Asian Banking and Finance

DISPLAY TO SEPTEMBER 30, 2012

shadow banking haunts china could it throw the world’s third-largest economy in jeopardy?

ASIA’S 50% dividend cut Is it just an option?

ceo interview StanChart’s Ray Ferguson

Mobile banking Tapping Asia’s potential

cloud vs virtualisation What do bankers prefer?

PAge 09

PAge 16

PAge 28

PAge 32

FROM THE EDITOR This year, Asian Banking and Finance steps up with the inaugural Asian Banking and Finance Wholesale Banking Awards aimed at acknowledging the best banks in the areas of Cash Management, Trade Finance, Project Finance, Technology and Operations, and Foreign Exchange.

Publisher & EDITOR-IN-CHIEF Tim Charlton Assistant Editor Jason Oliver Art Director Jae Rodny Fernandez Editorial Assistant Queenie Chan Media Assistant Daniela Gujilde Editorial Assistant Alex Wong ADVERTISING CONTACTS Laarni Salazar-Navida lanie@charltonmediamail.com Rochelle Romero rochelle@charltonmediamail.com

ADMINISTRATION Lovelyn Labrador accounts@charltonmediamail.com Advertising advertising@charltonmedia.com Editorial editorial@charltonmedia.com

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

The Retail Banking Awards, which is now on its sixth year, is also happening on the same night of the Wholesale Banking Awards as we attempt to gather Asia’s top bankers and promote an unmatched avenue for networking.

I am pleased to share with you that on its first year, the Wholesale Banking Awards saw a considerably high number of entries which bodes well for the upcoming years of this prestigious awards.

In this issue you we give you a preview of some of the banks that bested all others with their innovative strategies. We also explore the worrying shadow banking system in China that threatens the industry. And with the burgeoning mobile penetration in Asia, we investigate the market opportunity for mobile banking in the region as well as the potential success drivers.

I trust you enjoy this issue.

+65 62237660

HONG KONG Charlton Media Group

19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166

www.charltonmedia.com

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

Can we help?

Tim Charlton

tim@charltonmediamail.com

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

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

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

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

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

  

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

ASIAN BANKING AND FINANCE | JULY 2012 3

CONTENTS

09

Asian bank urged to cut dividends by 50%

FIRST

30 Big Issue 3

banks to incorporate locally

09 Asian bank urged to cut dividends by 50%

10 Bank of East Asia’s worrisome net interest income

ANALYSIS China’s fragile $2.2 trillion shadow banking system Is the world’s third-largest economy in jeopardy because of the country’s shadow banking system?

16 CEO Interview 22 Big Issue 1

All you need to know about China’s fragile $2.2 trillion shadow banking system

cash a run for its money

With 60-70% mobile penetration, is there a potential market opportunity for mobile banking in Asia?

HSBC says cloud is a more powerful concept but CIMB warns it still needs to prove its readiness to handle mainstream financial services applications.

OPINION 24 The Euro burns as Asia fiddles

What keeps Singapore banks the world’s strongest?

26 Big Issue 2 Will Vietnam reach the 15-17% credit growth rate target this year?

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 | JULY 2012

12

32 Cloud vs virtualisation:

12 All you need to know about

REGULAR

How will Indonesia’s new owner ship cap rules affect DBS’ bid for Bank Danamon?

28 Mobile banking to give

How will Indonesia’s new owner ship cap rules affect DBS’ bid for Bank Danamon?

08 Singapore to force foreign

30

Asian corporates have been on a debt-fuelled frenzy over the last few years with access to lots of cash at record-low interest rates. But that may be about to change.

14 As budgets are squeezed, financial institutions look within for talent

26 Exploring hedge funds around the world

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

ASIAN BANKING AND FINANCE | JULY 2012 5

News from asianbankingandfinance.net

The best of asianbankingandfinance.net More banks expand Asian operations most read

WHOLESALE BANKING

INVESTMENT BANKING

Cathay United Bank to acquire Cambodian bank

European banks continue exodus from Asia The dire Eurozone debt crisis is forcing more European banks to withdraw massive investments from Asia.

Singapore’s DBS Bank Ltd, Southeast Asia’s largest bank by assets, said an amount more than the entire GDP of Vietnam fled Asia in the second half of 2011, and the retreat is continuing.

BRANCH BANKING

Sterling Bank raises funds for expansion Improved investor confidence led to Sterling Bank of Asia to raise US$11.5 million from the sale of Tier 2 notes.

The Philippine savings bank said the funds will support its expansion plans to boost its lending business. Bank President Lamberto Villena noted strong loan demand from businesses and consumers.

Cathay United Bank will purchase 70 percent of the Cambodia-based Singapore Banking Corp. Ltd. This was announced by Cathay Financial Holding, the principal of CUB, which intends to expedite its expansion in Southeast Asia.

Indian banks scramble for Basel III

billion program to build roads and power plants over the next 10 years.

LENDING & CREDIT

Malaysian and Indian banks broker deal to boost trade Malaysia-India trade stands to improve with the recent deal between a Malaysian and two Indian banks.

RETAIL BANKING

Indian banks strive to meet Basel III

Indian banks are scrambling to raise the massive capital needed to fund Basel III and their own expansion plans.

Global research firm Macquarie estimate that Indian banks will require some US$30 billion over the next five years. This will result in considerable equity dilution over that period since capital requirements to meet these twin demands will be very high. Basel III implementation starts on January 1, 2013.

RETAIL BANKING

BRANCH BANKING

Asia-Pacific tops in mobile banking

Dubai bank expanding Asian operations State-owned Noor Islamic Bank seeks more business in Singapore and Malaysia to benefit from growth in Southeast Asia.

CEO Hussain Al Qemzi said Malaysian companies are looking to finance infrastructure projects as part of Malaysia’s US$444

The Export-Import Bank of Malaysia Bhd (Exim Bank) has signed a deal with the Indian banks, ICICI Bank Ltd and YES Bank, to further enhance MalaysiaIndia trade, especially in palm oil.

The Asia-Pacific will continue to have the most number of mobile banking users in the world.

Research firm Gartner Inc. said Asia-Pacific will be the largest market in terms of the sheer number of users between 2011 and 2016.

Dubai bank in Singapore?

6 ASIAN BANKING AND FINANCE | JULY 2012

RETAIL BANKING

China’s first techfocused bank to open in Shanghai The first bank in China focusing on technology companies will start operating in July.

Established to provide financial support to small- and medium- sized technology companies in China, the bank will be a joint venture bank between Shanghai Pudong Development Bank and Silicon Valley Bank.

Both companies have a 50 percent stake each.

The bank will have an investment capital of 1 billion yuan or $158 million.

LENDING & CREDIT

China to relax limits on lending China’s central bank cut interest rates by 25 basis points, the first reduction since the end of 2008.

An official at the China Banking Regula-

RETAIL BANKING

Bank Negara Indonesia to partner with 46 Japanese banks.

BNI is looking to partner with 46 Japanese regional in response to banks operating in Indonesia within the year.

The bank hopes to tap into the US$48.8 billion potential transactions with these Japanese companies.

CARDS & PAYMENT

AMMB targets up to 12% net profit

Cathay United Bank expands in Asia

tory Commission said that the agency is preparing to relax regulations on bank lending to local government financial vehicles and the property sector, two areas that the CBRC has repeatedly deemed very “risky” since 2010.

RETAIL BANKING

China’s ‘city commercial banks’ post good results in 1Q12 The banks recorded total assets of US$1.62 trillion with deposits at US$1.1 trillion during the first quarter.

The China Banking Regulatory Commission said the country’s “city commercial banks” did well during the first quarter of this year.

These banks, which constitute one of four sectors comprising China’s banking industry, recorded total assets of US$1.62 trillion with deposits at US$1.1 trillion during the first quarter.

behind.

RETAIL BANKING

LENDING & CREDIT

Korean banks eye customers from overseas

18 Korean banks’ bad debt ratio slips in Q2

Korean banks are luring foreign customersin response to an increasing number of workers from abroad and marriage with immigrants.

The foreign workers, mostly from China and other neighboring Asian countries, tend to send most of their income home to support their families left

The bad debt ratio of 18 South Korean banks fell in the second quarter from three months earlier.

Non-performing loans at 18 local banks totaled US$18.4 billion, or 1.49 percent of their total lending as of endJune, according to the Financial Supervisory Service.

total lending as of endJune, according to the Financial Supervisory Service.

LENDING & CREDIT

Thai banks set standards on lending to condo developers.

Commercial banks in Thailand are more inclined to focus mediumto large-sized property developers which are less likely to default, bank executives say.

AMMB Holdings is targeting an annual net profit of between nine and 12 percent for the next three years.

The group’s profit after tax and minority interest for the financial year 2012 increased 12.5 per cent to RM1.51 billion.

RETAIL BANKING

RCBC’s income up 35% to $71.9M

Rizal Commercial Banking Corp.’s income grew 35 percent year-on-year in the first semester to P3.01 billion or US$71.95 milllion.

For the JanuaryJune period, the bank’s total operating income grew 15.52 percent to P10.76 billion.

TRADE FINANCE

ABN AMRO to provide escrow and settlement services in Asia

Korea wants foreign customers

ABN AMRO will start providing its escrow and settlement services in Asia as it focuses its international growth on specialist businesses.

Paul Timmermans has been appointed head of Escrow and Settlement Asia and will be responsible for building its escrow franchise in the region.

ASIAN BANKING AND FINANCE | JULY 2012 7

FIRST We forecast loan growth to move up to 8% in 2013E

Singapore to force foreign banks to incorporate locally

A

recent directive by the Monetary Authority of Singapore will force foreign banks to incorporate locally in Singapore and decide whether to further commit to the Singaporean market and compete with domestic banks neck-to-neck.

Local incorporation is one regulatory trend that avoids the potential fiasco when a foreign bank gets into trouble and the host country regulator does not have enough control over the entity to protect the domestic banking system and its depositors.

Finance Minister and Deputy Prime Minister Tharman Shanmugaratnam said the new rules will apply to foreign banks that operate under the Qualifying Full Bank (QFB) licence. “The key objective for requiring local incorporation is to strengthen depositor protection. One indicator

of importance will be the QFBs’ market share of domestic deposits.

