Asian Banking and Finance

ASIAN

BANKING FINANCE SP EC I

M

EN

DISPLAY TO MARCH 31, 2011

CUTTING DOLLAR TRADES HONG KONG’s

‘DIM SUM’

market poised FOR Take-away growth

2011 is all About risk management

distressed

asian debt report

beware the bank levy why stanchart bought 15,000

iphones

ASIAN BANKING AND FINANCE | MARCH 2011 1

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www.atradius.com 2 ASIAN BANKING AND FINANCE | MARCH 2011

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FROM THE EDITOR

ASIAN

BANKING FINANCE

Publisher & EDITOR-IN-CHIEF Assistant Editor Art Director

Tim Charlton Jason Oliver Niyasuthin

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What a non-financial crisis that was. Now that Asian economies are back to growth and banks balance sheets are unscathed, the next challenge for banks is in staffing up with the kinds of people they need to drive their businesses. This issue we pay a lot of attention to resourcing banks and the kinds of roles and people that the CEO is going to need to hire to take advantage of growth conditions. You will also notice we have quote a few articles about social media, equipping bankers with iPhones, and generally the accelerating trend of technology from the back room basement into the hands of users.

Here at Asian Banking & Finance we have also spent a lot of time on our website which notched up 160,000 traffic last year and is growing its readership at 10 % each month. So if you aren’t going there to read the news, do try it out now.

And finally if you or a bank you know has done something worthwhile consider nominating in the 2011 Asian Banking & Finance Awards which will be held on June 22 in Singapore. You can nominate on the website.

From all of us here at Asian Banking & Finance Magazine, have a great year ahead.

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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 

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MICA (P) 240/07/2007 No. 64

ASIAN BANKING AND FINANCE | MARCH 2011 3

CONTENTS

16

14

INSIGHT Distressed asian debt hard to find

17

BANKS banks bracing for a back to normal year

CIO VIEW why stanchart bought 15,000 iphones

FIRST

22 Technology offers banks a path towards global competitiveness

10 Social Media banking takes off

23 It’s time to be hands-on

30 Corporates need to defend their money

11 Asian Banks to spend $28 bn on tech by 2015

25 Watch out for bank’s levy

REGULAR

28 Hong Kong’s ‘Dim Sim’ market poised for take-away growth

06 Most Read

12 Basel lll and its impact on Asia’s banks 12 Yuan trade of $3 tln by 2015 14 Banks bracing for a back to normal year

OPINION 17 Why Stanchart bought 15,000 iPhones 20 Employers fight for local talent

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 15 B Stanley Street, Singapore - 068734 4 ASIAN BANKING AND FINANCE | MARCH 2011

32 Is Fidrec fair?

33 Can risk and finance really come together?

29 Taking banking across the globe

08 Around Asia 34 Last Word

FEATURE 16 Distressed Asian debt hard to find 26 2011 is all about management

For the latest banking news from Asia visit the website

www.asianbankingandfinance.net

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MOST READ

The best of asianbankingandfinance.net Asian banks gear up for 2011

retail banking

retail banking

Maybank acquires 44.6% stake in Kim Eng

Retail Banking

RHB poised for Japan expansion with Sumitomo MoU An MoU has been signed by RHB and Sumitomo Mitsui Banking Corp, and it will be one of the many proactive steps in enhancing RHB’s local and global strategic economic network.

The bank wants to establish a stronger foothold in the international arena. retail banking

South Korea to privatise Korea Development Bank South Korea’s financial markets supervisor said the country would start the privatisation of Korea Development Bank, despite the country’s deadlocked $6 billion plus stake sale in Woori Finance Holdings. The government sees this as more difficult than Woori privatisation.

RETAIL BANKING

ANZ Bank starts issuing renminbi bonds in HK The issuance is the lender’s first Hong Kong renminbi offshore bonds oversubscribed 6 times. Australia & New Zealand Banking Group Ltd., started floating renminbi 200 million in renminbi-denominated bonds in Hong Kong.

It is the first Australian bank to issue renminbi offshore bonds.

The coupon rate for

Signing of MoU the two-year bonds is 1.45%, which may become a benchmark rate for non-Chinese issuers in the renminbi offshore market.

Retail banking

BOCHK to inaugurate offshore renminbi bond index Bank of China (HK) plans to launch the first offshore yuan bond index in Hong Kong to enable investors to have a better understanding of the prices and performances of offshore yuan bonds. The index aimed to monitor the total returns of offshore renminbi bonds.

