rate

Trade Finance

Two more Vietnam banks to sell gold deposits The State Bank of Vietnam allowed 2 more commercial banks to sell gold deposits to intervene the local gold market. The banks were not yet identified. The two banks were also permitted to open their international gold trading accounts as a hedge for their domestic gold selling. Domestic gold demand last Oct 10 fell to 8,000 taels/day, the lowest level since the SJC and 5 selected banks sold gold deposits under the agreement by the SBV, said Nguyen Cong Tuong, Deputy Dead of Gold Trading Department of the SJC. retail banking

Maybank names Michael Foong Seong Yew as Chief Strategy Officer The ex-managing director of Accenture PLC’s management consulting practice is tasked to oversee the group’s corporate development office. Malayan Banking Group Bhd, Malaysia’s largest lender by assets, appointed Michael Foong Seong Yew as chief strategy and transformation officer. Foong, 43, was formerly managing director of Accenture PLC’s management consulting practice in Malaysia,

State Bank of Vietnam allows gold selling Malayan Banking said in a statement. He will oversee the Kuala Lumpurbased banking group’s corporate development office, which covers merger integration and special projects, it said in a report. markets

Vietnam allows banks to resume offshore gold trading Five lenders will sell six tonnes of gold to help narrow the gap between domestic and international prices. Vietnam’s central bank has allowed five banks and Saigon Jewelry Co (SJC), the country’s top gold trader, to

reopen offshore gold trading accounts to help narrow the gap between domestic and international prices, state-run media said. cards and payments

Citibank in Malaysia targets 100,000 new cardholders Citibank Bhd expects to attract 100,000 new cardholders over the next three years with its newly-enhanced Giant-Citibank Credit Card. “This card was introduced in 2008 and to date, we have sold over 90,000 cards,” said Citibank Head of Consumer Markets Fabio Fontainha.

Citibank targets more cardholders

6 ASIAN BANKING AND FINANCE | DECEMBER 2011

Lending activity has started to ease off as banks become more careful. DBS Group, Southeast Asia’s largest lender, said it would cut interest rates for Singapore dollar deposit accounts from Oct. 14, affecting a range of deposit accounts. For instance, DBS has cut the interest rate for the first S$10,000 deposited in its “DBS Autosave (Personal)” account to 0.05 percent from 0.10 percent previously. “Increasing risk aversion have led people to keep money in the bank rather than putting it to work, like investing in stock markets or buying properties,” said Song Seng Wun, an economist at CIMB Research, as reported in Reuters.

retail banking

76% Assets under management soars 76% in leading Asia-Pacific banks

Citi surpasses UBS as the leading high net worth wealth manager in AsiaPacific, according to a Private Banker International report. Private Banker International’s Top 20 Asia-Pacific Benchmark, a survey of the region’s leading private banks, reveals that assets under management (AuM) held by the Top 20 Asia-Pacific banks has increased 76% to nearly $1 trillion since the last survey of its kind in 2007.

Lending and Credit

RHB and Credit Guarantee Corporation to enhance SME financing The tie-up’s Enhancer Direct scheme to assist viable SMEs that are unable to secure financing due to insufficient collateral. Credit Guarantee Corporation Bhd and RHB Bank Bhd have formalised a strategic tie-up to further enhance the small and medium enterprises access to financing through its new scheme, the Enhancer Direct. BANKING TECHNOLOGY

Bank Mandiri strikes deal to join BCA ATM network State-run Bank Mandiri and PT Rintis Sejahtera — the operator of the Prima ATM network which administers ATM transfers for banks including BCA — have signed an agreement that will eliminate barriers that have limited the two major banks’ customers transferring money.

BRANCH BANKING

ABC’s cross border RMB settlement reaches 121B by end of August

retail banking

Global regulators to force banks to increase liquid assets

term is not in anyone’s interest.” INVESTMENT BANKING

Underdog no The Basel group plans more: Goldman to put uniform impleSachs beats other mentation of the Basel firms as top JapaIII reforms at the top of nese M&A adviser its agenda, according to a Reuters report. The measures will also force banks to cut back on short-term funding. According to the report, the reforms, which were agreed to by the member states, will force banks to hold more top-quality capital against unexpected losses, but there are rising concerns that some countries will not stick to the agreement. Stefan Ingves, head of the Swedish central bank, said in the report, “It is going to be all about implementation in as uniform a way as possible. Balkanisation of the rules over the long

After being only number 7 last year, Goldman Sachs now has the top spot as it was hired for $54.1b worth of acquisitions this year. According to a Bloomberg report, Goldman beat Nomura Holdings’ $47.2 billion.

In 2010, Nomura was top adviser with $47.6 billion in deals. JPMorgan Chase & Co. was second with $27 billion and Goldman Sachs was only No. 7 with about $10 billion, according to data compiled by Bloomberg. cards & payments

RHB-OSK merger yet to get Bank Negara’s nod Analysts believe Malaysia’s central bank’s approval will come if it will

Bank Mandiri unblocks money transfer barriers

be supportive of consolidation of the banking sector. It has been many days since RHB Capital Bhd (RHB Cap) and OSK Holdings Bhd requested Bank Negara’s approval to commence merger talks but no one is any wiser on how the central bank will decide on this. With no “green light” yet from Bank Negara, the market is having to second guess if and when the two parties will be able to start negotiations. In the past, the central bank has allowed some negotiations to go through while rejecting others. For example, in the case of Hong Leong Bank Bhd, the central bank gave the nod for the bank to start negotiations with EON Capital Bhd (EON Cap) but applications of Affin Holdings Bhd and Mulpha International Bhd were rejected.

The Agricultural Bank of China recorded cross-border RMB settlement volume of RMB121 billion by end of August, including an increase of RMB89.15 billion or increase rate of 1156% in 2011. The six branches in Zhejiang, Guangdong, Shenzhen, Shanghai, Guangxi and Inner Mongolia have exceeded RMB10 billion in terms of business volume. Since the pilot program of cross-border RMB settlement service was launched, ABC has given active play to its advantages in capital and network to positively push the development of this service and continuously build the service brand of “Cross-border Express”. TRADE FINANCE

HSBC expands renminbi trade services to all China branches The move will provide the lender with the widest geographic RMB trade coverage among all foreign banks in China. HSBC Bank (China) Company Limited announced that it has rolled out Renminbi (RMB) crossborder trade settlement services to all of its branches across 24 cities in China. HSBC now has the widest geographic coverage of RMB cross-border trade services among all foreign banks in the Mainland.

ASIAN BANKING AND FINANCE | DECEMBER 2011 7

FIRST

Will the last bank to stop hiring please turn the lights out

rim and grimer may best describe the outlook for banking jobs in Asia. All through the first half of 2011 about the only bank still hiring in numbers was rumoured to have been Standard Chartered. But even they too have now slowed down job growth to a trickle. More worrying still are reports heard on the streets of Singapore by your correspondent that at least two international banks are planning net headcount reductions over the course of 2012 – the first in living memory for many young bankers. The reason is that while some more jobs are being offshored, in years past they would have been made up for by growth in other parts of the bank But with global markets and investment banking business also in a hold or dive pattern, the outlook is really quite bleak. Post the 2008 crisis much of banking in Asia was immune from the kind of firings that faced banks in the US and Europe. In fact many expanded to create pan regional groups and in the process went on 8 ASIAN BANKING AND FINANCE | DECEMBER 2011

hiring binges in back office and systems integration to weave these disparate operations together. But now as business slows down across the region, there is barely a bank hiring. Unlike 2009, when the industry was split between banks recovering and banks expanding, this time around, the economic climate has forced a broad retreat across the entire sector. Even banks like HSBC, which continued to hire as well, adding 5,000 staff in 2010, announced job cutbacks of 3,000 staff out of Hong Kong alone in the first half of 2011. In investment banking, the deal volume has almost halved in 2011 compared to 2010, mainly on the back of delayed and lesser listings in Hong Kong. Credit Suisse is reported to be wanting to lose about 1,500 staff and Nomura around 700, and this is representative across the board. But while job cuts and hiring freezes are to be expected in investment banking, even commercial banks are reining in their hiring expectations.

Credit Suisse is reported to be wanting to lose about 1,500 staff and Nomura around 700

A report by Reuters noted that even StanChart has said that most of its expansion is done as it tries to keep costs under control. High staff and overhead costs at StanChart’s investment banking operations, which fall under its wholesale banking division, have led to costs growing faster this year than income growth. Still all this could be good news for regional banks who may be able to get some top talent not previously affordable to them. This is exactly what many of the Chinese banks did after 2008, when ICBC and China Construction Bank hired a lot of out of work bankers of their wealth management businesses. And it is true that many of the wealth management businesses are still hiring relationship managers. But compensation still remains an issue, with eben ourt of work bankers likely to seek alternat employment rather than take home the kind of low salaries that non Singapore and Hong Kong banks tend to pay. ICBC’s outgoing Chairman Jiang Jianqing made only $150,000 in 2010, barely 0.5 percent of JPMorgan CEO Jamie Dimon’s $20 million paycheck, noted Reuters. Still, for many local banks across the region, the times have never been better to hire up top talent.

