14 minute read
Some respite for PH banks with credit costs sighted to decline
Compared to regional peers such as Indonesia, Malaysia, and Thailand, the Philippines’ ratio of restructured loans is noted to be significantly lower
Some respite for PH banks with credit costs sighted to decline LENDING & CREDIT
Philippine banks’ credit costs are expected to decline in 2022 as most stressed loans are already recognised or restructured, S&P Global Ratings reported.
Credit costs are forecast to drop further to 0.6% to 0.8% of loans, following a steep decline to about 1% throughout 2021.
The sector’s nonperforming loans (NPLs) of 4% and restructured, performing loans–which is at 2.2% of total loans–are at manageable levels, the ratings agency added.
Some slippage is possible from the restructured pool, especially from the services sector and from stretched consumers, S&P warned. However, Philippine banks are well placed to absorb this residual stress given their improved capitalisation and adequate provisioning coverage.
“Overall, we believe the banking sector’s NPL ratio has peaked and is likely to gradually decline supported by recoveries and write-offs,” S&P wrote.
Compared to regional peers such as Indonesia, Malaysia, and Thailand, the
Philippine banks’ profits are expected to strengthen in 2022, as the economy recovers with an expected GDP growth of 7.2%
Philippines’ ratio of restructured loans is noted to be significantly lower.
Along with lower credit costs, Philippine banks’ profits are expected to strengthen in 2022, as the economy recovers with an expected gross domestic product growth of 7.2% in the current year.
The banking sector’s return on average assets is expected to return to the pre-pandemic level of 1.2%, compared with 1.1% in 2021, on the back of higher credit growth, increase in fee income as business activity picks up, and lower credit costs.
Banks can also look forward to an uptick in demand for loans, with S&P forecasting credit growth of between 5% and 7% throughout the year.
“Any reduction in banks’ regulatory reserve requirement can push credit growth toward the higher end of our forecast,” S&P said.
YOY net loans growth at the largest Philippines banks (%)
Source: S&P Global Market Intelligence
Tech failures plague banks
ASIA PACIFIC
Some of Asia’s biggest banks have had a rough few months due to technical difficulties.
Japan’s Mizuho Bank faced a new set of disruptions, this time in its corporate banking services, last 11 January, an official spokesperson said. This is just the latest in a line of technical failures that the bank has suffered from over the past year.
From February to March 2021, Mizuho suffered several system failures that caused thousands of its ATMs to stop working in the days between February and March. Notably, the bank suffered four glitches in a span of two weeks, with over 4,300 of the bank’s ATMs in Japan affected.
As a result, Mizuho Bank submitted a business improvement plan to Japan’s Financial Services Agency (FSA), as ordered by the FSA.
Singapore’s DBS Bank also suffered a major IT outage in November 2021, resulting in customers being unable to access the mobile and even PayNow accounts.
Following this, the Monetary Authority of Singapore (MAS) ordered DBS on 7 February to set aside over US$690 (S$930m) in additional regulatory capital to guard against operational risks.
MAS has also directed DBS to appoint an independent expert to conduct a comprehensive review of the incident, including the bank’s recovery actions. An independent review is also required to assess how a similar incident can be prevented in the future.
The additional capital requirement will be reviewed when MAS is satisfied that DBS Bank has addressed the identified shortcomings, the financial regulator said.
Mizuho suffered several system failures that caused thousands of its ATMs to stop working
The ISO 20022 Journey: Connected, MarketReady and Native
ISO 20022 finally got your attention. The payments industry across the globe has done a very effective job to educate and persuade financial institutions about the benefits of a more robust messaging standard. And we have also made a compelling case that it is a touchstone of digital transformation and the ability to compete.
Still, we cannot declare “mission accomplished” yet. There is a lot more to do in terms of meeting deadlines and some banks are under a lot of pressure to adopt ISO and adapt to the changes it will create. Banks know this is not a one-time exercise. With that in mind, it is important to set some signposts on the ISO journey. Specifically, banks need to embrace a three-part journey to truly deploy the standard and reap the detailed data and digital modernisation rewards it will extend to them, corporates and consumers. That journey goes from ‘connected’, to ‘market-ready,’ to ‘ISO native’.
ISO connected is the minimum, and whilst it will leave a lot of work to do later on, banks have to start here. Connectivity in the ISO context is a two-part program. There is a technical connectivity part and there is a messaging business data part. Understand that neither one of these is a banking, payments, or cash management project. This is about messaging, data, and compliance. The technical connectivity will require adaptations of core systems and payment gateways to accommodate ISO standards, and IT teams will also need to adjust architecture to change reconciliation, sanction screening, fraud, and liquidity. ISO connected is your ticket to the game, but you cannot play yet.