RETAIL BANKING

DBS to acquire RBS China units DBS Group said it will take over British bank RBS’s retail and commercial business in three Chinese cities. DBS Bank and Royal Bank of Scotland entered into an agreement to transfer RBS’ retail and commercial banking customer base, business portfolios and related employees in Shanghai, Beijing and Shenzhen to DBS China, DBS said.

DBS currently earns the bulk of its earnings from Singapore and Hong Kong, but aims to expand into China, Southeast Asia and India.

Maybank has entered into conditional sale and purchase agreements through its whollyowned subsidiary Asean Credit Sdn Bhd, with each of Mr. Ronald Anthony Ooi Thean Yat and Yuanta Securities Asia Financial Services Ltd. for the acquisition of 15.4% and 29.2% stakes in Kim Eng Holdings Limited respectively. The shares are to be acquired at a price of S$3.10/ share (US$2.39), amounting to a total purchase consideration of S$798 million (US$615.47 million).

This transaction is subject to approval from, among others, Bank Negara Malaysia and the Monetary Authority of Singapore.

lending & Credit

$110B

to be lent by China’s “Big 4” in Q1 Chinese regulators have ordered the nation’s four biggest banks to cap their combined new loans in the first quarter at US$110 billion.

technology technology

Four banks to join MEPS HSBC Bank Malaysia, OCBC Bank, United Overseas Bank and Standard Chartered Bank Malaysia will sign agreements with Malaysian Electronic Payment System next year. The deal would link the banks to the MEPS service, allowing them to provide their customers with the convenience of making interbank cash withdrawals and balance enquiries. technology

Randy Guy gets head job

Bank of China to launch offshore yuan bonds

6 ASIAN BANKING AND FINANCE | MARCH 2011

Financial services firm Omgeo has appointed Randy Guy as new global head of technology. He will focus on developing and executing Omgeo’s technology strategy, while driving product innovation, promoting efficiencies and

continuing to enhance service reliability. He has a six-year experience as Chief Technology Officer in Linedata. technology

China Bank launches mobile speed banking ‘China Bank Online for Mobile’ is a mobile-optimised version of China Bank’s award-winning internet banking service.

China Bank’s mobile portal is accessible via all internet-enabled cellular phones and mobile devices.

China Bank Online for Mobile was developed to do balance inquiry, fund transfer, and bills payment via mobile phones and devices, anytime, anywhere.

services and manned service desks. These are in Sheung Wan, Tsim Sha Tsui, and Fanling.

Offering a brand-new banking experience to the Bank’s customers, the centres are equipped with the innovative “i-Teller” and “i-Stock Trading” booth.

Furthermore, the centres are equipped with self-service machines, allowing customers to conduct a wide range of banking transactions around the clock, seven days a week.

technology

ICBC boosts agricultural and rural services The bank leverages on the technical and product competitive advantage to lend technological and business support to the rural financial institutions via the Bankto-Bank platform or agency relationship.

This is to enhance their service capacity, and push the prosperity of financial services for “agriculture, farmers and rural areas”.

TECHNOLOGY

BEA opens i-financial centres BEA opened its first three i-Financial Centres across Hong Kong combining advanced automated banking

MEPS provides convenience to customers

investment banking Investment banking

World Bank issues first renminbi bond The World Bank issued its first RMB dominated bond. The US$ 76 million-equivalent 2-year fixed rate note due on January 14, 2013, offers investors a semi-annual coupon of 0.95 %.

This is the first RMB bond issuance in the HK capital markets in 2011.

The transaction comes at a time when China’s shareholding in the World Bank is set to increase as part of the realignment of voting shares. If the realignment is formally approved and subscribed as proposed, China would become the third largest shareholder in the World Bank.

The entry of the World Bank into the RMB bond market in Hong Kong will permit investors to diversify their currency

holdings and expand their RMB exposure.

The World Bank’s global reputation should help attract the attention of many international investors who have not previously invested in RMB to this rapidly developing market.

“This is a landmark transaction for the World Bank as it is the first World Bank issuance in RMB, and signals the strong interest of the World Bank in supporting the development of the RMB market. It is a privilege for us to have this opportunity that establishes the institution as a premier issuer in the fastest growing capital market in the world,” said Doris Herrera-Pol, Global Head of Capital Markets at the World Bank.

Investment banking

Allied-PNB merger stalled anew Allied Bank’s merger with PNB was stalled anew after it failed to divest its shares in California-based Oceanic BVI. The buyer of the stake had withdrawn his offer to buy 27.87% stake in the California bank, according to a PSE disclosure.