FIRST institutions which have entered into the agreement.” But he also says banks shouldn’t panic and start spending too much getting to the bottom of all those accounts. “The IRS has provided some clarity about what it expects FFIs to do, but financial institutions are wasting money by planning to do too much. For example, by attempting to become detectives to find out which existing clients should pay US taxes and by including entities that could be excluded from FATCA,” said Edwards.

Asian Banks worry FACTA goes too far

merica’s budgetary woes coupled with a desire to extend the long arm of their law into every bank around the world are the two driving forces behind FACTA, which Asian banks need to be compliant with come 30 June 2013. But for Asian banks, it could pose some real problems. What is FACTA? FACTA, which stands for the Foreign Account Tax Compliance Act, is reckoned to be able to raise between US$100b and US$350b for the US Inland Revenue Service. So that explains why they are doing it. Now as the US cannot enact laws in foreign countries, its approach is to “invite” foreign banks to register with the IRS on a voluntary basis. Of course, if a bank refuses to register it can face all sorts of penalties, including having 30 % withholding taxes deducted from US investment income. But it gets worse. The IRS will effectively also have 30% in withholding taxes deducted from the gross sale proceeds of instruments that yield US investment income, regardless of whether a profit or loss

Duncan Edwards

Banks need to “identify which parts of the business can be excluded from FATCA and identify which products are outside the scope of FATCA

was made on the sale. So let’s make no bones about it – FACTA may appear voluntary but any bank unlucky enough to get the invitation will have to attend this party. The way FACTA works is to effectively define which of its customers are US persons and then report their investment income to the IRS, upon which they can be issued with tax bills. In other words, the US IRS wants banks to dob in potential tax dodgers. This is very bad news for private banks and wealth managers everywhere, and the pain of compliance will particularly be felt in Singapore. Duncan Edwards with Ernst & Young says that, not surprisingly, financial institutions should start planning now for the likely day they get an “invitation” to join the FACTA program. Not accepting the invitation is a no starter, warns Edwards. “Except in rare cases, most FFIs seem to expect to have to enter into the agreement with the IRS. If not, they may waste money by suffering withholding taxes on US investment income and sales proceeds, which could put them at a serious competitive disadvantage compared to financial

What can financial institutions do now to avoid wasting money on FATCA? Start planning now. Edwards said financial institutions need to appoint a FATCA project manager now and plan as there are less than 18 months before FACTA goes live. Banks need to “identify which parts of the business can be excluded from FATCA and identify which products are outside the scope of FATCA, such as pure insurance protection,” noted Edwards, adding that any projects that are required to become FATCAcompliant will be major ones. “As such, these projects can expect to take 12 to 18 months to complete. Financial institutions that delay may end up having to rush to complete their FATCA compliance by the deadline, incur more costs and increase the risk of errors.” Still, some bankers are still concerned that FACTA compliance borders on the ridiculous. As an example, every bank in the world who might receive payment from outside their country will need to register with the IRS to get an identity number with which other banks will be able to determine their FATCA status. Another example is that every bank will either have to prevent non national to have a bank account and so be treated by the IRS as a “local” bank or comply with IRS regulations concerning the reporting of customers. Local banks for instance in India, South Africa, Thailand, etc would have to decide whether to deny bank account to residents of their geographical neighbours or comply with the onerous IRS reporting obligations. With so much riding on getting FACTA implementation right, it’s not surprising that banks need to start worrying now. ASIAN BANKING AND FINANCE | DECEMBER 2011 9

first direct lending, and indirectly via their Hong Kong customer base,” noted Fitch in a report. There is also grave concern that Hong Kong banks will face pressure from their Chinese bank parents, with Fitch seeing signs of the increasing influence of Chinese bank parents on Hong Kong subsidiaries, which could negatively influence efficiency or even reverse progress in key areas including risk management. “Hong Kong’s banks will cede some of their historical strengths (capital, liquidity, low risk appetite, supervision) should they lower their underwriting standards and prioritise rapid growth in the Mainland.”

HK Banks’ China lending has analysts worried Another banking storm might be brewing as HK banks continue heavy lending to troubled China, reports Krisana Gallezo

ong Kong Banks have long backed the Hong Kong Economy, but is there a danger now that they are financing a growing part of China? Yes is the answer, at least according to some analysts including Fitch Ratings, who have issued a stark warning that Hong Kong’s local banks could face a credit downgrade if they don’t rein in their lending to mainland Chinese entities. Such warnings should not be taken lightly, as it was just a few months ago that ratings agency S&P did the unthinkable and downgraded the US government. So what is wrong with Hong Kong banks extending their loan books to China? After all, much of the loans to China are short term, trade related and collaterized, which will keep them safe from near-term liquidity pressures, 10 ASIAN BANKING AND FINANCE | DECEMBER 2011

“Hong Kong banks’ gross Mainland Credit Exposures (MCEs) may rise to about 35% of Hong Kong’s banking system assets next year”

reckons Fitch. But what cannot be ruled out is the sudden liquidity squeeze which was the hallmark of the financial crisis of 2008 and which could yet happen in China, leaving Hong Kong’s banks deeply exposed. It is this threat of a sudden liquidity crunch, rather than a rising number of bad loans, that has analysts the most worried. Fitch estimates that Hong Kong banks’ gross Mainland Credit Exposures (MCEs) may rise to about 35% of Hong Kong’s banking system assets next year, up from just 24% at endJune 2011 and 10% in 2008, mainly due to aggression. “Fitch has so far observed a general tendency for the Hong Kong banks to accumulate China exposures through various sources as and when opportunities arise. This includes holding minority equity stakes in Chinese financial institutions, subsidiaries’

What about the smaller banks? Even tougher warnings were issued on the outlook for smaller Hong Kong banks. Despite some opportunities related to continuing to serve their respective niches at a time when competitors’ focus shifts to a new untested market, Fitch anticipates that their limited size disadvantages them in acquiring new clients. “Should they prioritise growth, they may be resigned to a ‘follower position’ – participating in larger transactions via syndications or taking credit risk via securities holdings. They will also face greater funding and margin pressure than their larger rivals, especially if credit growth needs to be financed by deposits,” noted Fitch. In particular, Fitch believes that the evolving operating environment will pose greater challenges for the smaller, indigenous Hong Kong banking groups such as Chong Hing Bank with MCEs of 21%, Wing Hang Bank at 27%, and Dah Sing Bank at about 13%. Other bank analysts are also concerned. Barclays Capital analyst Tom Quarmby warns of an impending liquidity squeeze driven by several factors, not least of which was the huge demand for credit coming from the Mainland as a result of both tightening by Mainland regulators and the relatively inexpensive cost of Hong Kong and US dollar loans available from the Hong Kong banks. The story seems to have unravelled largely as Barclays had expected, with rising cost of funds placing

first pressure on lending rates in Hong Kong and forcing many banks to cut loan growth expectations for the second half of 2011, and likely in 2012. Operational Risks In addition to the issues raised by Fitch, and Barclays’ own concerns over tightening liquidity in Hong Kong, Mr Quarmby says that along with increased credit risk exposure to the Mainland economy and corporates, Hong Kong banks are effectively importing operational risk through off-balance sheet exposures linked to so-called ‘arbitrage lending’, where borrowers are arbitraging appreciation of their RMB deposits against Hong Kong or US dollar loans. However, he also notes that in recent months, the HKMA has moved to curtail this activity. Mr Quarmby told Asian Banking & Finance Magazine that Hong Kong banks have been reasonably prudent in the past, focussing on loans to their existing customers in Hong Kong for use on the Mainland. However, there is an ongoing convergence between the economies and therefore the monetary and banking systems of China and Hong Kong, which means the HKMA will need to be increasingly vigilant with regard to risk management. “We would expect, given a sound track record, the regulator will err on the side of caution going forward.” But not all analysts think the Hong Kong banks are overextended in China. Mizuho Securities Asia analyst James Antos reckons as much as half of the China exposure

carried by Hong Kong banks is actually held by foreign owned banks with no retail banking presence in Hong Kong.

“Mainlandowned banks have exposures above 20% of assets”

So just how much concentration risk is there for domestic banks in Hong Kong? “BEA and tiny Mevas Bank have more than 30% of assets in nonbank China risk, which is a serious concentration risk. Mainlandowned banks have exposures above 20% of assets, which is high, but it seems logical that a Mainland bank will have more Mainland exposure. The other major banks have a manageable level of exposure,” said Mr Antos.

He also ruled out a major loss on the assets of Hong Kong banks over the next year or two as the NPL ratio for the Hong Kong banking sector is only 0.61% as of June 2011, which is the lowest in Asia. “The NPL ratio for the banks’ China exposures is similarly very low. It is difficult to imagine that the NPL ratio could increase to 2% or 3% unless there is a major recession in China and globally. This is a disaster scenario which seems unlikely to occur. Since Hong Kong’s banks are quite well capitalized, even a credit setback of this magnitude would be easily managed by most or all banks,” he said.