Then there is part two of the ISO connected phase—messaging data. This is more complicated because it is where banks have to change the information they are sending and receiving. ISO’s messaging architecture has thousands of fields covering payments, securities, trade services, cards, and foreign exchange. This stage of connectivity gets you into the game.
On to phase two: market-ready. In this stage, you get into the game, but you do not have ‘ring-side’ seats yet. The technology part is done, but there is more work to be done in the background. Some gaps that need to be addressed in this phase include introducing new network providers, new API options, new payment rails like instant payments and overlay services like Request to Pay. You can send and receive ISO messages at this point, which is a huge step up in the digital migration that is so urgent for banks. But market-ready ISO does not mean you are automatically ready for instant payments. What you do get is a more automated operation and an opportunity to think about payments as transactions leading to new products and services.
Phase Three: ISO native. Now you are in the game with the best seats in the house. All systems have the right architecture, the right data, and the right format. Accessible elements for ISO Native include real-time payments and real-time settlements, lower costs via straight-through processing, better tracking of transactions, transparency to meet current and new regulations, payments-system stability improvements, and better payment processing monitoring.
The Bottomline: The testing window for SWIFT is now open, as well as those for MEPS+, RENTAS & BahtNet. It is vital that banks and FIs ensure that they meet the deadlines for November 2022 to receive and process ISO 20022 messaging. If not, they risk losing visibility of messages being sent from SWIFT and also risk reputational damage from having not processed critical payment information. But the reasons to take this three-part journey go beyond rules and regulations. There is the enhanced customer experience resulting from the data generated by the ISO format, which will also make it easier for parties receiving payments to achieve higher levels of automation and provide more services to their customers. There is also the competitive and innovative necessity of the ISO format. The universal rollout will lead to enhanced interoperability and standardisation between countries as the region migrates to a single messaging standard. It will be nearly impossible to compete in 2022 and beyond without ISO 20022.
To find out more, visit: https://www. bottomline.com/apac/products/iso20022
CEO INTERVIEW Why SCB is transforming into a fintech group
With its reorganisation to SCBX, it plans to expand to a customer base of 200 million.
Siam Commercial Bank has kickstarted its biggest overhaul in its over 100-year history, a reorganisation that will see one of Thailand’s biggest banks transform itself beyond being a traditional financial institution, and into a comprehensive financial technology group.
“The role of the bank as an ‘intermediary’ will change to that of a platform,” Arthid Nanthawithaya, Siam Commercial Bank CEO and Chairman of the Executive Committee, told Asian Banking & Finance in an interview. “We will expand our customer base from 16 million customers to more than 200 million. Our geographical coverage will shift from ‘local’ to ‘regional’ through a growth strategy featuring [mergers and acquisitions (M&A)] and partnerships with market leaders.”
All of these underline SCBX’s new vision: to be the most admired financial technology group in ASEAN.
The step to change their business model from a traditional bank to something more akin to trailblazing fintech company started SCBX five years ago. Apart from upgrading the bank’s tech foundation, SCB had also set-up a number of tech-driven startups under the SCB Transformation Project.
Amongst their hit technology firms include SCB 10X, which received $400m in technology investments to date; and Purple Ventures, whose “Robinhood” food-delivery app so far has over 2 million users and is even expanding into non-food services.
Asian Banking & Finance chatted with SCB’s CEO to learn more about the planned SCB restructuring.
What pushed SCB to transform into a fintech group?
The increasing adoption of digital technology has rapidly changed consumer behaviour. At the same time, industry competition has intensified, industry boundaries have blurred, and macroeconomic conditions have become volatile and fragile. These events led us to rethink, or rather to re-imagine, how to sustain growth and profitability through what has become ‘the new normal’.
We decided to set up SCBX as a mothership to direct the fintech group’s strategic direction toward more efficient resource allocation to take advantage of synergy across the fintech group in order to unlock value. We also moved innovative change elements outside the bank to leave the traditional bank as a cash-cow business.
Many have asked us whether the new structure will allow us to ring-fence strict banking regulations. In fact, regulation was not a key driver for this change. SCBX will still be under close supervision by the Bank of Thailand. To us, what makes a difference under the new structure is governance, a risk-return mindset, and a new incentive structure.
Under the new structure, the CEO of each subsidiary will be accountable to his or her board of directors and not to me as a Group CEO. We will govern new growth subsidiaries through a board of directors that will have the specific industry expertise to enable them to make timely decisions. In terms of a risk-return mindset, each subsidiary will be able to adopt risk-return criteria that is the norm for its industry, rather than rely on the traditional bank’s rigid risk-return standard.
We will also be able to attract the right talent under the new structure with a new value-based performance measurement system.