Allied Bank is required by US banking regulators to divest its stake in Oceanic Bank prior to its union with the PNB, which will be the surviving entity in the forthcoming merger.

Allied’s merger with PNB will still be pursued, and the integration activities will continue with a view to improve revenue opportunities.

ASIAN BANKING AND FINANCE | MARCH 2011 7

AROUND ASIA

CHINA

ABC signed a Bank-enterprise Cooperation Agreement with China Shipbuilding Industry Corporation in Beijing to exert its competitive advantages for long-term mutual development.

HONG KONG

World Bank issued its first renminbi bond to diversify their currency holdings and expand renminbi exposure.

INDIA

ADB, IFC, Citibank and MCB Bank provided trade finance coverage of up to US$ 142.78 million for Ibrahim Fibers Limited to help boost Pakistan’s textile industry.

INDOCHINA

Commonwealth Bank acquires Vietnam International Bank’s 15% stake. CBA bought $235mln VIB shares to capitalise on Vietnam’s surging banking demand.

THAILAND

Bangkok Bank aims for 2011 loan growth of 5-7% after an expected 5 % this year.

MALAYSIA

Maybank acquires 44.6% stake in Kim Eng to represent the bank’s investment banking and equities platform in ASEAN.

INDONESIA

Bank Negara Indonesia launches US$222,000 to migrant workers, one of the bank’s main targets for their micro loan product, KUR.

SINGAPORE

Nikko Asset Management acquires DBS Asset for $105mln to tap business from the expanding ranks of wealthy Asians.

8 ASIAN BANKING AND FINANCE | MARCH 2011

JAPAN

Large amount of Japan CMBS is maturing on March and April 2011.

KOREA

Woori and Hana plan to engage in savings bank business as South Korea’s regulators consider how to prop up the nation’s savings bank sector.

TAIWAN

Bank of China and Taiwan Cooperative Bank sign agreement to finance, settle and liquidate enterprises funded by Taiwan and the mainland.

Philippines

The Philippines government to help sell global peso bonds due as long as 25 years.

AUSTRALIA

Australia and New Zealand Banking Group Ltd. issued debt worth $3 billion in a three-part sale.

ASIAN BANKING AND FINANCE | MARCH 2011 9

FIRST

GRG Banking and Microsoft launched joint lab Chinese ATM Manufacturer GRG Banking is getting serious about challenging the majors with its decision to set up a research lab with Microsoft.

Pascal Martin, general manager of Windows Embedded product from Microsoft and Li Yedong, deputy general manager of GRG Banking attended the launching ceremony.

The new Lab will work on developing a customized operating system for ATMs, in answer to the banking sector’s need of an easy to use, secure and stable operating system.

The new operating system dedicated to ATMs, will be based on Windows Embedded Standard 2009.

The advantages of original Windows XP system will remain in the new system while many functions will be optimized so that the security, stability and usability will be significantly enhanced.

With the increasing number of deployed ATMs in the past few years, the management of ATMs has become an important issue for the banking industry.

In current market situation, numerous different editions of operating system are in use for ATMs and sometimes they are incompatible with each other. This results in much inconvenience for the management and maintenance of ATMs. In this context, a customized operating system for ATMs is urgently needed.

As the largest ATM provider in China, GRG Banking has an abundant experience in ATM manufacturing and management.

10 ASIAN BANKING AND FINANCE | MARCH 2011

Social media banking takes off The current interest rate environment in many parts of Asia has been forcing the transaction banks to explore ways to accelerate growth of their fee based income.

Many transaction banks have developed industry specific programs to enhance their service delivery capabilities in specific industries including the usual suspects such as healthcare, education and some of the fast growing next generation industries such as renewable energy.

However very few transaction banks have set their sight on the social networking sector as a potential client base.

Today, millions of consumers and businesses across Asia (such as Qzone 380+M, RenRen 120+M, Kaixin001 80+M, Zing Me 6+M etc.) are actively using social media platforms (social networks, social games, and online marketplaces to name a few) to transact billions of dollars worth of real and virtual goods and services.

Social media industry in Asia is 1. Increasingly going international providing potential opportunity for transaction banks to develop cross border trade support offerings for social media businesses

“

“Online marketplace operated by Alibaba has more than 56M registered users from 200 different countries and it hosts more than 8M storefronts.”