Fig 1 Non-bank China exposure of major Hong Kong banks National

Non-bank

HKD bn

affiliation

China exp.

Assets

BEA

204.2

598.9

34.1%

71.6

219.8

32.6%

0.2

0.7

30.6%

Nanyang Comml Bk

China

Mevas Bk

China exp.

ICBC Asia

China

68.5

248.5

27.6%

Citic Bank Intl.

China

42.6

154.6

27.5%

Wing Lung Bank

China

28.5

137.1

20.8%

Chiyu Bk

China

8.9

44.3

20.2% 15.2%

BOCHK

China

278.0

1,833.8

WHB

25.6

176.7

14.5%

Dah Sing Financial

18.5

153.2

12.1%

Chong Hing Bk

6.2

73.6

8.5%

Fubon Bk - HK

Taiwan

5.1

61.2

8.3%

Standard Chartered Bk - HK

55.7

808.6

6.9%

Public Bk HK

Malaysia

2.0

38.1

5.2%

Shanghai Comml Bk

China

6.0

122.1

4.9%

HSB

80.8

973.2

8.3%

DBS - HK

Singapore

4.3

258.7

1.7%

865.4

5,903.

14.7%

2,034.0

13,505.7

15.1%

Total Banking sector (HKD bn)

Comment

At Dec-2010 At Dec-2010

Source: Mizuho Securities Asia

Barclays Capital | Hong Barclays Kong Banks Capital | Hong Kong Banks

HongFigure Kong6:system loan to deposit ratio China, HK and HKuse loans for y/y use offshore y/y gth Hong Kong Figure system 6: Hong loan to Kong deposit system ratioloan to deposit ratio Figure 7: China, HKFigure and HK7:loans China, forHK and offshore HK loans forgth use offshore y/y gth

Source: CEIC, Barclays Capital Source: CEIC, Barclays Capital

Source: CEIC, Barclays Capital

27.0 16.4

Aug-11

27.0 16.4

Aug-10

45.6

Aug-09

45.6

Aug-08 Aug-11

Aug-07 Aug-10

Aug-06 Aug-09

70 60 50 40 30 20 10 0 -10 -20

Aug-05 Aug-08

System LDR System LDR HK$ LDR HK$ LDR System (ex RMB deposits only) System (ex RMB deposits only)

Aug-04 Aug-07

Aug-06

70 60 50 40 30 20 10 0 -10 -20

Aug-11 Aug-05

Feb-11

Aug-09 Aug-08 Nov-09 Nov-08 Feb-10 Feb-09 May-10 May-09 Aug-10 Aug-09 Nov-10 Nov-09 Feb-11 Feb-10 May-11 May-10 Aug-11 Aug-10

Feb-09

May-09

Nov-08

Aug-08

Aug-04 May-11

Nov-10

China China HK total HK total HK loans for use outside HK HK loans for use outside HK

Source: CEIC, Barclays Capital Source: CEIC, Barclays Capital Source: CEIC, Barclays Capital

If we exclude the two If we largest exclude banks, the HSBC two largest and Standard banks, HSBC Chartered, and Standard which are Chartered, in a much which are in a much better liquidity position better (inliquidity terms ofposition LDR), we (in estimate terms of that LDR), system we estimate LDR is ASIAN that already system closeLDR to is FINANCE already close to BANKING AND | DECEMBER 2011 11 75%, the operational 75%, maximum, the operational since banks maximum, are required since to banks maintain are required a minimum to maintain liquiditya minimum liquidity ratio of 25%. ratio of 25%.

FIRST

SG banks step in where US banks fear to tread DBS profits are impacted by 2.5-3.0%, compared to 2.0-2.5% for UOB/ OCBC.

unable or unwilling to loan more money in Asean, Singapore banks are stepping in and loaning Singapore dollars to companies outside of Singapore.

Are Singaporean banks becoming Are Singapore’s three main banks too levered? prepared in the face of a potential Although the spread between system slowdown? loan growth and GDP growth is near According to Mr Swaminathan, at previous cycle highs, it is still below least at the outset, UOB has, by far, the levels seen in 2006-07. But one the most conservative loan growth worrying sign is that Singaporean to potentially risky sectors and has banks are at near ten year records a better cushion from conservative of loans to GDP - perhaps caused provisioning during the cycle. DBS by more overseas loans. Neverthless profits are the most sensitive to rising it does leave Singapore’ s banks credit costs among Singapore banks: Macquarie Research Singapore banks exposed to credit situations outside of for every 5 bp rise in credit costs, DBS Singapore over which they may have profits are impacted by 2.5-3.0%, less control. Mr. Swaminathan noted compared to 2.0-2.5% for UOB/ Volumes should act as a partial offset of the reduced NIM assumptions. Loan growth in Singapore on thathasthe main factors OCBC. OCBC a YTD basis consistently been verycontributing strong. Accordingto to the MAS’s monthlyBut statistics, whichhas we the most upValuations already discounting use as an imperfect indicator of growth for the three banks, overall loans expanded by 28% YoY. this trend are the increasing pace of side risk and it has also been the least This was driven by a sharp rise of demand for corporate loans, which were up 36% YoY in July. in credit inter-ASEAN trade and the drying spike conservative amongcosts Singapore banks While we still believe loans growth will slow in 2H11, the strong YTD numbers and pipeline of Valuations banks globally have been underthrough pressure given the current of US$ liquidity inloan thegrowth restassumption of Asia. in for boosting coverage levels property up projects leads us to raise our for 2011 once again, from the uncertainties. banks previous 14% to 19% YoY. We leave our 2012 forecast unchanged at 12%,While whichSingapore is optimistic givenhave slightly outperformed the NJA In essence, with the American banks general provisioning, he added. recently, their P/Bs are now the third cheapest in the region. the higher base. Figure 38: US$ MSCI bank indices—three-month absolute

priceyielding performance (%)of 82% Figtwice 7 Loans by of twice the pace in of deposits in July, LDR Loans grew by thegrew pace deposits July, yielding a LDRaof 82% 15

12 Loans out grew deposit s (+28%vs. +14%YoY)

15%

-8

Source: MAS, Macquarie Research, September 2011

Singapore banks' overseas exposure has always been a key factor during financial crises. Let's check out how the banks are faring recently in terms of their exposure. DBS: Singapore asset quality worsened during all the past asset quality stress episodes. Hong Kong and ASEAN exposure behaved relatively better during 2008-09, but was offset by worsening asset quality exposure in the ‘rest of the world’ (mainly Greater China, Europe and the Middle East). While DBS is now more conservative with its ‘rest

Source: MAS, Macquarie Research, September 2011

-25

NJA

2.0

-5

1.5

(5%)

-10

Loan grow th (YoY) 2 year Average LDR

-7-% -6

1.0

Jul-11

-16

-19

-10

Jul-10

-20

-12

Jul-09

Jul-07

Jul-06

Jul-05

Jul-04

Jul-03

Jul-02

Loan-to-deposit ratio (LHS) Deposit Grow th (YoY) Long term average LDR

-15

Jul-08

-10

65%

2.5

10%

-5

4.0

3.0

20%

85%

Figure 39: Asi

3.5

25%

75%

30% YoY Growth (%)

95%

Singapore’s big three

12 ASIAN BANKING AND FINANCE | DECEMBER 2011

In typically conservative management style, UOB has not been willing to become overly leveraged on its USD book, which we think is now at slightly higher than 100%,” he added.

Jul-01

With the recession almost upon us, how is Singapore faring after 3 years of heavy loan making? Well, it’s actually not that bad. Anand Swaminathan, an analyst at investment bank Credit Suisse, noted that though there are talks of a banking sector asset quality stress, things are still manageable as the headline banking system’s 28% loan growth is misleading. “The aggregate DBU+ACU system loan growth is a much lower 17% YoY; although this is high by Singapore standards, the gap over nominal GDP growth is not very high compared to history. DBU+ACU loan growth is currently 17% YoY compared to the headline DBU loan growth of 28% YoY,” he added. Macquarie Bank analyst Matthew Smith also noted the strong loan growth based on a sharp rise from corporate loans, but stressed that loan growth will slow in the second half of the year and the final figure will be 19% annualized growth. “While the data is not transparent, discussions with the bankers lead us to believe that roughly one third of loan growth has been USD-denominated RMB trade finance lending. We do not think this will prove to be sustainable in the longer term given funding issues. Specifically, high LDRs of close to 150% at DBS and OCBC should limit the ability to continue such heady growth in the short term as the banks seek medium term financing.