Not every QFB needs to be locally incorporated,” he said.

According to MAS, for QFBs that operate as local subsidiaries, a very small number may become significantly rooted in Singapore over time. MAS will consider granting such QFBs an additional 25 places of business, of which up to 10 may be branches. This will be part of an overall package negotiated with these QFBs’ home countries which are free trade agreement (FTA) partners with Singapore. These QFBs will be able to operate up to 50 places of business in Singapore. New QFBs that are granted under future FTA offers will have to first locally incorporate before they may establish up to 25 places of business.

ANZ Bank, BNP Paribas, Citibank Singapore, HSBC Corp, ICICI Bank, Malayan Banking, Standard Chartered Bank, and State Bank of India, are the QFBs in Singapore but only Citibank Singapore operates as a locally incorporated retail subsidiary.

What does this new directive say about the future of Singapore’s banking industry? Noritaka Akamatsu, Deputy Head, Office of Regional Economic Integration at Asian Development Bank, expects this regulatory arrangement to be a trend across ASEAN. He reckons that the banks which are already deeply into retail business are likely to incorporate, and those which are not may rescope their business to focus on wholesale banking which does not require extensive branch networks particularly in Singapore.

“The new regulation will force the foreign banks to self-select whether to further commit to the Singaporean market, that is expand and compete neck-to-neck with DBS and other domestic banks and so forth, or to limit the scope of their operation, for example have no retail deposit business and focus instead on wholesale banking.”

IG Markets Head of Research Justin Harper, on the other hand, sees these measures bringing Singapore into line with international rivals such as Hong Kong and China as it forces banks to commit themselves to Singapore for the long term.

“They will face significant set-up costs by incorporating themselves here and by doing this will signal their intentions to remain in the city for the long term. This will provide stability and security for the government along with retail clients,” he added.

Robust Thai and Indo banks Both sectors boast high double-digit earnings growth and ROA/ROE uptrend, supported by a robust GDP backdrop, resilient loan growth/NIM and contained credit and operating costs, says Nomura Equity Research.

Thai banks: Our bullish view rests with an investment and corporate/ SME loan cycle coming through for the first time post the1997 financial crisis leading to a sharp acceleration in profit growth.

Bangkok Bank and Kasikornbank are our top picks amongst the Thai banks.

RoA for Bangkok Bank is up from 1.2% in 2009 to 1.6% in 2Q12, expected to grow to 1.7% by 2014F while ROE is up from 11% to 14% in same period, 8 ASIAN BANKING AND FINANCE | JULY 2012

expected at 16% by FY14F. RoA for Kasikornbank isup from 1.1% in 2009 to 1.5% in 2011, expected to grow to 2.2% by 2014F. Indo banks: Our bullish view stems from accelerating asset growth in the sector on the back of rising investment activities driven by infrastructure spending and strong FDI inflows. This coupled with sustained high NIMs and strong asset quality improvements should boost earnings growth in the sector to 19-22% in FY13-14F. In addition, share price performance of Indo banks YTD 2012 have lagged ASEAN peers, most notably Thai & Phils banks, while

valuation multiples are still in-line with historical average of the past 7 years and remain attractively valued, in our view, given our forecast for the strong growth and high returns to be sustained in the next few years.

Thai Banks - 2012 Net profit forecasts

Source: HK Censtatd, HSBC

FIRST

Asian banks urged to cut dividends by 50%

B

arclays analyst Tom Quarmby notes that given the healthy Tier 1 ratios today, regulatory capital is at risk only in the event of meaningful earnings downside or material increase in RWA growth.

He adds that the strongest capital generation is from Indonesia, China and India.

“However, both starting Tier 1 and forecast RWA growth are lower for China while (NIM-related) earnings risks are higher, suggesting a greater risk of capital raising.

In a downturn scenario, in which earnings are 25% lower than forecast and RWA growth 1.3 times faster (as a result of fiscal stimulus, for example), we believe there would be a high risk of capital raising in China with a greater risk at the smaller banks,” says Quarmby.

Capital raising risk would be highest if we were to see a combination of earnings downside and faster RWA growth from stay fiscal stimulus, says Quarmby. But who would be most susceptible? Barclays reveals it is the Chinese banks, given NIM related earnings risk, currently low Tier 1 and low forecast RWA growth. Indonesian ang Singapore banks, however, are best positioned considering risks, capital generation and current capital ratios.

He adds: “We currently expect banks in the region to generate sufficient capital to cover forecast growth in risk weighted assets.

Around the region, we are looking for median RWA growth of 11-12% in the forecast years. From a capital generation perspective, we measure regulatory capital generation as the Post-Dividend Return on Opening Tier 1, or PDROOT1.”

Ratios under pressure If we assume a 25% reduction He reckons that Asian banks are to FY2 NPAT, the impact of a 50% generating sufficient capital to support reduction in dividend payout ratio current Tier 1 ratios. However, any would lift Tier 1 capital generation downside to earnings or acceleration back to current forecast levels, which of RWA growth would put Tier 1 would be sufficient to maintain current ratios under pressure.

Tier 1 ratios.

“In a downturn, we argue the best Quarmby concludes that at face initial form of capital raising would be value, high ROE and low payout ratios for banks to cut dividend payouts by at would appear to imply strong capital least 50%,” argues Quarmby. generation. However, he says, with

The best initial form of capital raising would be for banks to cut dividend payouts by at least 50%

earnings risks in many markets and low Tier 1 starting points in others, Tier 1 capital risks are still high in the region and most notably in China.

Risks are far greater for the smaller Chinese lenders due to higher forecast RWA growth compared with the big lenders, warns Quarmby.

“Conversely, the high level of capital generation at Indonesian banks and high Tier 1 ratios in Indonesia and Singapore leave banks in those markets looking relatively robust in a downturn scenario. Finally, we show that dividend cuts should be considered the first form of capital raisings as despite low payout ratios around the region, removal of dividends would be sufficient to support current Tier 1 ratios.”

Only an option However, according to Mark Young, Managing Director and Head of Asian Pacific Financial Institutions at Fitch Ratings, dividend cuts are clearly an option, but unless there is a major deterioration in the environment, bank management would find it hard to justify cuts to shareholders.

If the growth prospects remain reasonably positive, he explains, raising new capital can be achieved by issuing scrip dividends, issuing other types of capital instruments such as hybrids and tier-2 capital and then lastly issuing new shares. “Relative to other parts of the globe Asian banks capital positions look quite good. That said, some larger markets do look on the thin side given current risks and the potential downside such as China or in the context of meeting Basel III requirements and ongoing growth such as India,” says Young.

Impact of a 50% reduction to dividend payout

Source: Company reports, Barclays Research Estimates

ASIAN BANKING AND FINANCE | JULY 2012 9

Source: Fitch, RBI

10 ASIAN BANKING AND FINANCE | JULY 2012

Laos Domestic Technology & Operations Bank of the Year - Banque Pour Le Commerce Exterieur Lao Public

BCEL transforms banking experience in Laos Banque Pour Le Commerce Exterieur Lao Public (BCEL) was established in 1975, following the independence of the Lao People’s Democratic Republic. At that time, BCEL operated as a specialised branch of the former State Bank (the Bank of Laos), monopolising the operation of international banking services for the Lao government.

In 1989, BCEL transformed into a fully commercial bank and continued to grow gradually in respect of the size of assets, deposits, loans and the number of clients.

The transforming year From January 2011, BCEL has gone through a transformation from a state-run to a publicly owned bank. The bank has put tremendous efforts to improve its services, governance and structure to become a ‘public bank’ and let people in the society share ownership of the bank. This led BCEL to become the first bank in Laos to register on the Lao Securities Exchange. As a public company, BCEL is now 70% owned by the Ministry of Finance, 10% owned by the strategic partner, COFIBRED—a Mr. Vanhkham VORAVONG, CEO of BCEL Public subsidiary of the BRED Banque Populaire from France and the remaining 20% of the banking products, for example, E-banking Government to provide salary payment for share is put up for sale in the Lao Securities products including mobile banking and officials of all ministries and operate the internet banking. We have launched bill settlement related to state budget through Exchange for investors and staff.

By the end of 2011, the bank has had payment services via ATM and EDC to ease bank, and the bank is also trusted by local 18 branches, 38 service units (outlets), our customers and to reduce cash using in companies and international organizations to operate salary payment for their staff the society. and 10 foreign exchangers through banking services. nationwide and established BCEL is a leading bank At present, BCEL has successfully What does BCEL offer? banking relationships Moreover, we have also become a strong ‘public bank’ and a leading with more than 100 banks in Laos with total assets covering 40% of the developed our ATM cards bank in Lao P.D.R. The bank has set its worldwide. Apart from Banking sector’s total with an ability of being used new strategies, from 2012, of becoming the providing retail banking assets. overseas in cooperation first bank in the country to offer ‘advanced services, the bank also with China UnionPay banking’ and to develop the service system focuses on developing its Company. The bank is also to reach international standards. electronic banking services; it is the first bank in Laos to provide Real successful in becoming a full member of BCEL’s subsidiary companies: Time Online Service for customers in 2004. VISA to issue both credit and debit cards 1. Lao-Viet Bank, in 1999.

BCEL has set its goal to provide single- for local customers. Recently, BCEL has 2. Lao-Viet Insurance Company, in 2008. door services to facilitate the customers issued more than 215,660 cards, installed 3. BCEL Leasing Company, in 2009.

167 ATMs and 1054 EDCs in Laos. Further 4. Franco-Lao Bank, in 2010. nationwide. more, the bank also issues a special type of 5. BCEL-KT Securities Company, in 2010.

ATM cards to be used as student ID cards Leading the banking industry of Laos BCEL is a leading bank in Laos with total for all students in the National University CONTACT assets covering 40% of the assets of overall of Laos. In addition to these, BCEL is BCEL’s Head Office Banking sector. We have set our strategies now running the test of Prepaid Card No 1 Pangkham Rd. Chanthabouly from 2003 to 2011 to turn our vision toward Services for a particular group of clients District, Vientiane, Lao P.D.R a modern bank close to banking standards in settlement of goods and services under Tel: +85621 213200 of services at international level, especially a pilot project with various gas stations.