2. Increasingly becoming ‘trading hub’; it is supporting transactions of both virtual and real goods and services, yet another opportunity for transaction banks to develop an offering for social media businesses 3. Providing opportunity for transaction banks to accelerate presence in social media driven SME sub-segments 4. Gaining attention of regulators around cross border “real/virtual” funds flow , taxation issues driving social media businesses to explore platforms offered by transaction banks Across Asia, increasingly large numbers of consumers and SME businesses adopting the social media as part of their daily lives (e.g. online marketplace operated by Alibaba has more than 56M registered users from 200 different countries and it hosts more than 8M storefronts), it could be an interesting channel for transaction banks to accelerate presence in certain social media driven SME sub-segments.

The opportunity for transaction banks is huge – ranging from a role in the social media ecosystem as conventional lending service provider, to payroll, payments, and clearing & settlement service provider, to core business enabler (or operating partner) facilitating scalable platforms for these companies to operate their individual virtual currency empires and integrate them with ‘real’ world.

However it’s important to understand the dynamics of social media businesses which exist in a complex eco-system that comprise of diverse (and often transient) many to many up-stream and down-stream commercial relationships that blur the differentiation between B2B, B2C, and C2C (or peer-to-peer) commerce.

To be successful in exploiting the opportunity in the social media sector, transaction banks must rethink their current approach.

By Mohit Mehrotra (Regional Head of Financial Services, Strategy & Operations, Deloitte Consulting, Southeast Asia) and Lokesh Hole (Senior Consultant, Deloitte Consulting, Southeast Asia)

FIRST

Asian banks to spend $28bn on tech by 2015 An increase in spending on technology is expected over the next five years to hit US$132 billion, according to Ovum.

Asia-Pacific enjoys the highest growth of 49% to hit $28.1 billion by 2015. Japan leads the region in terms of market size with a forecast of US$9 billion followed China (US$7.8 billion) and India in third place, holding US$ 2.7 billion in 2015.

China and India hold the positions for fastest growth in the AP region.

Australia, on the other hand, holds fourth place forecast to grow from US$2.2 billion in 2010 to US $ 2.7 billion.

“An increase in spending on technology in branches is expected to be one of the major driving forces behind this rise in the Emerging markets,” said Jaroslaw Knapik, Senior Analyst.

“The technology spend for branches will increase by 53% in the emerging Asia-Pacific region within the next five year timeframe and hit $1.9 billion, as new branches open in the less saturated markets.”

Ovum’s figures show that AsiaPacific investment in technology to allow customers to access banking services via the internet will experience growth of 39 per cent from 2010 to 2015, to hit $1.8 billion. Senior analyst Jaroslaw Knapik commented: “There is a strong focus on online platforms and their extension onto mobile devices and tablets, given their ability to service clients at a lower cost. In addition, technologies that allows ‘smarter’ selling and servicing, such as customer analytics and channel integration are expected to remain hot spot areas in the near future.”

Spending on various middleoffice components, such as risk management, anti-fraud, compliance or performance management, based on these technologies, will experience growth of 51% from 2010 to 2015, hitting $650 million in Emerging Asia-Pacific and growth of 28% during the same timeframe, hitting $1.1 billion in newly industrialized and developed economies in AsiaPacific.

“

“An increase in spending on technology in branches is expected be one of the major driving forces behind this rise in the emerging markets” ASIAN BANKING AND FINANCE | MARCH 2011 11

FIRST

Basel III and its impact on Asia’s banks Some important new measures along the way to Basel III are now coming out at the annual G20 meetings, and this will lead to Asian banks adopting an “intelligent growth” strategy, according to Accenture’s managing director Pascal Gautheron, who argues that in Asian anchor economies, such as South Korea, Singapore and Australia, lending to small and medium enterprises represents a major opportunity for banks.

“It is our view that it is advantageous for banks to progress the main elements of Basel III now – instead of waiting for the ink to dry on the final reforms sometime in the future.

Those institutions which can move ahead rapidly will be in a better position to devote leadership attention and the resources needed to focus on customers, competitors and profitability as opposed to internally focused regulatory metrics and ratios.

So what should banks do?

According to Gautheron, banks must accelerate the process of integrating their risk and finance functions.

The chief financial officer and the chief risk officer must work from a single set of information, and must share an understanding of the interrelationships among credit, market and operational risk and the impacts on capital and profitability.

“Trading book match up more seamlessly with their “banking book.”

Yuan trade of $3tln by 2015 Trade transactions settled in the Chinese yuan may rise to $3 trillion equivalent a year by 2015 as China pushes for the wider use of its currency as an alternative to major world currencies in business and finance, said China Construction Bank.