1.2 0.9

0.5 0.0

Source: Factset, Credit Suisse estimates

Source: Factset,

P/Es already at previous crisis lows; P/Bs stil

some to that goroughly one While the data is not transparent, discussions with the bankers lead usway to believe third of loan growth has been USD-denominated RMB trade finance lending. We do not think this will P/Es are already below 2001-02 and 2003-04 lows. While this is par prove to be sustainable in the longer term given funding issues. Specifically, high LDRs of close to of the world’ exposure, the focus this uncertainties around net interest margins and capital market-related income 150% at DBS and OCBC should limit the ability to continue such heady growth in P/E the short term as 12-mth (x)—historical crisis investorsforward are already assuming a spike in credit costs similar to previous cris time could be on its exposure in Greater the banks seek medium term financing. In typically conservative management style, UOB has not lows been willing to overly the leveraged on its USD book, which we40: think is now at slightly higher China (in which it become has been most Figure 12-mth forward P/E (x)—historical crisis lows Figure 41: Cu than 100%. 15 DB

'98-'99 '0 1-'02 '0 3-'04 '08-'09 Current aggressive among Singapore banks) and 30 13.2 On the other hand, we have been calling for loan growth to slow since March, and it continues to 12.5 India (UOB/OCBC have So noweexposure). surprise on the upside. have to admit that there could be upside to this number as the latter 20 11.2 12 10.7 banks seek medium termThailand) USD funding in 2H11. Furthermore, we believe that upcoming UOB:two ASEAN (especially 10.5 10.3 10.2 10 government land sales in Singapore, which we think are intended to cool the domestic property 9.6 exposure has should beenprovide a key of 8.7 developers in 2H11 and market, for source financing opportunities to corporate9property 7.9 0 7.8 7.6 We are thus not expecting a sharpThis slowdown in corporate loan growth overall. concern2012. during previous episodes. 7.1 6.3 -10 5.7 could again be the focus when the -9 6 -20 current cycle turns as UOB has been -18 3 actively growing its ASEAN loan book -30 of late. -40 0 OCBC: ASEAN exposure has been a DBS UOB OCBC -50 key source of concern during previous Source: Datastream, Credit Suisse estimates Source: Datastre Source: Datastream, Credit Suisse estimates episodes. Key areas of concern could be Singapore banks’ trailing P/Bs, although near two-year lows, are still above crisis lows. The fall below 1x P/B for all three banks during the 2008-09 cris its ASEAN and Greater China (OCBC has been aggressively growing its US$ trade finance book) exposure. Singapore Banks Sector

8 September 2011

health feature

“Health is Wealth” AIA Survey Finds

John T. W. Chu, executive vice president and group chief investment officer, AIA Group Ltd.

vast survey of regional healthy living habits, involving 10,200 adults in 15 Asian markets, has turned up some surprising results. The average self-rating of those interviewed was 61 out of a high score of 100, indicating health is a common concern across the region whether in developed or developing economies. Commissioned by the AIA Group Ltd, and conducted by the leading consumer research company TNS, the AIA Healthy Living Index surveyed males and females aged 18-65 years old from various income and education groups and the questions were based on people’s satisfaction with their own health and the extent to which healthy habits form part of their routine. The results indicate quite a bit of dissatisfaction with individuals’ health status, while the specific concerns vary by country. The AIA Group and its subsidiaries comprise the largest independent publicly listed pan-Asian life insurance group operating in 14 markets in the Asia Pacific. According to John T. W. Chu, executive vice president and group chief investment officer, “AIA is interested in the health and well-being of not only our policy holders but also our employees and the broader community beyond the company. We were specifically interested in the health conditions and lifestyles of people in the region so we embarked on this endeavour. Now we are figuring out how to use the results to promote healthy living.”

TNS Commercial Director Thomas Isaac said, “The survey was conducted without any mention of AIA or insurance, showing there was no commercial motive or specific product in mind that could influence the results.” Chu agreed, saying, “We don’t want to have access to the raw data. We only want the analysis to use the findings as a catalyst to implement certain policies to affect people’s lifestyles and make changes for the better.” The survey showed that there is heightened awareness of healthy living in all age groups, but this awareness has not translated into new behaviour. The main concerns were not getting enough sleep, stress, healthy eating, obesity, exercise and regular check-ups with doctors or clinics. The fear of cancer was quite common as well. Chu emphasised that the company wants to promote healthy activities. “First we will engage our employees, agents and partners, hoping to trigger a multiplying effect. If our employees take healthy living habits home and share their good results, they can influence colleagues from church and school as well as family and friends. As the word spreads, we begin to put the ideas into practice and over a longer period of time, we grow a culture of Healthy Living.

“AIA is in the people business, so health is of the utmost concern to us.”

All this takes a change of behaviour, mindset and attitude.” The company is rolling out a set of activities over the next couple of months to start implementing the programme. Chu said, “Our target in China, for example, is to get serious about exercise. We have already installed a state-of-the-art exercise facility in our office in Hong Kong where people who use it can sign up and be noticed. In China, we are using the Chinese government’s programme of encouraging people to get more exercise by having our employees donate track suits to underprivileged kids, migrant workers and rural people”. The company’s employees are actively engaging children and teenagers by recruiting volunteers who become the ambassadors for Healthy Living, helping to promote a healthy lifestyle throughout their lives. Chu feels that once people are engaged in behaving or teaching others about Healthy Living, the more committed they are to the practice. The company will engage employees to create their own programmes suited to the different cultures, suggesting little steps people can take, such as getting off the lift two floors below one’s office or leaving a bus two stops from home that can begin to show great dividends over a period of time. Chu explained, “In Hong Kong, Singapore and Australia, we have already motivated about 500 employees to compete in the “Amazing Race,” while in Thailand we held a large rally in a public park. We are also changing the food in our office canteens to offer a wider range of healthy meals with more fruits and vegetables and helping employees keep track of calories. We have also supported Healthy Living lecturers at lunch time to share information about the wellness program.” Isaac said the survey showed that there were macro similarities of concern about aspects of health in all the countries but that by diving deeper the regions were sorted more finely. “Everyone is concerned about childhood obesity, for example, because even poor kids have access to junk food,” he said. Chu summed it up by saying, “AIA is in the people business, so health is of the utmost concern to us. The health of the family, customers and the community is a key driver of this programme. We want to take care of people when they are healthy, not later when they are sick.”

feature

RCBC’s passion for innovation

From its humble beginnings, RCBC is now one of the fastest growing banks in the Philippines offering a wide range of products and services.

CBC first started as a small development bank back in 1960 and has since grown into one of the biggest banks in the country. The bank caters to a wide range of markets including the FilipinoChinese market, the corporate market, locators in the export processing zones, the middle market, and the consumer/retail market. Asian Banking & Finance sat down for an interview with Mr. Ismael R. Sandig, the Executive Vice President and Head of the RCBC Retail Banking Group, to discuss the company’s recent achievements and outlook for the future. According to Mr. Sandig, one of RCBC’s proudest moments this year came when it won the awards for Philippine Retail Bank of the Year and Best Bank Website in the recently concluded Asian Banking and Finance Awards held in Singapore. The twin recognitions capped the bank’s victorious run in various international competitions that unanimously named it the Philippines’ best. Mr. Sandig says the recognitions being accorded to RCBC are all well-deserved. He explains that the bank’s undertakings in the past five years, all reflecting its passion for innovation, were able to bring in new customers—by the millions. “On the management side, we were able to bring in 1.5 million customers for MyWallet, a debit card we introduced a couple of years ago. We were also able to tie up with the biggest pharmaceutical chain in the country, Mercury Drug, which has over 900 – 1000 stores nationwide. Most of our projects five years ago are now at the forefront of the business. Since 2007, we have developed more than 11 products and services, and this is what differentiates us from the rest of the players in the industry.” Significant developments in RCBC’s recent history Mr. Sandig remembers a totally different sales and service environment when he first set foot in RCBC back in 2007. He noted that the organization’s sales structure and capabilities then were somehow incompatible with the bank’s intended 5-year growth targets in terms of customers, revenue and even in volume of deposits. “The first thing that we did was to re14 ASIAN BANKING AND FINANCE | DECEMBER 2011

Ismael R. Sandig, Executive VP and Head, RCBC Retail Banking Group

engineer and make sure the culture of sales and service will be instilled in the minds of the people, especially in the distribution channels. After preparing the infrastructure, we looked at the six different fundamentals of management in Retail Banking. We started looking at the customers, the production, the business model and the business revenue management. After that, we looked at the distribution channels and finally, back to the organization. We never lost sight of compliance issues and risk management. By 2009, we were able to develop five main products that will make the bank grow exponentially in terms of the volume of customers. On a yearly basis, we have been hitting our targets locally.” Among RCBC’s highly-specialized products that easily hit the mark is one that targets women as its next potential market. The highly successful e.Woman was launched in 2008. RCBC’s future plans Mr. Sandig adds that the bank is planning to

“RCBC aims to be customer-centric by 2012.”

target different markets in the next five years. It has already started with the transport industry, and is trying to look into other utilities as well. “We are looking at the 92 million customers who make up the total population of the Philippines. If you have to look at it, we have at least 72 million Filipinos who are cellphone holders. But you see, the irony is we don’t have as much Filipinos who are ATM cardholders. So there is an unbanked market that remains untapped. We are planning to get a slice of this market by going into transportation and water services. These are the things we are looking at that could help us tap this so called unbanked market.” Mr. Sandig says that in the next five years, from 2012 to 2016, RCBC is targeting to achieve a growth average that is better than the government index. “We have already prepared the organization, and we have the infrastructure. We will be changing our Core Banking System by next year and it is capable of different kinds of automation needed in our branches. We plan to connect everything to the new core banking system to ensure an efficient way of serving our customers,” he adds.