Website: www.bcel.com.la the development of Banking Information Apart from electronic card services, bcelhqv@bcel.com.la Technology. We have invented many new BCEL has received the privilege from the ASIAN BANKING AND FINANCE | JULY 2012 11

ANALYSIS: China’s Banking System

All you need to know about China’s fragile $2.2 trillion shadow banking system Is the world’s third-largest economy in jeopardy because of the country’s shadow banking system? By Matthew Boesler

I

t is clear that the Chinese economy is slowing, and some think the risk of a hard landing are rising substantially.

If economic growth in China continues to slow, rising and sudden defaults on loans made in the country’s shadow banking system could threaten to bring down China’s traditional banking sector and throw the world’s third-largest economy in jeopardy, according to Bank of America Merrill Lynch China Strategist David Cui. The hodgepodge web of nonbanks that comprise the shadow nexus in China includes pawn shops, underground banks, various wealth management products, trust companies, and guarantors – many of which don’t take deposits to insure against risky lending activities and operate completely 12 ASIAN BANKING AND FINANCE | JULY 2012

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

beyond the eye of regulators and authorities.

What follows are highlights from Cui’s comprehensive report examining China’s shadow banking system.

Why the shadow banking system in China is so important The sheer size of the system is overwhelming. At an estimated 14.5 trillion RMB ($2.2 trillion) according to BofA, the amount of loans made by shadow banking entities amount to 25% of all the loans made in China by the traditional, regulated banking sector.

The system is also highly leveraged.

Shadow lenders make most of their money by borrowing from regular banks at low interest rates and lending out at higher interest rates to riskier borrowers. No deposits at these institutions means they are highly vulnerable to loans gone bad, especially given the types of less-than-

creditworthy clients who borrow from shadow banks.

Cui walks through the shadow banking system in China and takes a look at the institutions that comprise it and the unique risks posed by the activities of each.

Shadow banking entity #1: The investment trust industry Investment trusts are basically companies that manage other people’s money by lending it out to finance various business projects or property loans on the one side and, on the other, guaranteeing a certain percentage return to the investors.

Cui says his team at BofA has “noticed early signs of stress in the system, e.g. at least three property trust products had failed to meet their repayment schedule and had to be bailed out”. Furthermore, he estimates that leverage in the investment trust entities “remains high, often reaching 10-15x.”

Not only is the trust industry highly leveraged, but also highly concentrated. Of the 62 Chinese investment trusts, 10 of them account for half of all assets under management industry-wide, and 20 account for 72%.

The huge issue in Cui’s mind is the total lack of transparency in the investment trust industry. Only two of those 62 companies are required to disclose any sort of investment returns. This leads to investment

ANALYSIS: China’s Banking System “pooling,” wherein a trust will take an investor’s money and invest it in multiple projects at the same time.

Bottom line: If property prices and other investments turn sour and highly-leveraged, highly concentrated investment trusts have guaranteed a certain level of returns to investors, they will have to be bailed out or they will face collapse.

Shadow banking entity #2: Pawn shops There are over 4,000 pawn shops spread across China. They will probably provide the earliest warning signal that the system is melting down, according to Cui. Pawn shops will show up on the radar first because of the nature of their lending business: most borrowers seek loans from pawn shops for extremely short periods of time, and for the typical borrower, it only takes one to three days to secure a loan.

So, with the pawn shops, it’s all about short-term lending. And, being pawn shops, they accept all sorts of collateral against these short-term loans – everything from cars and jewelry to financial securities like stocks and bonds, and property.

Bottom line: The property is a big issue, because if volatility in China’s property market continues and property prices take a further tumble from here, thousands of pawn shops will be left holding the bag on defaulted loans backed by collateral that is heavily discounted in value.

Shadow banking entity #3: Guarantors China has guarantors of over 19,000 different businesses. They provide guarantees on loans to risky borrowers, making it more palatable for traditional banks to lend to those who are less creditworthy than the average client.

The upshot here is that guaranteeing loans to risky borrowers isn’t that great of a business to begin with since a guarantor makes probably half the rate on a given loan that a pawn shop does, for example.

Cui surmises that “the biggest risk in the industry is guarantors are acting more like lender rather than

focusing on their core guarantee business.”

What do the guarantors do to make money instead? They literally take a portion of the loan they are guaranteeing from the borrower and lend that money back into the shadow banking system to other underground borrowers. The net effect, of course, is amplified leverage within the shadow nexus.

Bottom line: When those new shadow loans blow up (potentially due to any of the four triggers mentioned at the beginning of this article), it is the clients – who are supposed to be guaranteed by the guarantors in the first place – that end up footing the bill.

Cui writes that “many of their clients have been sued by their banks for loan repayments although the borrowers claim that their guarantors have been using the fund,” and that “some of these borrowers are now seeking help from the municipal government of Beijing to negotiate for a loan extension with the banks.”

Shadow banking entity #4: Underground banks Cui calls underground banks “arguably the most unstable shadow banking sector”. And the commodities business is currently a major player in this area.

Letters of credit – trade finance agreements in which a bank pays the seller of a commodity and then goes and collects payment from the buyer of the commodity – are booming, and they are off-balance sheet vehicles, meaning they don’t factor into the traditional banking sector’s balance sheet leverage ratios and regulations regarding loan quotas.

Cui points out that many of the companies that are shut out of the official loan market are resorting to securing letters of credit from banks using copper and other commodities as collateral.

Bottom line: Cui says these practices in the steel market are potentially explosive because “local warehouses, unlike those four or five well regulated in bonded areas, often provide multiple bills of lending to traders so they can obtain loans from different banks using the same steel

“The underlying problem facing all the institutions that make up China’s colossal shadow banking system is a slowdown in growth.”

inventory.”

Shadow banking entity #5: Wealth management products Wealth management products set up by traditional banks have some characteristics that are similar to trust companies that cause concern, and there are rumblings that a lot of the industry could be operating one big Ponzi scheme. Indeed, the biggest problem with wealth management products in China is that by and large, no one has any idea what they are investing in or what kind of returns they generate.

Cui writes, “So in theory, the bank can invest up to 70% of the fund in areas we have zero information on.”

Bottom line: Pooling is a big concern. Cui says banks will “issue multiple WMPs with various durations, pool the funds together, and invest in various areas with different durations jointly and pay out ‘expected’ returns from the pool.”

Cui continues: “According to some industry insiders, some banks have been using new WMP proceeds to cover losses from previous products in the pool – in our view, this is not fundamentally different from a Ponzi scheme. However, the music may stop at a certain point if/when WMP asset size stops expanding.”

The underlying problem facing all the institutions that make up China’s colossal shadow banking system is a slowdown in growth.

In fact, we wrote about four major triggers that could bring down China’s shadow banks, all of which stem from continued economic weakness, just like the one China is currently experiencing. The four triggers are 1) (Illegal) Ponzi schemes falling apart; 2) a wave of defaults in highly-leveraged loans within the shadow banking system; 3) more turbulence in the Chinese property market; and 4) shrinking corporate sector earnings.

Given the shadow banking system’s enormous size, importance to the real economy in terms of the credit it provides, and the numerous feedback loops back into the traditional banking sector, China could face major issues if it starts to look like no one is able to pay anyone else back.

ASIAN BANKING AND FINANCE | JULY 2012 13

OPINION

George McFerran

As budgets are squeezed, financial institutions look within for talent

by George McFerran Managing Director at eFinancialCareers Asia-Pacific.

M

oving people internally is an increasingly important way for firms to reduce recruitment costs, plug urgent skills gaps, boost retention rates, and take on low-risk talent with proven track records. And in the current stagnant external job market, it is providing staff with career progression opportunities they wouldn’t otherwise enjoy.

This renewed emphasis on mobility was a critical topic for the 15 senior HR professionals from leading financial institutions who attended a recent roundtable discussion in Singapore organized by my company.

A representative of a big four accounting firm, for example, said he has seen “huge demand” for in-house transfers in the last few months, especially from auditors wanting to work in another department and from employees outside of Asia looking for roles in the region.

Mobility is a must Recent redundancies, cuts to hiring budgets and longer recruitment approval times have made many organizations revise the way they promote and run their mobility programmes this year.

This is especially true for critical replacement roles. Managers would rather hire quickly from within their own ranks – even if the in-house candidate isn’t a perfect match for the job – rather than be slowed down by having to justify the high cost of going external.

Mandatory two-week periods in which new vacancies are announced to the workforce before they are advertised externally are commonplace.

Mobility, either internationally or to another department, is also an important retention tool.

One roundtable attendee said this was especially true for back-office staff who tended to get “bored with their jobs” and wanted new challenges after about two years.

Education and promotion The challenge for HR in instigating a companywide mobility plan is educating managers that losing a good employee to another team or country office is in the best long-term interests of the business.

Moreover, as a roundtable delegate remarked: “It’s critical to tell employees about what mobility really is. It’s not an easy option to escape your boss, or for a boss to shift a ‘problem’ person over to someone else.”

To help ensure that only the best talent is eligible for transfers, one major international bank limits eligibility to the top 25 per cent of performers and insists on at least a year’s tenure.

14 ASIAN BANKING AND FINANCE | JULY 2012

Encouraging internal mobility is more than just reactively marketing roles to staff as they arise.

HR should have programmes in place to identify individuals who are willing to move.

Two attendees mentioned that people at their banks were able to express an initial interest to HR without telling their line manager.

One firm runs an online network in which staff can update their profiles, allowing in-house recruiters to search those who state they are mobile.

Another incorporates a mobility discussion into annual development reviews.

A representative from a European bank told the roundtable that his firm recently held an internal career fair, with booths promoting jobs in various departments.

“It’s the first time we’ve been able to do this openly, this has helped changed people’s mindsets in favour of more open discussions about mobility.”

Implemented with care and thought through in advance – with buy-in from HR, line managers and staff – internal mobility can offer timely solutions to some of the hiring needs faced by financial institutions in the current cost-conscious market.

Moreover, with fewer external vacancies available than a year ago and a general candidate reluctance to change companies, many employees are willing to advance their careers via an inhouse move.

Mobility matters

Co-published corporate profile

Trade Forex and save your time Find out how you can trade on the market with less time and effort yet take as much profit as experienced traders do.