“The yuan market makes perfect sense for many reasons and we believe it will explode,” Paul Schulte, Hong Kongbased global head of financial strategy at CCB International Securities Ltd. CCB International is a unit of China Construction Bank.

China Construction Bank forecasts an 12 ASIAN BANKING AND FINANCE | MARCH 2011

Banks must improve their overall data management. Under Basel III, banks would need to consolidate positions from their trading desks, and make their “trading book” match up more seamlessly with their “banking book.”

Banks have always applied a rigorous approach to the P&L process.

Asian banks have been hampered in their risk management and execution of growth strategies by an overall scarcity of talent.

Consequently, major initiatives – such as expansion into emerging

increase from the current $19 billion a year of yuan-denominated trade transactions, or commercial transactions primarily paid for and financed using the yuan that don’t involve the dollar.

Demand for China’s currency is escalating as the economy grew 9.6% in the third quarter. The currency has become more attractive since China ended a two-year peg to the dollar on June 19, and investors bet on further gains.

“It’s natural for China to want to have control over its currency and the way to do that is to internationalize it,” Schulte said.

Hong Kong will develop a liquid market in the yuan, to provide “loans to Brazilian or Argentinean companies for Chinese goods like locomotives, electric turbines or healthcare equipment,” he said.

economies or the entry into capital market activities – have slowed while banks develop or recruit the talent needed to undertake such efforts.

Banks, especially in the emerging countries, are still operating on old platforms and a multitude of interdependent systems that are challenging to integrate and starting to inhibit growth.

One key area that would require significant investment is in the area of global limits and exposure management, especially given their more regional footprint and increased market exposure.

FEATURE

Bringing Asia’s Financial Services Industry to the Cloud IT has suffered from an image problem across much of the financial services world.

It is often seen as expensive and difficult to manage, with opinions reinforced by experiences of buying technology that has not delivered expected value and ROI. But according to enterprise cloud computing company, Salesforce.com, this doesn’t have to be the case.

The Financial Services Industry Looks to Reinvent Itself with the Cloud On the back of the last financial crisis, the financial services industry is being forced to reinvent itself into a more efficient and agile industry. Now institutions in wealth management, capital markets, banking, and other business segments are looking to enterprise cloud solutions to help shift computing burdens from their data centres into the cloud.

“With enterprise cloud computing, businesses of any size get access to massive computing power, sophisticated computer programmes, and the best data security money can buy on a simple pay-as-yougo model without any of the headaches of traditional IT,” explains Renny Monaghan, Senior Director of Financial Services, Salesforce.com.

Currently, over 1,600 global financial services customers put their trust in the Salesforce.com cloud-based model with many of these organisations based in Asia.

Salesforce.com’s financial services customers in Asia include the likes of Japan Post, Ffreedom Financial Planners, Bajaj Auto Finance, Siam Commercial Bank, Prudential Vietnam, and Commonwealth Bank Australia.

Multi-tenancy is the key Multi-tenancy is a fundamental technology value of cloud computing. Similar to Facebook and Google, multi-tenancy means that all customers run off the same system, where they experience the benefits of a shared system. It also ensures that Salesforce customers do not have to rebuild their customizations or integrations every time the service is upgraded to the next version.

“Think of multi-tenancy like an office building where tenants share all the infrastructure such as the elevator, power and water services. Each has their own offices to serve their distinct purposes,” explains Monaghan.

“But the benefit is that they share the same infrastructure. They can upgrade the elevators and make it high speed and everybody can benefit.”

Multi-tenancy provides instant capacity for

Over 1,600 financial institutions around the world benefit from salesforce.com’s cloud-based model growth, on-demand. Customers need not re-architect their systems, they just add on more users.

Is cloud computing safe?

Security of data and the potential risk of data loss is probably one of the biggest concerns the financial services industry has when it comes to considering cloud computing. But according to IDC Financial Insights analyst, Michael Araneta: “As banks take on the newer models of IT delivery they can rely on the best practices they have been using for outsourcing. The principles are the same.”

In fact, enterprise cloud computing can actually reduce the major IT security risks of misconfiguration, informal or uncoordinated tools and procedures, and error or abuse by in-house staff. Organisations are coming to recognize that the security and operational assurance of their cloud services are better than they can cost-effectively provide for their own locally operated facilities.

“At Salesforce.com, because security is a top priority for us, all of our customers benefit from the diverse requirements of our 87,200+ customers, and these include large financial institutions and government organisations,” adds Monaghan.