OPINION

Andrew Pitcher Why retail lending origination excellence is important in Asia

cross Asia in recent years, consumer demand for credit cards, unsecured loans and mortgages has increased substantially. With positive demographic changes and favourable economic conditions, it is expected this growth will continue at pace. The need for banks to focus on retail lending origination excellence is not simply an option, but a necessity, if they are to close the gap between growth aspiration and execution readiness. To achieve this, banks need to develop and refine a number of capabilities across the retail lending value chain, thereby fostering revenue growth, cost reduction, higher credit quality and ultimately, profitability. Based on our analysis of market maturity, we have segmented Asia into three groups. These include: Advanced Asia (Australia, Hong Kong, Japan, Singapore); Maturing Asia (Malaysia, South Korea, Taiwan, Thailand); Emerging Asia (China, India, Indonesia, Philippines). Strong prospects for growth in Asia Pacific lending Confidence in retail lending growth is particularly evident in Emerging Asia. This confidence is driven by strong domestic demand, a growing middle class and government policy designed to boost credit availability. Most notably, demand for retail lending is growing faster in comparison with other types of lending in Asia. In Advanced Asia, increasing consumer sophistication (demonstrated by the rise in foreign purchases and investment in the property market) is driving growth in retail lending, with both unsecured debt and mortgage debt growing at an exceptional rate in 2010. In contrast, banks in Maturing Asia tend to have a more balanced retail lending portfolio, with greater emphasis on non-mortgage products (for example; personal loans, auto loans).

Andrew Pitcher Senior Executive & Managing Director, Accenture

it increasingly difficult for banks to meet evolving customer demands and grow revenue per customer. The origination processes also tend to be slow and painful for the customer, which in turn reduces the ability for the sales force to secure swift sales. Banks in the region also lack scalable platforms to achieve growth. Inadequate technology platforms mean banks cannot achieve significant cost efficiencies and realise optimum economies of scale. Finally, banks often do not have infrastructure that is compliant with the new and emerging regulatory requirements, inhibiting the ability to capture optimum revenue share.

So, from a geographic perspective we believe In Advanced Asia it will be critical to focus on endto-end process automation using integrated technology platforms, standardisation of processes via cross product regional factories, investment in advanced segmentation, and analytics to support greater sales force effectiveness. “...consumer demand for credit cards, In Maturing Asia it will be critical to develop a ‘customer origination’ mindset and unsecured loans and mortgages has increased empower a skilled sales workforce. They must simplify legacy business processes, introduce substantially.” automated credit decision-making, and improve credit monitoring to enhance end-to-end Challenges to retail lending growth profitability. To secure rapid and profitable growth in retail In Emerging Asia it will be critical to focus on lending origination, Asian banks need to address a process control, the development of simple sales number of challenges, such as differentiation, pace, tools, sales force product education and pricing. They scale and regulation. must also improve credit risk management in order That is, a lack of differentiation in customer acquito achieve rapid and scalable growth. sition and product and service innovation is making 16 ASIAN BANKING AND FINANCE | DECEMBER 2011

Lend me that money!

OPINION

Christine Wright Hiring hotspots in Asia

Christine Wright Managing Director Hays, Japan

hile there is a sense of uncertainty for some banks, others have made no changes to their hiring plans and good talent remains in high demand. The latest Hays Quarterly Report, for the October to December quarter, found that in Singapore’s Banking Product Control market for example, hiring remains strong. But while some top-tiers continue to hire strongly in this space, there are others who are continuing to offshore to India. Who’s in-demand and who’s not? Niche Internal Auditors with in-house banking experience are also highly sought after in Singapore and there is a shortage of high-calibre candidates in this area. Because of this, applicants from European markets are actively encouraged to apply for roles in Singapore banks. Accountancy and finance skills are also sought after in Singapore. Senior finance professionals are wanted to head up overseas operations, as well as candidates with niche skills such as debt/capital markets expertise to raise funds for investment opportunities that could arise from market uncertainties. The pharmaceutical and FMCG sectors continue to flourish due to investment in Asian operations and these sectors are often attractive to candidates. Cost accountant positions are widely available across both commerce and banking. Turning to Japan, we expect to see more positions open this quarter with a busy October and November for recruiting activity as companies rush to fill vacancies before year-end. Active areas include Compliance, Market Risk, Product Control and Project Managers in Middle Office Operations where there is a limited supply of experienced candidates to fill roles available.

Over in Hong Kong, Financial Reporting, Internal Audit, Operational Risk Management and Finance candidates are wanted to fill available roles, particularly within insurance companies. Turning to China, there is growing demand for candidates with strong technical skills in financial planning and analysis as well as commercial and business analysis in China due to the rapidly changing business environment. Internal Audit and Risk and Internal Control Financial Analysis candidates are needed as organisations focus on reducing both their operational and financial risk. Finance Technology continues to be an active area of recruitment across Hong Kong, Japan and Singapore. In Japan, bilingual Project Managers and Business Analysts are in high demand. As investment banks move away from their traditional models, they are offshoring a lot of development, which is generating the need for a local person to sit “We are seeing a number of good candidates between the business and the developers receiving multiple offers from several companies.” offshore. In Asset Management, experienced Salespeople, Product Managers and Investment Managers/Fund Managers are still in demand. Those with strong product knowledge and an established track record in managing client relationships and marketing foreign investment opportunities to Japanese companies are most in demand. Roles in Corporate Banking will be available as firms seek to take advantage of the more stable revenue streams which it offers. 18 ASIAN BANKING AND FINANCE | DECEMBER 2011

Candidate trends The candidate shortage means that good candidates at the staff and middle management level have multiple choices. We are seeing a number of good candidates receiving multiple offers from several companies. Because of the candidate shortage, employers need to process candidates quickly in order to secure top bilingual talent. We are noticing increasing interest from foreign banking professionals looking to Asia for their next career move.

Are you a front row liner?

analysis If we look at broader definitions of size, both Singapore and Hong Kong banking sectors tend to rank close in existing international surveys. A recent example of such survey is the one conducted by the City of London (Global Financial Centers 2010) which ranked Singapore and Hong Kong as global and deep financial centers, together with Chicago, Frankfurt, London, New York, Toronto and Zurich. Such classification is based on three key criteria: degree of connectivity (how well-a center is known around the world); diversity (how many industry sectors flourish in each center); and “specialty”. Notwithstanding Hong Kong’s recognized merit, the survey shows that it has been losing some of the clout as shown by its decreasing ranking in business environment, human capital, infrastructure, general competitiveness and market access. The most rapid fall in the ranking actually refers to human capital.

How does HK fare as an international financial center Comparing Hong Kong with Singapore: Which one is larger? Hard to tell

ong Kong and Singapore are not really large international financial centers when compared with those of major economies but they clearly are for the size of their economies. Although it is argued that Hong Kong and Singapore have their own comparative advantage in China and Southeast Asia, respectively, they have been competing with each other for decades to be the next largest international financial center after Tokyo. The two have their comparative advantages in two different sectors: the stock market –namely IPOs - in Hong Kong and derivatives and foreign exchange markets in Singapore. When looking at the banking system as a whole, and not only at the off-shore activities, Hong Kong continues to be bigger, according to BIS statistics, but Singapore is catching up. In fact, Hong Kong’s consolidated bank claims (shown in Graph 4 as external position) rose steadily from 250 billion USD in the beginning of 2003 to 450 billion USD at the end of 2009 (i.e., 11% yearly increase) while Singapore’s consolidated bank claims (Graph 5) 20 ASIAN BANKING AND FINANCE | DECEMBER 2011

“...Singapore’s efforts to become a large corporate banking center as opposed to Hong Kong which is a more pure banking sector”

increased from 130 billion USD to 260 billion (i.e., a 14% annual growth). When we looked into the off-shore banking sector only, the size is quite similar. In fact, external assets of banks in Hong Kong and Singapore are at about 750 billion USD in 2009. However, external total liabilities are quite different. In Hong Kong, external total liabilities were about two-third of external total assets in the past decade; in contrast, in Singapore, external total assets and liabilities were almost the same. This means that banks in Hong Kong have financed their expansion abroad from Hong Kong while this is not the case in Singapore. The difference between the two probably stems from Singapore’s much stricter off-shore banking regulation. As for the evolution of external bank assets and liabilities, both banking centers have grown at a similarly rapid speed during the last few years. In fact their external position have doubled until the beginning of the global crisis and have stagnated since in Hong Kong and have fallen somewhat in the case of Singapore.