N

owadays information and time cost more than money, so private investors may face a challenge of finding high-yield investment solutions that do not take too much time. Though some people associate Forex market with spending a lot of time and effort, modern Forex is ready to offer something completely different. Leading Forex brokers keep pace with not only time and its companion technological process, but also with expectations and needs of traders, regardless of how much effort and money they are ready to spend on it.

At present, traders do not have to waste their time in front of the screen waiting for a trend or learning fundamental and technical analyses. Forex market comprises people, a huge number of people, with different levels of knowledge and experience, trading both less and more effectively. At the same time, Forex is a boundless trading floor, a community, or even an organism. If someone is successful on Forex, he can share his knowledge with novices and those who have not succeeded in receiving stable profit yet. Now no one

needs to find a Forex guru and try to learn something from him. It is much simpler.

Brokers with extended client bases are able to provide their customers with new services of a higher rank. For example, InstaForex, recognized as the best broker in Asia, offers its customers the PAMM system. It allows traders to invest money in the trading accounts of other traders and become holders of a share in those accounts, or collect investments in one account and use them in trading Forex.

During the last two years InstaForex PAMM system has gained great popularity among traders who enjoy more spare time and stable income from managing traders. On the other hand, managing traders having bigger amount of money invested increase their trading volume and, consequently,

“Forex is a boundless trading floor, a community, or even an organism”

profit. Moreover, the PAMM system is absolutely transparent: you can track the positions of your trader and choose any manager in the monitoring list.

However, most members of the Forex community have already become used to the PAMM system. What is really innovative is a unique ForexCopy system by the best broker in Asia again – InstaForex Company. The system allows online copying deals of successful traders choosing the ratio. Unparalleled among services of other international brokers, the ForexCopy system by InstaForex is a high technology market maker and a new waymark on the market of top-notch financial services. The system is unique for it has nothing to do with investing in share projects; furthermore, it implies instant execution of the copied trades, copying trades on the preferred instruments and selecting the copying ratio. The ForexCopy system provides an opportunity to copy deals of successful traders, registered users of the system, and find out their trading strategy and statistics in Monitoring.

Using the ForexCopy system, a novice not only gets profit, but also learns Forex basics. Thus, InstaForex Company can be considered the pioneer of a new trend on the Forex service market. It allows everybody to trade on the market spending less time and effort yet taking as much profit as experienced traders do. If you want to trade Forex and live your life to the fullest, InstaForex services are what you ASIAN BANKING AND FINANCE | JULY 2012 15

CEO INTERVIEW

Asian banks will be safe from the Eurozone crisis Standard Chartered CEO Ray Ferguson says they are strong enough to weather the financial storm from Europe.

Mr. Ray Ferguson Standard Chartered CEO Mr Ferguson is pretty experienced in financial crises, making him well placed to oversee Standard Chartered’s interest in Singapore during the current Eurozone meltdown.

He was the CEO of Standard Chartered in Indonesia during the fallout from the Asian Financial Crisis and he was in charge of the bank’s Southeast Asia operation when the Global Financial Crisis (GFC) struck in 2008.

ABF: How are you dealing with the Eurozone crisis and the potential exit of Greece from the euro?

Mr. Ferguson: We have devised three scenarios we believe could play out in the Eurozone. Scenario one involves a “muddle-through” where a compromise is reached between the new Greek government and EU policymakers.

Scenario two involves a Greek exit but it is contained by firm action from the European Central Bank which provides liquidity to vulnerable economies.

In the worst case scenario, Greece exits the European Monetary Union and is followed by other periphery economies leading to concerns over the future of the euro.

ABF: Although Greece has been pretty quiet after its second election, what do you think is the most likely scenario in the near term?

16 ASIAN BANKING AND FINANCE | JULY 2012

Mr. Ferguson: The bank is looking at scenario two but we remain cautiously optimistic about the future of the Eurozone.

We are looking at a Greek exit from the single currency and the likely impact on the markets. We think it’s more likely than not that the Greeks will exit. We are working on that internally, developing plays. The bigger question is on what basis does that exit happen?

If Greece did exit the euro it would need to secure power supplies and oil while making sure it had money to pay salaries and pensions. It will need some sort of divorce settlement. The IMF will likely come in with some trade maintenance agreement. It’s the sort of thing I saw in Indonesia during my time there in the aftermath of the Asian Financial Crisis.

Lehman which caught everyone by surprise. If you don’t already have a plan for a Greek exit where have you been?

But we are in similar conditions to when Lehman Brothers collapsed and we see equity markets testing the same lows we saw in that period. This includes the same paralysation of dollar funding even if no-one else other than the Greeks exit the euro.

ABF: The Eurozone crisis has exposed the weak finances of Europe’s banks. Do you think this will spill over to Asian banks?

Mr. Ferguson: Open economies like Singapore, Hong Kong and Taiwan are all vulnerable to a slowdown in Europe because of their trade and financial links but I think as European banks have been deleveraging here, regional and local banks should be able to fill the void.

Asian banks have always differentiated themselves from banks in the West. We have strong banks in Asia with healthy balance sheets that are enjoying growing intraAsian domestic demand while not being exposed to periphery Europe.

ABF: Are you poised to capitalise on European banks deleveraging from Asia?

Mr. Ferguson: European banks are not pulling out of Asia. They still have core franchise clients who are still here. They are just pulling out of the fringes.

ABF: Is the current Eurozone crisis much like Lehman Brothers all over again?

Mr. Ferguson: The Eurozone crisis has been well telegraphed, unlike

“Standard Chartered continues to grow the business at an impressive rate in Singapore regardless of the Eurozone woes. “

ABF: What are your memories of the Global Financial Crisis?

Mr. Ferguson: During that time I was one of a handful of Standard Chartered leaders who met every 12 hours for a conference call at 7am and 7pm to discuss the latest developments within global finance.

This lasted for six weeks at the height of the GFC when panic spread across investors following the near-collapse of the global banking system. A lot of the decisions we made were based on rumours. But a lot of those rumours turned out to be true.

Today, Standard Chartered continues to grow the business at an impressive rate in Singapore regardless of the Eurozone woes.

Under Mr Ferguson’s guidance the bank has recorded six straight years of record income and profits.

Last year, income breached the US$2 billion mark and the bank now employs 7,000 people here.

However, as a group Standard Chartered has come under flak after being accused by US regulators of hiding billions of dollars in transactions with Iran. This has been strongly denied by Standard Chartered bosses, although the case could damage its reputation as one of the world’s most sociallyresponsible banks.

In fact, it was Ray Ferguson who first raised alarm bells about such transactions when he was head of Standard Chartered Americas back in 2006.

Talking about possible fallout in Singapore, a spokesman for Standard Chartered said: “It is business as usual for us.”

Vietnam Domestic Cash Management Bank of the Year & VIetnam Domestic Trade Finance Bank of the Year -Techombank

Reaching new heights in 2012

V

ietnam Technological and Commercial Joint Stock Bank, more commonly known as Techcombank, is one of the leading commercial banks in Vietnam established in 1993. With HSBC as our strategic shareholder, holding the maximum allowed stake of 20%, we have a sound financial base. In conjunction with a network of 307 branches and 1,205 ATMs throughout the country, state-of-theart banking technology, and a committed workforce of 8,335 professionally-trained staffs, we are well positioned to maximize the delivery of values and profitability to our stakeholders.

Our Technology We are at the forefront of technology within the banking sector and a major user of advanced information technology with an annual spending of nearly VND 900 billion.

Notably, we are the first Vietnamese bank to provide internet banking services in Vietnam. Indeed, our e-banking channels include services for both personal and business customers and we are widely regarded in the Vietnamese market as an innovator of e-banking services.

“Simon Morris, Chief Executive Officer: There is no doubt that 2012 will see us reach new heights in everything we do”

What We Do We serve and provide banking products and services to around 66,000 enterprises and 2.3 million individual customers through Our People our three core business strategies: Personal We are empowered by an experienced Vi- Financial Service, Small and Medium Enteretnamese leadership team in combination prise Banking, and Transaction Banking. with the hired talent from leading global Through these strategies, we are able to offer banks to strengthen our capabilities. Techfinancial products and services combank always pays special which address the needs of difattention to our human referent and diverse categories of “We are source development strategy to customers. one of the attract and retain such talent.

The focus has been on building largest joint stock Reaching New Heights the best working environment commercial banks 2011 was a breakthrough year for Techcombank. Our in Vietnam.” for our employees to develop, total assets reached VND contribute and build success.

180,531 billion, while our pretax profit was a record VND What We Aspire To Become 4,221 billion.

These figures were achieved Techcombank’s vision is to be the best place while enhancing our top-ranking profitabilto bank for our customers and the best place to work for our employees. The combina- ity, illustrated through ROA of 1.83% and ROE of 28.87% – the highest figures in the tion of local knowledge from operations in market. Record growth, record profits and 43 provinces and centrally governed cities, the employment of over 8,000 staff have seen and an engaged workforce is supported by the Bank reach some truly new heights. To a significant financial capability founded perform this way in the face of an uncertain on balance sheet strength. Techcombank macroeconomic climate, both in Vietnam is progressively raising the standards of and the world as a whole, has been a remarkour services through our comprehensive able achievement.

TechcomOne* strategy 2009 – 2014 and is In recognition of this year’s achievements, ever closer to becoming the Best Bank and the Bank was awarded an unprecedented Leading Business in Vietnam. number of prestigious international finan-

cial awards from some of the most trusted financial magazines such as: Finance Asia, Global Finance, Asia Money, The Asset, and Banking and Finance Magazine. 2011 also marks the halfway milestone in implementing our strategic transformation program, TechcomOne*. In this program, we have consolidated as well as strengthened all our fundamental systems and continued to develop our people. The result is that we are now in a position where banking operations can serve ever-increasing numbers of customers smoothly and efficiently.

We have become a truly modern bank which utilizes a deep understanding of the local market together with international best practices to provide people and investors in Vietnam with the best place to bank. As we draw from our solid foundation and the momentum inherited from an outstanding performance in 2011, we are confident that Techcombank is set to reach new heights in 2012 – and beyond.