Asia’s financial services leaders head to the cloud (no matter what their size) Let’s take a quick look at 2 different-sized organisations in Asia who use enterprise cloud computing to streamline their business processes and improve productivity.

Large – The Japan Post Network

The Japan Post Network has 24,000 post offices nationwide and is Japan’s largest bank, with 100+ million clients. Recently privatised, Japan Post needed a new technology platform to streamline business processes. It also had to support 6+ million insurance policies for Japan Post Insurance and 14 billion mail packages annually for Japan Post Service.

The solution: Japan Post chose the Force. com cloud platform for its ability to adapt to their business. Japan Post then built 15 custom apps for 75,000 users at 24,000 post offices on this cloud platform.

“We developed a system that fully met our cost and functionality needs in 2 months; Force.com was the only way we could accomplish this,” said Japan Post management Small – Ffreedom Financial Planners Ffreedom Financial Planners is India’s upcoming financial institution. The company was growing quickly, and they needed a solution that could provide scalability and flexibility.

The solution: Combining elements of Sales Cloud and customisation based on the Force.com Enterprise Edition Ffreedom has created its own business system it calls “Advisory Factory”.

“Without Salesforce we wouldn’t have the business we have today. The model would have been different and the business smaller because we wouldn’t have been able to afford the technology, or the time to customize it.,” says Sumeet Vaid, founder and CEO, Ffreedom Financial Planners ASIAN BANKING AND FINANCE | MARCH 2011 13

FIRST

Banking

Banks bracing for a back to normal year

I

f 2010 was the year of living in liquidity, Singaporean banks may well find that 2011 is the year loaning prudently. And that will put pressure on the banking sector, which had a stellar 2010 growing earnings by an average of 30%. But not only will Singaporean banks be affected by a slowing economy and hence loan growth, but it may be the “only banking market in Asia where net interest margins remain under pressure” in 2011, according to Credit Suisse banking analyst Sanjay Jain.

In fact, earnings will likely grow by single digits if everything goes according to plan, and a lot of that plan depends on the currency. While many central banks in Asia, such as Thailand and Indonesia, have raised interest rates over the back half of 2009, Singapore’s interest rate, or SIBOR, is set by banks themselves and generally moves in line with interest rates in the US and the UK. This means that if those key markets, which are still mired in recession, keep interest rates low, Singapore will also likely have a low 14 ASIAN BANKING AND FINANCE | MARCH 2011

interest rate environment.

All of which makes it difficult for banks to raise rates to borrowers and earn more money.

So where can Singapore’s banks still find money ? Interestingly, 2010 proved a record year for trading income from banks; that is the money they make from buying and selling things like currency, rather than the retail banking business of deposits and loans.

Almost $1 billion The big 3 local banks between them made $881 million in trading profits, with DBS raking in the largest chunk.

Perhaps 2011 will also prove a good environment for trading, but don’t bet on it.

Another concern for the banks, and a big unknown, is how much capital the MAS will ask them to set aside under new banking rules, known as Basel 3, which came in globally in the wake of the financial crisis. These new rules are not blanket, but they do set minimum reserves and ask local regulators to ask banks to increase

“Singapore is the only banking market in Asia where net interest margins remain under pressure”

those ‘safety net’ reserves if necessary.

The good news is that Singapore’s banks are well above the minimum reserves of 7% of equity, with DBS having 11.2%, UOB 13% and OCBC 11.5%.

However banking regulators in Switzerland have imposed a 19% buffer whilst the British Financial Services Authority is looking at 15%.

There is also a list made of SIFI’s, which are beautifully named by bankers as ‘Systemically Important Financial Institutions’. To you and I these are the banks that are ‘too big to fail’.

Many of these SIFI’s will have to increase their reserves but so far there are no Asian banks on the list. But that doesn’t mean local regulators may want to impose higher capital buffers, if only for image sake. Will Singapore follow suit? Nobody knows at this stage, but should that be the case, the local banks will have to hold back on those dividends or raise some more capital, which either way is not good for shareholders although it would make for an even better protected Singaporean banking system.

Macquarie Bank’s Ismael Pili notes that Switzerland only has such a high buffer because the two major banks in Switzerland, UBS and Credit Suisse, are multiples of its GDP and the country has to uphold its image as a private banking haven.