Hong Kong banking center is more bank-oriented while that of Singapore more corporate-oriented When examining the components of external total assets in Hong Kong and Singapore, financial-sector related assets account for 80% of the external total assets for banks in Hong Kong on the average, and non-bank assets account for the rest (Graphs 6 and 7). The numbers for Singapore are similar to those of Hong Kong prior to 2005 but the financial sector-related assets rapidly went down thereafter below 70% thereafter in 2009, while nonbank assets’ share went up to about 30%, accordingly (Graphs 8 and 9). This reflects Singapore’s efforts to become a large corporate banking center as opposed to Hong Kong which is a more pure banking sector (with most transactions happening between banks). This could possibly have negative consequences for the future of Hong Kong in as far as it leads to a less diversified economy. However, it may be beneficial in terms of attracting foreign financial institutions which are hesitant as to which financial center to choose when operating in Asia. Subsidiaries vs cross-border lending Other than size, Hong Kong and Singapore banking centers differ in as far as Hong Kong attracts more foreign banks’ subsidiaries (60% of the total

analysis foreign bank assets as shown in Graph 10) while Singapore attracts more cross border bank loans (over 60% of the total as shown in Graph 11). In fact, cross-border bank loans in Hong Kong and Singapore are actually very similar in absolute size so the difference lies on the role of subsidiaries, which is much more active in Hong Kong than in Singapore. The difference in the composition of bank flows has been found to make a difference in terms of the origin of bank assets but also in terms of their stability. In particular, Garcia-Herrero and Martinez Pería (2006) have shown empirical evidence of local bank assets being more stable than cross-border bank financing. Looking back to the recent global financial crisis, crossborder funding in Hong Kong and Singapore fell 20% and 22% respectively between the second quarter and the fourth quarter of 2008. Local assets by foreign subsidiaries, though, fell much less (7% in Singapore) or even grew by 11% in Hong Kong during the same period. We can see that in 2009 it went back to its trend in Hong Kong, much quicker than in Singapore where it barely increased (see Graph 12 and 13). This is in line with the literature consensus on the higher stability of subsidiaries as opposed to cross border flows and favors Hong Kong given its composition of bank assets. Hong Kong banking sector is very dependent on British banks while that of Singapore is much more diversified Hong Kong and Singapore banking centers are dominated by British

banks followed by those in Euro-zone ones. Asian banks, mostly Japanese banks, ranked third while the US ranked only fourth. The weight of British banks have increased substantially over time while that of the Eurozone have decreased (Graph 14). The origin of banks located in Singapore is much more diversified (Graph 15). In conclusion, Hong Kong is still a larger banking center in absolute terms but it looks much more similar to Singapore when focusing on the off-shore market. The fact that Singapore may be catching up as an international banking center should be seen by Hong Kong authorities and other operators as a signal that measures have to be taken for Hong Kong to lure international banks to continue to operate in Hong Kong. On the positive side, the fact that Hong Kong has a very large number of foreign banking institutions and that it is more concentrated on banking and not on direct borrowing from corporates should clearly help. Furthermore, the fact that Hong Kong is less dependent on bank branches and more on bank subsidiaries should also imply –according to existing literature – less volatility of foreign banks’ exposure to Hong Kong. These positive aspects about Hong Kong are offset by the looser definition of off-shore versus on-shore banking activities in Hong Kong visa-vis Singapore. In fact, Hong Kong have financed one-third of external operations with local funds while liabilities and assets from non-resident have perfectly matched. The crises experienced by some off-shore financial centers in the past (an example would

“Hong Kong is still a larger banking center in absolute terms but it looks much more similar to Singapore when focusing on the off-shore market.”

GRAPH 6: External Positions of Banks in Hong Kong: Assets

be Uruguay in the 1980s) warns against having large open positions between non-residents’ assets and liabilities. Hong Kong’s special niche: China’s off-shore banking center Hong Kong is set to benefit more from the modernization and internationalization of mainland’s financial system, at least in the near term. Hong Kong has a clear advantage of geographic and cultural proximity, as well as very close political ties. Within that proximity, Hong Kong’s skilled labor, strong regulatory environment, and high quality of business services are just what the mainland is short of. We should thus expect Hong Kong to continue to provide financial expertise to China and in the development of China’s financial system. In return, Hong Kong’s position as a financial and banking center and gateway to China will be strengthened with China as its main hinterland. Hong Kong’s specialty in terms of its relation with China is demonstrated through seven different Closer Economic Partnership Arrangements (CEPA). These agreements give Hong Kong banks an easier access to China in several ways. First, less capital is required to open a branch in China, less time is needed to offer RMB services and it is also easier to have an incorporated bank. All these advantages basically imply that foreign banks should find it interesting to be placed in Hong Kong as a gateway for China. The fact that the number of foreign institutions has remained stalled during the last few years (see Graph 2 above) does not seem to support this hypothGRAPH 7: External Positions of Banks in Hong Kong: Assets

GRAPH 4: External Positions of Banks in Hong Kong

GRAPH 5: External Positions of Banks in Singapore

Source: Bank for International Settlements

GRAPH 8 : External Positions of Banks in Singapore: Assets

GRAPH 9: External Positions of Banks in Singapore: Assets

GRAPH 10 : BIS Reporting Banks (consolidated) Claims on Hong Kong

GRAPH 11 : BIS Reporting Banks (consolidated) Claims on Singapore

Source: Bank for International Settlements

analysis esis. The reason behind might be that foreign institutions actually prefer to access the Chinese market directly as shown by the rapid growth of foreign financial institutions in Shanghai. Hong Kong’s niche market as regards China also goes in the opposite direction, i.e., Chinese banks opting to operate in Hong Kong for their offshore services. Beyond culture and language reasons, an important factor which explains the growing presence of Chinese banks in Hong Kong is the peculiar way in which China is opening its capital account. In fact, Hong Kong is so far the only place where you can offer a wide range of RMB services (from deposits for residents to RMB settlements for trade-related operations to issuance of RMB denominated bonds). It goes without saying that this advantage should favor Hong Kong’s role as offshore center. However, it will also push Hong Kong towards being more and more dependent on China’s financial services and less so on European financial services. The key issue is whether Hong Kong will manage to maintain that comparative advantage even after China’s capital account is fully liberalized. Hong Kong and Shanghai complement one another more than competitors do Hong Kong, as international banking center, has two key challenges for the next few years: One is to continue to be a large Asian banking center and to be able to withstand the competition coming from Singapore. To that end, maintaining international standards and human capital seems the key.

The other key challenge is to adapt to Shanghai’s becoming an international financial center on its own. In fact, Shanghai’s achievements have attracted the world’s attention in past years, especially when its GDP exceeded that of Hong Kong in 2009. The Chinese central government and Shanghai municipal government both aim at establishing the city as an international financial center. However, this does not mean that Hong Kong’s position has to be replaced by Shanghai. On the contrary, Hong Kong could actually benefit from Shanghai’s growth if it is to find its niche. Hong Kong’s primary role should be to serve as a main international offshore financial center for China, Asia and the rest of the globe. On the other hand, it could also facilitate foreign capital into the mainland. Shanghai’s main target should be to become a major domestic financial like Tokyo (or actually bigger). Hong Kong should also remain the key to conduct financial services between the Pearl River Delta and the rest of the world. In conclusion, Hong Kong should be complementary with the development of Shanghai as major banking sector. Hong Kong and Shanghai complementing one another should be more apparent when China’s capital account liberalization is proceeding slowly. In fact, Hong Kong will benefit more than any other financial center from the controlled outflows of funds from China. This is due to China’s better knowledge of Hong Kong’s financial system.

“Singapore is being more active as a banking platform for international corporates while Hong Kong remains larger in terms of banking relations.”

Conclusions The banking industry is the key for

Hong Kong’s economy but Hong Kong is not a big international banking center, at least not when compared with other centers belonging to large economic areas, such as New York and, to a lesser extent, Tokyo. Within Asia, Hong Kong has a larger banking sector as a whole but similar if we focus on the off-shore side of it and growing faster than in Hong Kong. Furthermore, Singapore is being more active as a banking platform for international corporates while Hong Kong remains larger in terms of banking relations. In fact, Hong Kong continues to have one of the highest concentrations of large banking institutions in the world. Such international banking platform, together with the increasing local presence of Chinese banks, offers Hong Kong a unique opportunity to become a major banking center, probably the largest off-shore center in Asia. Whether Hong Kong will reap this opportunity will very much depend on how it navigates among the opportunities that China offers in is current situation of capital controls without losing its international clout. In fact, Hong Kong banking system should benefit from the business from China coming off-shore due to capital controls. However, it should also look for non-Chinese related banking business so as to ensure that it remains distinguishable from Chinas’ domestic banking system in the years to come. Alicia Garcia Herrero is the Chief Economist for Emerging Markets at BBVA and is affiliated with the University of Lingnan

GRAPH 12: BIS Reporting Banks (consolidated) Claims on Hong Kong

Source: Bank for International Settlements

GRAPH 14: BIS Reporting Banks (consolidated) Claims on Hong Kong by geographic origins

Source: Bank for International Settlements

22 ASIAN BANKING AND FINANCE | DECEMBER 2011

GRAPH 13: BIS Reporting Banks (consolidated) Claims on Singapore

Source: Bank for International Settlements

GRAPH 15: BIS Reporting Banks (consolidated) Claims on Singapore by geographic origins