CONTACT

191 Ba Trieu street, Le Dai Hanh ward, Hai Ba Trung District, Hanoi, Vietnam Tel: +84(4) 3944 6368 Fax: +84(4) 3944 6362 Email: AssistanttoCEO@techcombank. com.vn Website: www.techcombank.com.vn ASIAN BANKING AND FINANCE | JULY 2012 17

Philipp ines Domestic Technology & Operations Bank of the Year -Rizal Commercial Banking Corporation

RCBC continues to make mark with innovative SME loan services

T

he various initiatives of Rizal Commercial Banking Corporation (RCBC) for small and medium enterprises (SMEs) continue to make headway in helping more budding entrepreneurs meet the financial requirements of managing and expanding their businesses. Consequently, it significantly helps boost the financial vitality of a segment that is seen as the backbone of the Philippine economy.

The bank’s latest string of awards in recent years – both locally and internationally – attest to the growing recognition of its role in enhancing the country’s banking and finance sector. The latest citations from the 2012 Wholesale Banking Awards by the Asian Banking and Finance (ABF) Magazine rest on RCBC’s innovative Phone-A-Loan service.

The RCBC Phone-A-Loan service won under the Philippines Domestic Technology & Operations Bank of the Year category.

ABF cited RCBC’s groundbreaking service for its innovative technology that significantly contributes to the further development of the banking and finance sector, and for the unique advantages and benefits it provides to the bank’s customers.

recorded voice prompts. Upon completion of the questionnaire, those who would like to pursue their business loan interest further shall be asked to leave their contact information for an RCBC Loan Officer to get in touch with them.

Since its launch, the Get-A-Loan website has been averaging 1,500 unique monthly visitors who are enticed by the convenience and accessibility of discovering online if they can get loan approvals instead of inquiring directly to a bank. RCBC states that the new Phone-A-Loan service is also picking up well, since it gives entrepreneurs an even more convenient way to find out if they qualify for a business loan.

Giving greater confidence to entrepreneurs Typically, most entrepreneurs are intimidated to approach big banks.

Doubtful of their prospects of getting a loan, they are reluctant to go through the hassles of preparing the necessary documents, setting up appointments, driving to the bank, and facing a loan officer who just might turn them down. For this reason, they often go to informal moneylenders who usually charge two or three times as much as formal lending institutions.

Leading in SME lending innovations With the Get-A-Loan website and now Relaunched in 2008, RCBC’s the Phone-A-Loan service, SME Banking program has they will know at once if “RCBC Phone-Acome up with technology they can get a business loan Loan service won -based innovations in under the Philippines even before they step foot order to reach a wider Domestic Technology inside a bank. When faced range of potential loan with affirmative results & Operations Bank clients. Recently introduced from the questionnaire, of the Year” was the RCBC Phone-Athey will be enthusiastic Loan service which was developed to about preparing the necessary documents complement the award-winning SME and will have greater confidence to face an business web portal, www.getaloan.com. RCBC Loan Officer. ph. This is an internet-based loan selfBy pre-screening loan inquiries assessment site launched in 2009 by RCBC beforehand, both of these innovative to let potential borrowers find out their services streamline the whole process for eligibility for a business loan from the bank. the borrower and for the bank, enabling This innovative service was the first of its RCBC to handle applications more kind in the Philippine banking industry. efficiently.

Both the innovative Get-A-Loan site On a larger perspective, these innovative and the Phone-A-Loan service begin by tools reflect RCBC’s compliance with the posing several simple questions typically directive of the Bangko Sentral ng Pilipinas, asked by a Lending Officer. Interested the country’s central bank, for financial entrepreneurs just have to visit the website institutions to open up greater access to or call 877- RCBC (7222) and follow the credit for borrowers belonging to the SME 18 ASIAN BANKING AND FINANCE | JULY 2012

RCBC’s President and Chief Executive Officer, Lorenzo V. Tan

market, which accounts for about 98% of total businesses in the country.

With such innovative features that significantly simplify the loan approval process, the award-winning Phone-ALoan service and its acclaimed companion program the Get-A-Loan website are generating greater interest from the business sector. They also present wouldbe entrepreneurs with viable business loan options that they can eventually tap for their operations. Other innovations are being developed as RCBC positions itself as a true catalyst for the growth of the Philippine SME sector.

RCBC likewise recently launched its Women’s Enterprise Loan, the first business loan program in the country developed specifically to address the needs of the Filipina entrepreneurs.

CONTACT Rizal Commercial Banking Corporation Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City, 0727 Philippines Tel: +632 8949000 Fax: +632 8949414 Website: www.rcbc.com / www.getaloan.com.ph

ASIAN BANKING AND FINANCE | JULY 2012 19

Philippines Domestic Cash Management Bank of the Year -BDO Unibank, Inc.

BDO: Merging strengths to maximize customer benefit

I

n a world where competitive advantage is an edge, all kinds of businesses, whether family-owned or top-tier, would do better to focus on their core businesses rather than the tedious administrative processes involved in managing payment and collection activities.

This is where the cash management services (CMS) of BDO Unibank, Inc. (BDO) plays a vital role. A major player in the Philippines’ banking industry, BDO offers a complete spectrum of advanced products complemented by a nationwide network of more than 700 full-service branches – a combination which provides substantial benefits to corporate funds managers.

BDO’s CMS is anchored on four offerings: payables solutions, receivables solutions, access and information solutions, and cash flow solutions.

Payables solutions enhance clients’ efficiency through the Bank’s various electronic disbursement services using a secure internet-based platform. These include, among others, automated check processing; direct credit to account; all-inone card that supports both corporate and Emmanuel T. Narciso, Senior Vice President and Head of BDO’s Transaction Banking Group. retail payment requirements; and payroll senior vice-president and head of BDO’s For BDO, the constant challenge is how solutions.

Transaction Banking Group. to continuously innovate and in so doing Collections can be handled through autoRealizing that financial supply chain remain several steps ahead of competition. debit, bills payment, PDC warehousing, management is better served when “The Bank takes pride in having highly and deposit pickup arrangements. solutions are applied across all commercial trained and client-centered officers and staff Access and information solutions allow counterparties, BDO CMS has focused on addressing varied requirements, round-the-clock tracking further shifted its focus towards whether internal or external, simple or of finances and transaction “BDO offers offering a range of products complex. Our sales team is strategically initiation via BDO Corporate a complete that cater to both the large and divided into several industry-specific Online Banking at http:// spectrum of www.bdo.com.ph. Electronic advanced products small members of a commercial market segments, with each sub-unit tasked community of buyers and to constantly identify and capitalize on statements can also be complemented sellers. This community-based opportunities within their specific market delivered daily in the popular by a nationwide approach to designing solutions segment. This team regularly performs Infolink format for easier network.” has further leveraged the power product training for all of the Bank’s frontline reconciliation. of BDO’s branch network and personnel, ensuring that they are equipped Cash flow solutions allow wide range of cash management solutions with the latest updates on new features customers to transfer balances between to bring the benefits of complete integration and enhancements on cash management linked accounts and consolidate funds into to buyers and sellers in the shortest possible initiatives, and prepared to address customer one single account at any BDO branch via time. inquiries and issues regarding their operating an account sweeping facility.

“BDO is committed to serving not just cash flow” says Narciso.

“BDO’s CMS is unique in that we the top Philippine corporations, but also integrate our cash management solutions to providing grassroots banking access to and technology with branch-based service CONTACT smaller industry players. Evidencing this and logistics management. With our BDO Corporate Center, commitment is BDO’s partnership with strategically located branches operating 7899 Makati Avenue, Makati City, companies large and small, combining the under extended working hours, managers 0726, Philippines strength of the banking sector with the of financial supply chains nationwide Tel: +632-8407000 reach of banking technology to benefit all benefit from solutions with better flexibility Fax: +632- 8784413 sectors of the country’s economy,” adds in terms of time, location, and customized Website: www.bdo.com.ph Narciso. service” says Emmanuel T. Narciso, 20 ASIAN BANKING AND FINANCE | JULY 2012

ASIAN BANKING AND FINANCE | JULY 2012 21

BIG ISSUE 1 sharp and protracted, resulting in significant capital impairment risks, although Fitch views this likelihood as low in view of the banks’ solid lossabsorption defences and satisfactory record.

What keeps Singapore banks the world’s strongest?

Find out what analysts have to say about OCBC, UOB, and DBS being three of the world’s strongest banks.

R

eports say that OCBC, UOB, and DBS lead Bloomberg’s ranking of the world’s strongest banks - what could be the key to their success?

Oversea-Chinese Banking Corporation (OCBC) was named the world’s strongest bank for the second straight year in Bloomberg Markets’ second annual ranking of the world’s strongest banks.

BOC Hong Kong Holdings came in second place.

United Overseas Bank (UOB) ranked seventh, followed by DBS Group Holdings at eighth place.

IG Markets: Justin Harper, Head of Research Singapore’s banks manage their risks well and are conservatively run. They have definitely benefited from the strong economy and from a very high portion of high net worths who have considerable assets to deposit with the banks and are a low risk.

This keeps their non-performing loan ratios low compared to other companies. Interest rates on savings 22 ASIAN BANKING AND FINANCE | JULY 2012

“Longer term funding allows the Singapore banks to weather any potential liquidity tightness.”

are very low here which keeps costs down further. Singaporean banks also benefit from the country being a major financial and commodities trading hub with plenty of transaction banking demand. The banks are also very forward thinking and always looking at expansion within the region in Indonesia, China and the Philippines for example.

Fitch Ratings: Alfred Chan, Director, Asia-Pacific Financial Institutions Singapore banks should be able to keep their credit profiles intact, even as the probability of a fresh global downturn appears increasingly likely.

The agency’s expectation stems from the banks’ strong and liquid balance sheets, reasonably diversified loan books and satisfactory risk management, and the government’s fiscal capacity to introduce countercyclical measures to protect the domestic economy - as evident during the 2008-2009 global turmoil.

Downside rating risks could result if the renewed downturn were to be

DBS Group Research: Lim Sue Lin, Analyst We keep our stance that the credit cycle will remain healthy and provisions to stay low. We project 10% earnings growth for 2012 (from 7% previously) premised on flat NIM and provisions, 12% loan growth, 43% cost-to-income ratio with noninterest income growing at 6%.