But isn’t Singapore also trying to uphold its image as a private banking haven? “Asia is no Switzerland... however, it does bring to mind that Hong Kong and Singapore, where in the absence of a central bank, the HKMA and MAS may take a tougher stance on ensuring the solvency of their banks by imputing a local SIFI surcharge,” notes Pili.

Don’t break out the champagne too soon then.

3-month SIBOR, US$ LIBOR and HIBOR (%)

Source: Datastream, Credit Suisse estimates

co-PUBLISHED corporate profile

Are you losing GEMS? Companies must not lose emails from their customers, suppliers and partners positive standard for email security filtering services is one (1) lost email in every 400,000.

Most vendors publicly claim their anti-spam filters are accurate to this level. However, independent research has shown that the actual false positive rate for most anti-spam filters is often several hundred times worse than the acceptable standard. The false positive rate among vendors can range between 1 in 100 and 1 in 1000 of legitimate email. Statistically, this failure results in over 50 million emails everyday that are not being delivered to end users.

How many GEMS are you losing per month?

Manish Goel, CEO of TrustSphere

T

oday, email replaces most other forms of business communications (eg. fax, telex); it is the lifeblood of communication flow for most organizations. Currently, around 250 billion emails are sent worldwide daily. This is estimated to grow to over 500 billion by 2013.

As a consequence of email’s popularity, spam and malware have become key threat vectors to an organization’s network infrastructure, accounting for 80 – 90% of incoming email traffic. “To combat this, email filters have to be more aggressive. The higher the vigilance of email filter, the more spam is caught. However, this also results in users losing genuine emails.

This problem of genuine emails marked as spam [GEMS] is also known as ‘false positives’.

This dilemma is experienced across most organizations every day. Yet alarmingly, many are unaware of the actual level of risk that their spam filters are causing,” said Manish Goel, CEO of TrustSphere.

What losing GEMS is costing you GEMS add unintended operational risk to those business processes which rely on email messaging. They threaten the integrity of such processes. The more important though harder to quantify consequences of GEMS include: • Opportunity cost for sales and business development teams who miss time sensitive enquiries from prospects; • Reducing customer service delivery

standards – by not responding on a timely basis (or in some cases not at all) to a customer enquiry; Missing a time-sensitive email (eg. a change to a meeting or an electronic airline boarding pass) because it was trapped in the “junk” folder and not sent to an executive’s blackberry; • Creating vast and varying impact on several other stakeholders’ reputation and customer relationships right across a business’s value chain.

The impact of these failures affect risk management governance, revenue and operational processes within an organization. It is estimated that losing GEMS costs businesses over $20 Billion annually.

Meeting Gartner’s standard According to Gartner, an “acceptable” false

“A contract from a customer was lost in the email filter which resulted in us missing key project deliverables. This caused confusion and embarrassment .”

- Sales Director, IT Software Provider

“Lost an account for not replying to RFP because it was in my junk folder. Our competitor beat us to the post.”

- Director, Publishing Company

Fighting for Email Integrity TrustSphere aims to redefine the agenda for email security by creating a new category of email security solution – Email Integrity.

Their technology focuses on adding an email integrity layer that works towards active false positive prevention, while complementing organizations’ existing email security solution.

TrustSphere’s technology is designed to balance the two parts of the spam filtering problem by first protecting legitimate, authenticated traffic and then blocking spam.

It quickly and automatically builds an organization’s correspondence graph in order to “protect” and “fast track” traffic from its network of ‘known’, authenticated correspondents.

TrustSphere has developed a unique audit tool to help organizations measure the number of GEMS they are losing. Companies can request for an email integrity audit by sending an email to info@trustsphere.com.

TrustSphere solutions are available worldwide through a network of leading IT solution providers.

TrustSphere’s major partner across Asia Pacific is SingTel Alatum, the leading “in-thecloud” commercial grid computing solution provider to businesses and the public sector across the Asia-Pacific region.

CONTACT TrustSphere 3 Phillip Street #13-03 Commerce Point Singapore 048693 email: info@trustsphere.com Fax: +65 6536 5203 ASIAN BANKING AND FINANCE | MARCH 2011 15

INSIght

Y R A L SA EY SURV 1 0 20

No bear market in distressed debt

Distressed Asian debt hard to find

T

he great credit crunch of 2009 has passed and unfortunately for distressed debt traders, there is little in the way of bad debt to be traded in Asia.

Many pundits had predicted that the credit crunch would bring with it a wave of defaults due to difficulties in getting refinancing, but in reality, local currency liquidity did much to stave off the damage. Nevertheless Asia’s distressed debt community has found something to cheer about when they recently met in Singapore for Debtwire’s Asia Pacific Distressed Debt outlook 2011 panel discussion.