Arthid Nanthawithaya, CEO and Chairman of the Executive Committee, Siam Commercial Bank
Our new vision is to become the most admired fintech group in ASEAN How different will SCBX be structurally, and in terms of propositions offered, from what SCB has offered for the past one hundred years?
Our new vision is to become the most admired financial technology group in ASEAN. The role of the bank as an ‘intermediary’ will change to that of a platform. We will expand our customer base from 16 million customers to more than 200 million. Our geographical coverage will shift from ‘local’ to ‘regional’ through a growth strategy featuring M&A and partnerships with market leaders.
We will reorganise our businesses into two groups. Banking operations will remain as a cash-cow business.
We will no longer impose disruptive changes on SCB banking functions, and the bank will continue to operate in a relatively low-risk, low return environment. We are working on business portfolio optimisation and creating a lean operation with increased digitalisation in our work processes and services to lower service costs.
Another group consists of subsidiaries in high growth, high return businesses. Under this group, we have two types of subsidiaries: digital lending and consumer finance businesses and tech platform-driven businesses. We believe digital lending and consumer finance businesses in Thailand are still blue ocean.
Key subsidiaries under this group are Card X (an SCB Bank spin-off operating credit card and unsecured personal loan businesses), Auto X (a newly set up subsidiary operating a title loan business), and AISCB (a new jointventure company with one of the largest telecom operators focusing on personal loan business). In the tech platform business, key subsidiaries are Robinhood (our one-year-old food delivery platform which is to be transformed into a super app), and SCB10X and SCBS (spin-off subsidiaries from SCB Bank focusing on digital asset investment and a digital ecosystem).
We also set up SCB Tech X and Data X to provide IT infrastructure solutions as well as data AI to subsidiaries within the group. This will ensure cost efficiency and data capabilities across the group. There are also a number of other subsidiaries that we did not mention here, and we continue to look for growth opportunities traditional elsewhere in the region.
To achieve this restructuring plan, we will redeploy excess capital from the bank to SCBX in the form of a one-off dividend totaling ฿70b. After the capital release, the bank will still operate at healthy and sustainable capital levels, whilst redeployed capital should generate much higher returns in the long run.
We have set a target of achieving high-teen ROE in five years’ time from the current single-digit ROE. The bank will generate more-or-less stable earnings whilst the adjacent lending subsidiaries should be earnings accretive almost immediately as the key business is a spun-off entity with expected improved efficiencies. The profit signature of the tech platform subsidiaries may come at a later stage but will be able to contribute high double-digit return on equity (ROE) once we scale up.
How do you plan to continue to support your traditional bank clients whilst evolving into a fintech company?
One key reason for changing the group structure is to reduce disruption to the bank business. We have learned from our digital transformation that it is very challenging to ask bank executives to make transformative changes whilst expecting them to continue maintaining quality services and delivering core profits. We found that creating a separate team to focus on building new things is more effective. This approach also allows the bank management team to focus on improving the quality and efficiency of the existing banking business.
This group restructuring does not affect bank operations, and customers should not be impacted by the group restructuring itself. Bank customers should be able to continue making transactions, deposits, payments, and other services just as they did before. The branch network, SCB EASY, and other service channels will remain available to our customers.
Going forward, with enhanced technology and data capabilities, our group should be able to provide better financial services and products to a larger customer base with speed, simplicity, and affordable prices whilst being able to drive better growth and returns to our shareholders, as well. As each of our subsidiaries will expand based on digital technology-led strategies, the group should enjoy access to enhanced and complementary big data. With such data capabilities, the group should then be able to continuously improve the quality of its services with improved speed and pricing.
Existing bank customers will find the overall customer experience more fulfilling, with complementary services from new growth businesses outside the bank. A case in point here is that our small merchant customers have fully benefited from the Robinhood platform from the beginning of our launch last year with our zero GP model. In the future, they should find their increasingly diverse financial needs will be more conveniently met.
With enhanced tech and data capabilities, SCB can provide better financial services and products to a larger customer base
SCBX will expand its customer base from 16 million clients to more than 200 million
SCBX has outlined its goal of achieving a network of 200 million customers by 2025. What drives your optimism that you can achieve this goal in less than four years?
Our plan is to expand our customer base via a digital ecosystem and technology platforms to enjoy network effects. We will partner with leaders in various industries to enlarge our customer base, and M&A will be key to achieving this target. This strategy will not be limited to Thailand, but also apply to our regional expansion. We will adopt an asset-light strategy to ensure efficient capital usage. We have continued to build our technology and innovation capabilities to drive our customer base. Domestically, we have already announced our partnership with leading telecom operator AIS. These are our initial steps and there will be many more to follow.