We believe the Singapore banks remain well positioned to take advantage of extended credits given their liquidity position, similar to what we saw in the recent past when they benefited from the pullback of credits by the European banks. This would also provide Singapore banks an opportunity to price up loan spreads in view of a tighter supply market, hinting a possible upside for NIM. Separately, we do not expect issuances of new Qualified Full Banking (QFB) licenses or the requirement for foreign banks to locally incorporate their operations as subsidiaries to significantly affect the domestic Singapore banks.

Barclays Capital: Tom Quarmby, Head of Regional Banks Sector, Asia Ex-Japan Equity Research Longer term funding allows the Singapore banks to weather any potential liquidity tightness in the future in light of rising economic headwinds, and meet tougher regulations surrounding liquidity and the growing importance of “stable” sources of funding under Basel III. Singapore banks have solid funding base due to their strong deposit franchises domestically and Singapore’s status as a safe haven for foreign funds. The domestic banks have been winning deposit market share, evidenced by higher deposit growth rates relative to the system since 2010. Meanwhile, loans have grown largely in-line with the industry reflecting the Singapore bank’s prudent approach to managing liquidity risk and managing a rising loan-to-deposit ratio more conservatively relative to peers.

ASIAN BANKING AND FINANCE | JULY 2012 23

ANALYSIS: cORPORATE LENDING

EU banking system woes impact Asia

The Euro burns as Asia fiddles

Asian corporates have been on a debt-fuelled frenzy over the last few years with access to lots of cash at record-low interest rates. But that may be about to change.

T

he saying used to be that when America sneezes, the world gets a cold. But these days, it is the influenza infecting Europe’s banking system that could really start to affect Asia’s major corporates.

The reason is that over the last decade, European banks have become the biggest lenders to Asia, outstripping the U.S. Data from the Bank for International Settlements (BIS) which show that european banks have the largest presence among foreign banks in the Asia-Pacific region. Their total exposure was $841 billion in December 2011, which was about 4.3% of the total GDP of the Asia-Pacific region.

Economic mayhem in the Eurozone, however, has led European banks to scale back their lending to Asia. And what has started as a flood of funds could well dwindle into a trickle if the crisis deepens.

Data just released for the fourth quarter of 2011, the latest avail24 ASIAN BANKING AND FINANCE | JULY 2012

“European banks could cut their total assets by another EUR2 trillion, about 7% of their current holdings, by the end of 2013.”

able, shows another steep drop in European lending to Asia. Nearly USD100 billion was chopped off, with aggregate lending to emerging Asia now down to USD1.3 trillion.

That still leaves total exposure at an impressive level, of course. The point, however, according to HSBC economist Frederic Neumann, is that even USD100 billion in lending reduction can put a real squeeze on Asian markets.

Neumann noted that the markets already saw an acute dollar shortage occurring across the region in the fourth quarter: interbank rates rose, credit sold off and exchange rates came under pressure. He also reckons that in the first quarter, though data are not yet available, deleveraging from European banks likely slowed, but it didn’t stop the process entirely.

In its latest Global Financial Stability Report, the IMF estimates that European banks could cut their total assets by another EUR2 trillion

(about 7% of their current holdings) by the end of 2013.

Ritesh Maheshwari and Naoko Nemoto of Standard and Poor’s say that while Asia-Pacific financial markets have so far avoided a significant disruption from deleveraging by European banks in 2011 (because the regional banks have solid liquidity and European banks have limited exposure in local-currency denominated lending), the large cutbacks by European banks could significantly affect Asia-Pacific financial markets due to their sizable presence in specific areas and markets such as foreign-currency denominated loans.

The financial markets in Asia have already sounded the alarm bells starting last year, said the S&P analysts, as a result of the European banks’ decision to apply stringent lending standards on overseas markets due to higher funding costs and tighter liquidity—in particular for U.S. dollar funding.

The rise in offshore dollar funding costs in the latter half of 2011 also choked the market for a while, as it constrained funding flexibility and boosted funding costs for AsiaPacific banks relying on wholesale dollar funding.

The worst-case scenario Clearly, the crisis in Europe looks set to drag on for years, according to Fitch Ratings analyst Andrew Steel, what with little or no decisive action being taken to resolve the issues surrounding Greece, and the country remains in political flux.

“Fitch has been forecasting a slow and anaemic recovery for Europe since the crisis began back in 2008, and continues to use that as the basis for producing all its rating case forecasts,” he says.

Steel adds that what makes the crisis harder to solve is the lack of a general consensus or concerted political momentum behind the various solutions discussed to address the broader issue of future financial stability across the monetary union as a whole.

So how will Asia fare in the face of a prolonged crisis? S&P analysts say that in a worst-case scenario, they may consider negative rating actions if stresses in the Eurozone cause a market dislocation and

ANALYSIS: cORPORATE LENDING result in funding difficulties for Asia-Pacific banks.

HSBC’s Neumann, meanwhile, says that in the short run, Asia will feel an immediate squeeze if Eurozone tensions re-erupt. He warned that Asia would feel “a real pinch” should the EU bank deleveraging accelerate and prompt banks from other regions to cut back.

Cashing in on the crisis While the crisis has caused European banks to be more cautious and review their usual lending practices, Fitch’s Steel believes there’s a bright side to the crisis, especially for Asian banks.

Most Asian banking systems have better funding structures and as a result benefit from surplus liquidity. This has meant that they have managed to step into the void left by the European banks to support the financing needs of the Asian corporates.

The main beneficiaries, according to Steel, have been the Japanese mega banks, particularly HSBC and Standard Chartered, and to a lesser extent, the Singaporean banks.

Asian banks looking to expand their regional exposure have also bought assets from the departing Europeans.

Countering the European pullout is the fact that Asia’s domestic banks are still lending and the first quarter of this year saw a pick-up, especially in China where the reserve ratio was lowered.

A survey by the Institute of International Finance suggests that banks in emerging Asia remained relatively cautious in the first quarter compared to other emerging market regions, leaving their overall lending conditions largely unchanged from

the fourth quarter of 2011.

Neumann noted that bank funding conditions improved rapidly despite the decline in the lending activity of European banks, suggesting that credit growth will continue to accelerate in the second quarter and possibly beyond.

“This should provide the region some resilience in the face of European bank deleveraging that will likely continue for another couple of years, if not longer,” he says.

The analyst adds that although it is difficult to say how much of the European banks’ deleveraging will occur in Asia, there are some buffers in place for the likely dip in the assets of European banks in the region.

“For one, not all European banks in the region will necessarily reduce their assets: some may even grow them further, thereby partly offsetting deleveraging by others.

Moreover, US and Japanese banks are stepping up their presence, thus helping to fill the void left by departing Europeans,” Neumann says.

In addition, tighter credit supply could present a chance for Asian banks to charge proper risk premiums for liquidity and credit risks.

S&P has observed various cases in which local players were well-positioned to fill the gaps created when foreign banks cut their credit lines.

For example, Singapore banks recently saw robust growth in U.S. dollar-denominated loans and they have been actively participating in syndicated loans. One of Japan’s big banks, Sumitomo Mitsui Financial Group Inc., acquired the aircraft leasing assets of The Royal Bank of Scotland Group PLC. Meanwhile, Mitsubishi UFJ Financial Group Inc. rose in its ranking

International bank lending to emerging Asia (USD bn)

Source: BIS, HSBC

“Asia will feel an immediate squeeze if Eurozone tensions re-erupt”

in the global league table of project finance to second in 2011 from eighth in 2010, at the same time when banks in Singapore, Malaysia, and Hong Kong increased their presence in the interest rate derivatives market.

Credit risk enhancement : A must But S&P analysts cautioned that while such opportunities could boost the banks’ market positions and increase their revenue diversification, some may need to rely more on wholesale funding to take advantage of the opportunities—which in turn would expose them to volatility in global markets.

If there’s one lesson that Asia-Pacific banks are quickly learning in the face of the troubles in the Eurozone, it is the importance of enhancing their credit risk and liquidity risk management.

The crisis has shown that banks cannot just recklessly gobble up the new business opportunities left by retreating European banks because they will be faced with a doublefaced dilemma when they do: their stand-alone credit profiles could come under pressure if they become more aggressive in increasing lending, while growing their credit rapidly could cause ratings agencies to lower its assessments of their risk positions or to lower the results for their of funding and liquidity positions.

So while Asian banks can blunt the blow from the economic slowdown in Europe by picking up where the European banks have left off, they still need to become more cautious in their lending activities and tone down the appetite for risk because the crisis isn’t ending anytime soon.

European bank lending to individual Asian economies (USD bn)

Source: BIS, HSBC

ASIAN BANKING AND FINANCE | JULY 2012 25

BIG ISSUE 2 Regarding the current ambitions, given the early stage development of the Vietnam credit market, it is reasonable that the country could bring a few sizable issuances to the market, being led by sovereign. After all, the country has a few sizable institutions whom potentially could access the USD issuance or possibly regional markets, e.g., RMB, SG, THB. Appreciating we are ½ through the year it does look challenging but moving the needle is easier when you are at an earlier stage of development, i.e., 2-3 deals make the target seem more reasonable.

Will Vietnam reach 15-17% credit growth rate target this year?

Standard & Poor’s says the government’s policies to stabilize credit growth are showing some signs of success.

W

ith various difficulties that abound Vietnam’s banking system, is the target even possible?

Oliver Wyman: Jason Ekberg, Consultant Asian credit markets have been hot in Q1 with issuance volumes up some 30%+ across LC and USD, though we do see volumes slowing given ongoing risk concerns and some bifurcation in the market, i.e., investor appetite for recent Sri Lanka and Indonesian (Celyon, Pertamina) issuance over Vietnam.

What we have to remember is Asian credit markets, in general, are still at an early stage of development vs Western markets. Vietnam’s credit market is particularly at an early stage of development.

What this means in practice is that we see Asia issuance either IG or HY (mostly ID and CN issuers).

The middle risk rated institutions struggle to find placement in Asia and in the West, though the latter is more due to lack of investor awareness.

To overcome this, it is important that regional issuers have strong 26 ASIAN BANKING AND FINANCE | JULY 2012

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

support from sovereign issuance, e.g., increasing investor awareness, providing yield benchmark, etc. In the case of the bifurcation I referenced earlier, it is important to note both Sri Lanka and Indonesian governments vs Vietnam are active issuers, which paves the way for HG domestic issuers to access the market, e.g., reference yield curve, portfolio positioning, etc. As such, if Vietnam were able use sovereign issuance to pave the way for corporate credit issuance, this should help accelerate market development.