Source: Bank for International Settlements

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OPINION

Mike Lee

Will cash survive beyond the 21st century?

henever I read about the apparently imminent arrival of the cashless society, I smile quietly to myself, knowing that the global facts tell a completely different story, one which should see cash surviving beyond the 21st century. Take the latest press release from London-based Retail Banking Research, for example: “The total number of ATM cash withdrawals worldwide is expected to increase at an average of 8% per year between 2010 and 2016, compared to an average of 6% per year in the number of [ATM] installations.” Euromonitor International reported in May that $14.413 trillion in consumer payments was made with cash worldwide in 2010, compared to consumer payment card transaction value, excluding commercial payments, at $9.582 trillion. It is no wonder, given these, and similar figures, that a recent book on the history of money has stated: “Despite the rise of plastic cards and electronic money transfers, cash is still the most important kind of money in the world.” A Cashless Society? Why would the most important kind of money, cash, suddenly disappear after 27 centuries of playing such an important role in all human societies? Cash is one of the most successful human technologies of all time and is not going away anytime soon. Those who make extravagant forecasts about the demise of cash simply do not understand its resilience as a technology and its resistance to technological substitution. Those organisations which want to “kill cash” remind me of King Canute who believed he could hold back the ocean tide. It is the popularity of cash which lies behind its success as a technology and this human reliance on cash shows no signs of abating. The May 2011 issue of Currency News, published by Currency Research Ltd,

Mike Lee CEO ATM Industry Association

interest in the demise of cash to give them greater market share for cards in payments markets around the world. In addition, the voice of cash is not being sufficiently articulated. Consequently, the ATM Industry Association this year established the ATM Cash Council (www.atmia.com) with a mission to portray the truth about cash by tracking global cash demand, circulation and usage today, whilst protecting the freedom of the world’s citizens to choose to use cash.

The Lifeblood of the ATM industry Besides, cash is the lifeblood of the ATM industry: “Strong demand for ATM cash withdrawals will remain one of the major drivers of ATM growth in the next few years. RBR expects the global installed base of ATMs to increase by 42% to 3.2 million terminals by 2016.” The US alone manufactures over 80 million items of cash every working day! A total of 62 billion ATM cash withdrawals worldwide in 2009 is forecast to rise to 94 billion cash withdrawals “...RBR expects the global installed base of ATMs to in 2015. One dimension of cash which is always conveniently overlooked by increase by 42% to 3.2 million terminals by 2016.” the anti-cash lobby is its strong sociopolitical role. A study carried out by the Economic and Social Research Institute warns that stated that during the last seven years the banknote market has been increasing in volume, with an overall the move towards a cashless society would mean that financially excluded households risked becoming average global rate of growth of about 6% per year. increasingly marginalised. Not only is cash used in A visit to the websites of central banks in virtually the huge informal economies of both advanced and every country of the world will reveal similar healthy emerging countries and among lower income groups year-on-year growth in banknotes in circulation, in as an important budgeting tool, but the demographic both developing and developed countries. I firmly believe that the myth of the cashless society group of the elderly depend heavily on this form of money. is being propagated by card companies with a vested 24 ASIAN BANKING AND FINANCE | DECEMBER 2011

Cashless Society? Oops, not anytime soon!

Take a peek into one of DBS’ redesigned branches in Singapore

Reinventing the bank, one branch at a time Banks in Singapore are redesigning their branches to cater to the ever changing behavior and needs of its customers, reports from Isabelle Ulanday.

sia’s bank branches are getting a bold new makeover as bankers fight over for fashion and convenience in the battle for hearts and wallets. Singaporean banks are at the forefront of the changes to branch design, which is only fitting as it remains one of the most competitive markets in Asia. DBS, Singapore’s largest bank, has converted 12 of its branches into what they believe will be a branch that better caters to young adults. One of the criticisms of DBS is that it was perceived to have long queues, so the new branch design specifically addresses this issue by offering a streamlined process to encourage customers to perform regular, straight-forward transactions at self-service banking 26 ASIAN BANKING AND FINANCE | DECEMBER 2011

”DBS has converted 12 of its branches to cater to young adults”

terminals and through iBanking and mBanking, thus shortening queues. Starting with just 12 remodeled branches in November 2010, DBS says its new branches encourage managers to be more entrepreneurial. Branch Managers have more time and can now assume the role of entrepreneurs who “own” their branches and their branch’s Revenue and Expenses. These Branch Managers and their teams are empowered to generate business in and around their geographic vicinity through programmes that are relevant and unique for the customers who patronize their branch. This changes everything that was traditional about the “old” bank branch, from a predominantly servicing model to

one of active engagement with the emerging affluent customers and SMEs. It generated incremental revenue for the bank, as customer marketing is now decentralized to the teams who are closest and are most knowledgeable about their customers. While this transformation is still underway, DBS has already seen marked improvements in effective targeting and sales conversions from these branches versus same period a year ago. New apps for smartphones DBS has also introduced location based applications for smartphones that allow customers to locate deals around them using DBS credit cards. The apps also feature mobile coupons that deliver

branch banking exclusive promotions to their fingertips, saving them the hassle of clipping and carrying around printed coupons. DBS has also partnered with PayPal on its Bancassurance “DBSTravellerShield” app which was launched in July 2011 and has seen close to 500 travel insurance policies purchased via the mobile phone in October alone. DBS boasts the highest adoption rate for mobile banking in Singapore and the take up rate of its mobile suite of applications has far exceeded expectations, with over 380,000 unique users for mBanking and over 300,000 downloads for its dining and shopping apps, DBS Indulge and DBS Shopper. OCBC’s new online banking experience OCBC has also redesigned its online banking interface after concluding that the top three user functions were account balances, bill payment, and funds transfer. It has streamlined links (from 81 options down to 6 banking service categories); and logically-ordered, colour-aided navigation to guide user through his task in a step-bystep manner. For online banking, customers are now able to create savings jars for different goals, allowing them to integrate savings goals with their bank accounts and enable real-time monitoring of its progress. Customers are now also able to top up telco pre-paid cards and ez-link cards. Other new features include SRS contribution and the Pie Chart view of customers’ Assets & Liabilities. New features for its internet platform include the Upcoming Bill Reminder and the Opening of CPF & SRS Account. For its mobile platform, customers are able to transfer money overseas for over 17 currencies, place time deposits; apply for balance transfer; Scan-nPay bills on Android devices and iPhone; and it also offers an Online Banking application & PIN reset. UOB’s ‘arty’ branches UOB, Singapore’s second largest bank, has embarked on a ‘horses for courses’ approach to branch redesign, eschewing the one size fits all approach to tailor branches to their environment and expected

DBS Remix transforms branches from the traditional ‘old’ ones to new modernized designs

A DBS branch undergoes a makeover

DBS’ self-service banking makes it easier for the customers

clientele. Branches that mainly cater to SME businesses have a more business design with Oriental touches, such as those in their Rochor, Nex Shopping Centre and Serangoon Garden branches UOB Rochor Branch. Other branches which are located in areas with predominantly young families with children, such as the Nex Centre branch, have a design more appropriate for that market. And other branches are more ‘arty’. The Serangoon Garden Branch has paper cranes in the ceiling of its stairway, made by

DBS’ new branches encourage managers to be more entrepreneurial “OCBC’s customers are now able to integrate savings goals with their bank accounts”

bank employees in partnership with the children of the Little Arts Academy. UOB’s long association with the arts amassing a 1,500 piece art collection over the last 30 years sees many of these on display throughout the branch network. For example, winning pieces of the UOB Painting of the Year Competition in 1984, 1988 and 1995 can be found in their branches in Holland, Cecil Street and Novena respectively. A consistent aspect to all improvements made under the programme, which began in 2009, ASIAN BANKING AND FINANCE | DECEMBER 2011 27

branch banking has been the increase in the space dedicated to customer engagement, said Wendy Teo, UOB’s Head of Group Channels. The bank has increased customer-fronting space to 80% of each branch so that bank employees can better engage customers.

aged between 30 and 55. For the first time, products commonly held for the ultra high net worth segment will also be made available to the rising rich. These include products with shorter duration to ride on market trends, such as currency, index, commodity and interest ratelinked products. UOB has also opened a Wealth Banking branch at Scotts Square, Orchard Road. Customers will be able to access trading ideas and real-time information, including stock recommendations, identification of value stocks and receive advice from their

Bank branches for the rich UOB has also launched a flagship Privilege Banking Reserve Centre at Marina Bay Financial Centre for its affluent customers. These customers are individuals with investable assets of at least S$100,000 and make up 25% of the working population in Singapore,

“UOB has increased the space dedicated to customer management.”

Scan-n-Pay Ð bill payment made easy

relationship manager on fundamental and technical analysis of investment opportunities at the centre’s Reuter Insights corner. The centre also includes a travel concierge service to help customers with their travelling needs. Butlers will also be on hand to serve coffee and tea to customers. UOB will open two more Wealth Banking branches in the first quarter of 2012 – one in Katong, a key residential district and the other in Tampines. The three Wealth Banking branches will allow UOB to serve 50% of the rising rich segment in the country.