Standard & Poor’s: Ivan Tan, Primary Credit Analyst We believe that in 2012, Vietnam banks will reverse some of the excesses of the past, which was characterized by unbridled credit growth. The government’s policies to stabilize credit growth are showing some signs of success.

Loan growth moderated to 10.9% in 2011, about half the government’s target of 20%. This was significantly lower than the rapid credit growth that averaged 35% from 2006 to 2010, during which Vietnam’s credit-to-GDP ratio soared to 125% from 71%.

We believe that in addition to government intervention, high lending rates of up to 25% have dissuaded borrowers from seeking credit. Tightened liquidity conditions have also crimped the ability of banks to lend aggressively.

Going forward, we expect the government to continue pursuing stability over growth. We also expect that overall loan growth could be less than 17% depending on how the government allocates credit growth caps under its proposed banking reforms.

Loan Growth and System Leverage

*Year to date December 2011

©Standard & Poor’s 2012.

ASIAN BANKING AND FINANCE | JULY 2012 27

ANALYSIS: MOBILE BANKING different applications. Mobile platforms - whether smart phone or tablet – are leading to a significant increase in transaction volumes and that the mobile environment has developed into a fast-evolving, innovative space, he adds. So which countries are embracing the mobile banking hype?

Mobile banking to give cash a run for its money

With 60-70% mobile penetration, is there a potential market opportunity for mobile banking in Asia?

F

or most people in emerging markets, a mobile phone is more of a necessity than a bank account. In countries such as India and Indonesia the trend is high telecom / low banking penetration. This trend saw the rise of mobile banking across Asia. In emerging markets, only 20-30% of the population being “banked,” which demonstrates that there is poor and limited access to banks and financial markets. Mobile penetration, on the other hand, is 60-70%, and rising rapidly. According to Nomura analyst Sachin Gupta, telcos are well positioned to leverage their existing billing relationships to bridge this gap.

However, though mobile banking may help increase revenues, the 0-5% commission rate on transactions is very low to even contribute significantly to profitability in the next few years. But regardless of these uncertainties, is there really a potential market opportunity for mobile banking in Asia?

28 ASIAN BANKING AND FINANCE | JULY 2012

“M-payment users could reach 160mn subscribers by FY16F in Asia, implying an adoption rate of around 5%. ”

Market opportunity in Asia According to Gupta, Gartner estimates that the number of mpayment users could reach 160mn subscribers by FY16F in Asia, implying an adoption rate of around 5%. In transaction value, m-payments could rise to USD156bn or a CAGR of 35% from current levels as per Gartner.

“We note Gartner includes transactions that are conducted on bank accounts, cash, credit/debit cards, prepaid cards including mobile or e-wallets. But it does not take into consideration carrier billing or point of sale transactions and therefore its outlook for transaction value is likely to be conservative,” he says.

John Laurens, Head of Global Payments and Cash Management at HSBC, reckons that more businesses in Asia move onto the internet and banking infrastructure providing immediate settlements are already easily accessed via

Mobile banking in Asia In India and Africa, Bharti recently launched its m-wallet. In the Philippines, Globe Telecom’s GCash now has over 1mn customers.

Gupta adds that all three Chinese telcos have equity stakes/ alliances with local banks and are trialling near field communication (NFC) while the three Thai operators have their own form of m-payment service and in Indonesia.

In developed countries, however, banking penetration is significantly higher. High access to ATMs and other facilities, security, issues/ costs of clearance, lack of infrastructure/ stores for payments are among the reasons for low takeup of mobile banking . Japan is one of the few markets where m-money adoption has been relativelysuccessful to date, but the financial contribution to telcos is still minimal, notes Gupta. “In May 2012, Softbank in Japan tied up with PayPal in a JV to offer NFC-based wallet solutions.

The commission rate for PayPal in Japan is being set at 5%, higher than the 3.9% in Hong Kong and 2.7% in the US.” A recent study by Asian Banking and Finance reveals that banks in Malaysia, Cambodia, Taiwan, and the Philippines are currently implementing a mobile banking service but their main concern is how to provide more personalized and differentiated services as well as how to develop and maintain mobile banking service for different mobile devices is costly and challenging.

There appears to be a mixed adoption rate of mobile banking in Asia. Gupta explains that in India, China and Indonesia, mobile banking could surprise on the upside, given the ability of the telco to play a dominant role in the value chain, relatively lower competition

ANALYSIS: MOBILE BANKING from alternative solutions and the ability to drive scale, given the size of the market.

“However, there could be challenges in identifying a compelling transaction proposition suitable for the local market needs, and telcos will also need to invest in increasing subscriber awareness and in building a transparent and efficient ecosystem,” he adds.

Developed markets are likely to have ‘convenience’ as a key value proposition as mobile banking could complement other forms of payment. As Gupta puts it: “We think a successful m-banking solution should encompass a complete range of services, including integration to bank accounts and credit cards, and the ability to use it at different points of sale (online and offline) to offer consumer convenience – which will be a key selling proposition for take-up.”

Mobile banking drivers As countries with a population that has the least access to financial infrastructure, India, Indonesia, and the Philippines present an untapped opportunity for m-banking services.

Gupta also cites a Euromonitor study which states that cash payments account for 60% of total transactions in APAC, which could mean there is room for alternative payment mechanisms such as mobile money.

Value Creation Potenial

Source: Oliver Wyman report on M-Banking

Rising Asian smartphone penetration of 20% with data usage at 15% of revenues is also another key driver.

“Rising smartphone adoption bodes well, which should allow for a bigger proportion of online transactions to be conducted on mobile devices over time. For example, PayPal notes a 4x increase in transactions conducted through mobile devices in 2011.“ Lastly, a sophisticated technology and infrastructure that could definitely support mobile banking is also a plus.

Korea, Japan and Singapore rank high in this regard.

Iswaraan Suppiah, CIMB’s Head of Group Information and Operations Division, reveals that CIMB Group holds a stake in Touch ‘n Go Sdn Bhd, a Malaysian company that offers near field communication (NFC)-based stored value card to consumers, currently focused primarily on transportation. “Touch ‘n Go cards can currently be topped up at special purpose vending machines located in transport hubs and stations, automated teller machines (ATMs) of CIMB as well as other participating Malaysian banks. From predominantly being used to pay public transport fares, the infrastructure for Touch ’n Go has been extended to parking, road toll and usage at selected retail chain outlets,” adds Suppiah.

“Cash payments account for 60% of total transactions in APAC, which could mean there is room for alternative payment mechanisms such as mobile money.”

Gupta reckons that the mobile banking potential can not be dismissed. Even at a 5% adoption rate, it could be USD30bn in value in Asia.

“Success of m-banking in Kenya, which now has +50% adoption and contributes 16% to revenues to Safaricom, is well touted by the market. It benefited from favourable industry dynamics, regulations, and an appealing product – secured P2P transfers. Operators in India, China, Indonesia and the Philippines have similar potential, and we will continue to observe these developments.”

He adds that success-factors are likely to differ from market to market based on socioeconomic behaviour, needs, demographics,regulations etc., as has been evident in markets such as the Philippines, which despite offering the service for few years now and having a large ‘unbanked’ population has seen limited success so far.

“Hence, we think it could be another two to three years before a success story similar to that of Safaricom’s M-Pesa in Kenya, emerges in Asia. One could also view this as a ‘new business’ segment which could emerge over the medium term,” concludes Gupta.

Mobile payment users outlook, Asia

Source: Gardner, Nomura research

ASIAN BANKING AND FINANCE | JULY 2012 29

BIG ISSUE 3 Maybank Kim Eng: Desmond Ch’ng, Director, Equity Markets (Research) The DBS acquisition of Bank Danamon is likely to proceed, but the manner in which it is executed is still unclear at this juncture. The uncertainty is whether DBS would be exempted from the ruling that an acquirer can only increase its stake above 40% if the acquiree bank has maintained a GCG level of 1 or 2 in three consecutive appraisal periods within five years. This implies that DBS will have to build up its stake gradually. Even so, the initial acquisition of a 40% would still provide DBS with control over Bank Danamon, which we believe is a positive move over the longer term.

How will Indonesia’s new ownership cap rules affect DBS’ bid for Bank Danamon?

Analysts believe DBS’ acquisition of Bank Danamon is likely to go ahead despite the new regulations - but on what grounds?

U

nder Indonesia’s new 3-tier bank ownership cap rules, single ownership of domestic financial institutions will be limited to 40%.

Asian Development Bank: Edimon Ginting, Senior Country Economist, Indonesia Resident Mission The new BI Regulation no. 14/2012 limits single ownership of domestic financial institutions to 40%. But there is certain exception for wellrun publicly-listed banks that meet capital and other financial requirements. These banks have to receive approval from Bank Indonesia and are committed to stay over a certain period in Indonesia to contribute to the country’s economic development.

In addition, these banks will need to sell off at least 20% of its shares 30 ASIAN BANKING AND FINANCE | JULY 2012

“It will take DBS more than a year to acquire a majority stake in Danamon.”

to the public within five years of the acquisition.

So technically, the new regulation provides room for DBS’ bid for Bank Danamon to go ahead, as long as DBS can meet all the requirements and obtain Bank Indonesia’s approval.

As stated by Bank Indonesia, the new regulation is motivated by the need to strengthen and consolidate domestic banking system. In addition, the new regulation applies equally to domestic private banks and foreign-owned banks. Internationally, each country has different regulation on single ownership limit.

But Indonesia’s experience before the 1997 Asian crisis demonstrated that banks’ corporate governance was often negatively correlated with the size and domination of single ownership.

IG Markets: Justin Harper, Head of Research This could be good news for DBS and opens the back door up to a deal being struck to take over Danamon.

While the 40 per cent cap on foreign ownership could put off future overseas banks from entering the market it may not affect DBS’s planned takeover of Danamon. This is because there is the caveat that a strong bank will be exempt from this cap. While DBS definitely qualifies as a strong bank there is still a question mark over just how much of Danamon will it be allowed to buy?

Indonesia has turned very defensive of its banking sector and the rules are still unclear. Even if DBS is successful, it may face hurdles further down the line as the central bank announces more limitations on foreign banking activities.

CIMB: Kenneth Ng, Analyst The regulations appear to lean in favour of DBS. We think DBS should be able to meet BI’s exemption guidelines fairly easily, which spells a higher chance of a DBSDanamon M&A. A slight drawback is that it will take DBS more than a year to acquire a majority stake in Danamon, as case-bycase exemptions will include three assessments of the target local bank, which are held twice a year.

Danamon was never meant to be a near-term positive, so a delay does not detract from its longer-term value proposition.

ASIAN BANKING AND FINANCE | JULY 2012 31

ANALYSIS: banking technology to change the perception of both the financial services industry and the regulators, he adds. Suppiah reveals that CIMB is moving to a “Private Cloud” model which is expected to help them achieve all the benefits of virtualisation and most of the benefits of a Public Cloud. “While the price of adopting a Private Cloud may not be as competitive as adopting a Public Cloud, we strictly uphold the importance of data security and privacy of our customers and the bank,” says Suppiah.

Cloud vs virtualisation: What do bankers prefer?

HSBC says cloud is a more powerful concept but CIMB warns it still needs to prove its readiness to handle mainstream financial services applications.

J

ust implementing cloud or virtualisation will not make a difference unless the support model is also changed, which makes understanding the differences and getting the most out of the approaches of utmost importance, reckons KPMG partner Edge Zarrella. He warns, though, that demand must be driven from business need rather than technology strategy.

Cloud vs virtualisation According to John Laurens, Head of Global Payments and Cash Management, Asia Pacific at HSBC, cloud computing is far more powerful a concept than virtualisation because it addresses the software cost-of-ownership question, whereas virtualisation only reduces the hardware costof-ownership. Of the two, it is in-house software that drives most cost in an organisation.

On the other hand, he reckons that virtualisation, as a solution to 32 ASIAN BANKING AND FINANCE | JULY 2012

“Cloud computing is far more powerful a concept than virtualisation”

hardware management, works by more effectively sharing computing resource among enterprise applications - allowing several virtual servers to share the same physical computer within a company.

“Cloud computing takes the full computing service outside of the organisation, enabling corporations to use computing power and execute advanced computing applications on demand provided by a third party. This creates far greater opportunities for an organisation to draw on computing power much more efficiently than via the traditional route of purchasing or developing in-house computing systems,” adds Laurens. But Iswaraan Suppiah, CIMB Head of Group Information and Operations Division, argues that cloud still needs to prove its readiness to handle mainstream financial services applications. Apart from demonstrating readiness on security robustness, there is also the challenge for Cloud vendors

Whilst the technology of cloud and virtualisation both provide banks with all the benefits of effective software and hardware management, the near field communication technology is one that is slowly creeping into the banking industry.

Near-field communication Although the technology is in its infancy, Laurens believes there is little doubt that the application of technology in this area will help corporates manage both inventory and receivables more effectively.

NFC is transforming how individuals initiate settlement; this is impacting collection models for retail and consumer corporates.

According to Laurens, the key opportunity for banks is to use the point of sale collection technology to provide richer information to their clients thereby facilitating sales reporting and receivables reconciliation. “The processing of these transactions will run over existing infrastructures so banks will need to fine-tune their existing payment processing infrastructures to cater to the increased volumes that easy-to-use NFC services are likely to generate,” he warns. So while NFC allows for peer-to-peer payments, how are the banks preparing the backbone to support it?

According to Laurens, HSBC has a standardised payments infrastructure and has built interfaces into all its major clearing systems across the region. CIMB, on the other hand, has been constantly working on its NFC technology as it holds a stake in Touch ‘n Go Sdn Bhd, a Malaysian company that

ANALYSIS: banking technology offers near field communication based stored value card to consumers, currently focused primarily on transportation. “Aggregators, or market infrastructure providers, are expected to play a greater role in servicing NFC-created volumes, although the growth in these channels will be tempered by the increased market focus on counterparty risk in an increasingly stringent regulatory environment,” says Laurens.

tion will lead to greater efficiency for corporates in the reconciliation of receivables, the shortening of DSOs and the ability to increase sales, says Laurens.

Suppiah warns, though, that banks will have to work harder to understand their customers and foster loyalty through targeted value propositions for each segment, because intermediaries will make competing banking propositions available to consumers more easily on both mobile and internet devices.

Laurens adds that banks will need to build transaction processing capacity, as well as servicing models, that deliver a higher volume of transactions that need processing. Banks will also need to support a higher degree of customers’ expectations for instant, flawless execution that is associated particularly with mobile services.

“The focus on ‘straight through processing’ from origination of transactions to their settlement will continue to determine how banks configure their technology platforms. The linkage to ‘open standards’ will be important to ensure that the extended clearing infrastructure can operate seamlessly.”

So with all the available and constantly evolving banking technologies, which will be the most useful in the next 2 years?

Mobile banking So how will mobile platforms and contactless payment systems affect banking in the coming years?

Suppiah notes that in the ASEAN market, disruptive banking models will emerge in multiple customer segments as a result of mobile phone penetration and technology advancements in mobile devices and networks. He adds that in countries like Indonesia with a large under-banked population and limited access to banking branches, banking has become feasible for the un/under-banked.

As tech-savvy consumers are already expecting to carry banking capabilities in their pockets, the mobile phone is likely to give cash a run for its money and perhaps even make a dent in cheque usage by emerging as a convenient person-to-person payment mode, says Suppiah.

Laurens also reckons that mobile platforms - whether smart Moving forward phone or tablet – are leading to According to Laurens, developa significant increase in transacments in the standardisation tion volumes and that the mobile of transactional messaging and environment has developed into communications channels between a fast-evolving, innovative space corporates are the two areas to where providers of new services watch out for. He notes that the compete intensely; which is creatstandardisation of transactional ing significant advances for online messaging will have a significant users as well as a myriad of new conduits for clients to access bank- impact on corporate banking over the next couple of years. It will not ing services. only drive down processing costs More commerce is moving onto between corporations and banks the internet, and applications are but will also enable companies to giving direct access to banking gain better visibility and control infrastructure providing immediover their financial positions, ate settlements. The associated delivery of invoices that electroniacross several banking providers cally capture settlement informaworldwide.

Iswaraan Suppiah

John Laurens

He adds that banks, systems vendors and corporates are working together to ensure that the latest version of XML is truly an open standard across the industry, offering the opportunity for banks and corporates to ‘wipe the slate clean’ by eliminating old proprietary methodology and moving to a global industry standard. “Equally the standardisation of communication channels, like SWIFT as well as the standardisation of vendor systems with banking systems, will simplify systems integration and will support the need to process higher volumes of transactions and information which result from the broader industry trends noted above. Long term, across both corporate and retail banking, the emergence of better information management capabilities will transform how banks serve and support their clients.”

Suppiah reckons that multi-channel technology architecture where the bank’s products, services and customer analytics capabilities are replicated across all channels is revolutionising banking - creating a seamlessly integrated experience for customers. “From traditional channels like branches to digital channels like the internet, tablets and mobile-devices and even extending across into social media platforms, the banking industry is pushing the boundaries to allow customers to bank when, where and how they want, with greater insights into the options for managing their liquidity and wealth.”

ASIAN BANKING AND FINANCE | JULY 2012 33

OPINION

Sofia A. Johan

Exploring hedge funds around the world

H

edge funds and their managers have in recent times been vilified for their high-risk activities and relative lack of regulatory oversight. Recall that hedge funds were thought to be responsible for the Asian Banking and Financial Crisis of 1997.

A recurrent concern shared by market participants and regulators around the world is that the increasing size of the hedge fund industry coupled with potential agency problems, activist investment practices and herding behavior that exacerbates financial instability.

Having said that, although media reports frequently suggest that hedge funds are unregulated, hedge funds are in fact regulated at least to some degree in every country around the world.

So before we start maligning hedge fund managers, it is worthwhile to consider such differences in legal and institutional settings across countries as they directly affect the structure, governance and performance of hedge funds.

In our book Hedge Fund Structure, Regulation and Performance Around the World (Oxford University Press, 2013) we consider data from a multitude of countries to understand how and why hedge funds markets differ around the world.

Idiosyncratic features of certain countries may distort our understanding of how hedge funds work in practice, therefore by considering international data including data from Asia and Europe, and not just US data, we are able to gain a significant amount of insight into how hedge funds operate on a global basis.

While hedge funds are hardly regulated in the US, other jurisdictions implement different and sometimes more onerous sets of regulatory requirements.

As explained in the book, international differences in hedge fund regulation include but are not limited to minimum capitalization requirements, restrictions on the location of key service providers and different permissible distribution channels via private placements, banks, other regulated or non-regulated financial intermediaries, wrappers, investment managers and fund distribution companies.

This raises the question of whether hedge funds forum shop, that is move to jurisdictions that afford less strict forms of regulation. We find little support for the view that hedge fund managers pursuing riskier strategies systematically select jurisdictions with less stringent regulations.

34 ASIAN BANKING AND FINANCE | JULY 2012

Sofia A. Johan Adjunct Professor at Schulich School of Business and Extramural Research fellow at Tilburg Law and Economics Center,

In fact, to the extent that there is evidence of forum shopping, it is for the most part suggestive that funds pursuing riskier strategies select jurisdictions with more stringent regulations.

Hedge funds may select stricter jurisdictions mainly in order to facilitate capital raising, but nevertheless they are not seeking more amendable shores as initially though.

So now we know. Not all hedge fund managers vilified, just some. I say this because among other things, we also show evidence that international differences in hedge fund regulation are significantly associated with the propensity of fund managers to misreport monthly returns.

For example, misreporting is less common among funds in jurisdictions with minimum capitalization requirements and restrictions on the location of key service providers.

Finally, we also assess the determinants of hedge fund survival and examine arguments regarding the interplay between the hedge fund industry and the stability of financial systems and consider whether hedge funds affect macro-financial outcomes in a country, or the reverse causality regarding the affect of macro-financial conditions on the stability and survival of hedge funds.

Essentially, hedge fund regulatory structures differ than other countries, so maybe we should not tar and feather all hedge funds with the same brush.

Hedge fund regulation variations

ASIAN BANKING AND FINANCE | JULY 2012 35

36 ASIAN BANKING AND FINANCE | JULY 2012