It’s easier to navigate through OCBC’s new online banking interface The Centre also includes a travel concierge service

UOB has opened its flagship Privilege Banking Reserve Centre for its affluent customers

UOB Rochor 28 ASIAN BANKING AND FINANCE | DECEMBER 2011

UOB Scotts Square

UOB Holland

OPINION Bryan O’Neill bryan o’neill Regional Vice President, Asia, Progress Software

How regulation can boost Asia’s role in the international financial scene

ow, more than ever, there is a greater call for Asia to step up and play a bigger role in international financial institutions and along with this greater role will come the challenges of regulation. United States Deputy Secretary of Treasury, Neal Wolin, on a recent address to the Singapore Exchange, said global coordination on financial regulation will create strength in the international market in averting a future crisis. Mr. Ravi Menon, Managing director of the Monetary Authority of Singapore (MAS), has highlighted that the need to redefine the roles of markets and regulation. Particularly, he spoke on the fact that self-regulations and market discipline are no longer sufficient to ensure market stability. The answer to these challenges thus lies in smarter – not simply more – regulation. Regulation in Singapore Singapore is in fact one country where we will see a strong commitment to regulatory change. The second half of 2011 looks set to see legislative amendments by the Monetary Authority of Singapore and in January, the Economic Crimes and Governance Division was set up to prosecute complex financial crimes. While the City welcomes measures designed to bring greater stability to Asian financial markets and reduce excessive risk taking, there is a danger of over-regulation. Lawmakers are right to be concerned with issues such as short selling, algorithmic, high frequency trading and dark pools. However, they must not let that concern lead to banning these effective, liquidity-providing activities. If the regulators focus on their roles as market policemen, they will stand a better chance of sensing and responding to fraud, market manipulation, fat finger and insider trading. Advancing the technology But to keep up requires a different kind of regulation – a mandate for technology, which can help to spot and manage these issues. The same technology would enable them to flag liquidity concerns by monitoring how liquidity moves across venues. This is a huge issue for regulators as the markets become increasingly fragmented. They have also fallen behind in supervising the markets that they are responsible for, partly due to budgetary constraints and partly

30 ASIAN BANKING AND FINANCE | DECEMBER 2011

due to an atmosphere of complacency. Moderating risk was not a top priority for regulators when times were good. After all, why interfere with a booming financial services industry? On the other hand, banks and hedge funds can afford to buy and use the latest technology to design and execute high-speed market strategies. Until recently, most regulators were unaware that it was even possible to monitor the markets in real time. The traditional forms of detection such as mandatory recording of phone calls, emails and messaging conversations are all useful. But, to truly address the problem and regain trust and credibility, real-time market surveillance technology must be adopted to monitor and detect patterns that indicate potential market abuse, with support for replaying OTC alongside exchangetraded instrument data as soon as it becomes available. Detection of abusive patterns has to occur in real-time, before any suspicious behaviour has a chance to move the market . Technology can’t solve all of these problems, but it can help to give far more market transparency. To restore confidence in capital markets, organisations involved in trading need to have an accurate, real-time view of what’s going on. Mandating the use of this technology is smarter regulation.

SG Financial Center: Ready to welcome regualtory change?

Singapore is in fact one country where we will see a strong commitment to regulatory change.

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OPINION

Andrew Hanson

Top five mistakes junior banking professionals make in job interviews

Andrew Hanson Director of Banking & Financial Services Robert Walters Australia

ow you perform in job interviews is arguably the most important factor in determining whether or not you secure the job you want. This is particularly true for junior banking professionals, whose limited jobspecific experience can mean interview performance is the key differentiator between candidates competing for the same role. In our experience at Robert Walters, there are five key mistakes commonly made by junior banking professionals in job interviews that instantly disadvantage them. If you can avoid these mistakes, you’ll be well on your way to interview success. Not adequately researching the organisation they are doing the interview with While it seems like a basic step to undertake when looking for jobs, we still see a number of candidates who don’t properly do their due diligence on the company they’re applying to work for. It is vitally important for candidates to be able to talk confidently and intelligently about what their potential employer does. You should be able to recite specific facts about the organisation, including: their history, financial position, mission and products/services; the market in which they operate; their main competitors. Giving generic explanations on why they like the role/company they are applying for When asked why they like the role/company they are applying for, many junior banking candidates give very generic and unconvincing answers. This means they come across as though they are looking for any role in banking as opposed to that particular job, which is a turn-off to employers. To avoid this, you need to be enthusiastic and talk specifically about what aspects of the role/organisation appeal to you, such as the organisation’s reputation or the key responsibilities of the role.

“You should never talk negatively about a previous (or current) company, manager or role.” Not knowing their CV in detail Junior candidates can be guilty of not knowing their CV in detail and being ill-equipped to answer questions on the information they have supplied. Don’t assume that just because the information is in your CV, interviewers won’t ask questions about your background, including your responsibilities in previ32 ASIAN BANKING AND FINANCE | DECEMBER 2011

ous roles and educational results. Instead, you should review your CV before your interview and practice how you will respond to any potential questions on the details you’ve provided. Don’t forget to describe how your accomplishments relate to the role you are applying for. Speaking negatively about previous employers or roles We’ve seen many junior candidates ruin their job prospects by making derogatory remarks about their current or previous employers and experiences. This is absolutely inexcusable. You should never talk negatively about a previous (or current) company, manager or role. Try to find the positive aspects of your employment history and focus on these instead. Some candidates going for contract roles can also be too honest regarding their situation and why they are considering a contract. Whatever your reasons for looking for a new job, you should present them in as positive a light as possible. Your recruitment consultant can help you practice how to respond to these questions. Being too familiar with the interviewer This is a behaviour commonly displayed by junior banking candidates. We see that many fall into the trap of being too familiar with their interviewer/s, which is inappropriate in a job interview. While it’s important for you to be charismatic and demonstrate your interpersonal skills, you must always conduct yourself with professionalism, even if you feel you have a good rapport with the interviewer.

Sorry, but you’re not shortlisted!

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Last word Zennon Kapron

Is LinkedIn the future of banks in China?

umerous articles have explored the usage of social media and marketing in the financial industry. Although our feeling is that no institution has really perfected their social networking strategy, most would claim that their engagement brings them closer to their customer and enables them to offer the products and services that their customers are looking for. Social media/networking in China In many respects, social networking in China has surpassed that of the US. Domestic companies like Weibo (twitter-like), and Renren (China’s facebook) now boast millions of users and have given the huge Chinese population a way to connect that distances and costs have prevented in the past. Further, Chinese companies have largely imitated the US social media models and improved on them for the domestic market. The gap that we currently see is really on the ‘professional’ networking side. As compared to Renren or Weibo, which both have a significant

“...the future ‘LinkedIn of China’ will have to provide a perfect combination of usability, value and convenience.” user-base of domestic Chinese users, the nearest Chinese equivalent to Linkedin is generally thought to be a services called Ushi. It claims 12,000 CEOs, 5,000 CTOs and 75% of VCs active in China among its 300,000 members, with forecasts of 10 million users by 2013. LinkedIn is of course working hard to penetrate the market. Challenges for social media in China’s financial industry So what we have found, especially in the Chinese financial technology space is that people rely on more traditional ‘BBS’ or online forums for exchanging information. And typically the level of participants in the forums doesn’t seem to be very 34 ASIAN BANKING AND FINANCE | DECEMBER 2011

senior. How can social networks more effectively reach and engage senior financial industry professionals? LinkedIn was seen as a useful service, but was far from being widely used or accepted. It has been very interesting to see this change over the years until today when it is widely used and senior executives, including the likes of Vikram Pandit, CEO of Citi, ‘who’ are embracing the platform and seeing the positive benefits. Getting to that critical mass is one of the primary challenges – there needs to be enough of a base of users to change the question from ‘why are you on this site?’ to ‘how can you not be on this site?’ For serious professionals, LinkedIn is nearly at this point now. A further challenge, and somewhat specific to China, is internet ‘fatigue’. “Group buying” portals similar to services provided by the international online portal Groupon.com (not to be confused with the complete Chinese knock-off site groupon.cn) were very popular towards the end of 2010 and into early 2011. At one point there were over 1000 group buying start-ups in Beijing alone – more than in the entire United States. Over the past few months however, ‘group buying fatigue’ has set in as there have been more and more offers inundating the market and now many smaller players are looking to sell, merge or even just close shop. The future Professional online social networking in China’s financial industry will certainly grow in the future and will be an increasingly important channel and way for institutions to connect with each other and potential customers. However, the future ‘LinkedIn of China’ (perhaps even LinkedIn itself?) will have to provide a perfect combination of usability, value and convenience specifically designed and tailored for the Chinese financial industry executive. By no means an easy task, but certainly one that can reap huge rewards for whomever gets it right. Zennon Kapron, Founder & Managing Director, Kapronasia