Australia has proved to be the one bright spot for trading in distressed debt, mainly due to the failure of major property companies and trusts such as the now-failed Babcock & Brown and Centro. The flood of liquidity into Asian capital markets has meant that there are few refinancings to be done over the remainder of 2010 and 2011, although 2012 could be challenging as a lot of refinancings are due then. Robert Schmitz, Head 16 ASIAN BANKING AND FINANCE | MARCH 2011

“There was recently a $100 million placement in a private situation and that is typical of what you will see over the next six months.”

of Restructuring and Debt Advisory at Rothschild noted that across the region banks still have the liquidity. “We do see funds coming in and looking but we have not seen the deeply distressed transactions go through.”

Scott Bache, Partner and Head of Asian Restructuring & Insolvency Group at Clifford Chance said that there are deals of a 2007 and 2008 vintage that haven’t been completed because of issues with deal structures.

At the same time, many insolvency practices are finding it difficult simply getting debtors to a table in order to have a sensible discussion about how to proceed with a restructuring.

“A lot of those debts are going into litigation and no real liquidity with people weary to buy into a litigation work out,” said Bache.

“And in Asia many companies with debt are family-owned and so a lot of these distressed debt deals has been completed privately, which leaves Australia as one of the largest markets in the region. In Hong Kong and Singapore we have a lot of people

who want to take capital and put it to work in Australia,” he added.

Few opportunities In contrast to the United States and Europe, the market for distressed debt in East Asia ex-Japan has provided relatively few new opportunities recently, noted Sandor Schick, Managing Director of Schick & Associates law firm in Singapore. “There has been another default this year by a so-called “S-Chip”, in this case, China Milk Products, a Chinese company that is listed on the Singapore Stock Exchange.”

“This is the latest of a series of such defaults in the last few years. In addition, one Indonesian company whose secured notes are listed on the SGX, Arpeni Pratama Ocean Line PT, has also just defaulted on its obligation. But, on the whole, there have been relatively few defaults in Southeast and East Asia in 2010, and the amount of debt typically involved in such cases has also been quite small compared to the massive amount of debt at issue in certain recent, large- >>

INSIght >> scale bankruptcies outside of the re-

gion, such as those of Lehman and General Motors. There has thus been limited scope for trading in distressed debt in East Asia.

Some distressed debt trading desks have consequently been examining investment opportunities further afield such as in high yield.”

According to Schick, there is also one rather interesting and highprofile distressed situation currently unfolding in Vietnam, that of Vietnam Shipbuilding Industry Group (Vinashin).

“Vinashin raises anew an issue which often appears in cases involving state-owned enterprises: will financial support from the government be forthcoming if the resources of the debtor prove insufficient to meet its obligations? Even in the absence of any legally-binding guaranty, foreign creditors often profess to perceive an implicit sovereign guaranty of the debt of substantial state-owned enterprises. The government of Vietnam so far has taken all of the appropriate steps in response to Vinashin’s difficulties: it has removed much of the senior management of the company and has also appointed respected external financial advisors to assist in a debt restructuring. However, whether the government also determines it to be necessary or appropriate to provide direct financial support remains to be seen.”

Australia still best for debt So where are the opportunities likely to be in Asia? According to Cameron Duncan, a Partner at boutique re-

structuring firm KordaMenthaNeo, which has worked on such deals as Advance SCT and Asia Water Technology in Singapore, the distressed debt investment focus in Asia is expected to continue to be in China and Indonesia, with more opportunities also expected to arise in Thailand and India.

The added perception of risk with opportunities in India is likely to mean that non-India based investors will be more cautious until one or more large Indian workouts are successfully completed. Still, it is the land down under that remains the largest market in the region for traded distressed debt. Law firm Henry Davis York Partner Nicholas Dunstone noted Australia is the largest market for distressed debt in Asia following a slew of corporate failures in 2009.

“There has been an unparalleled influx of secondary debt liquidity into our market totaling around AU$5 billion since Babcock started trading in 2009. Now Centro and a dozen other names are well covered.

The driver for that is that Australia, is at the forefront of debt structuring,” said Dunstone. “In Australia the major banks are sellers of distressed and highly-stressed debt. The major Australian banks have denied they were involved but actually they are at the forefront of conducting auctions of their debt,” he added.

The problem for buyers of distressed debt, such as the 40 funds that are active in the Australian market, is that now the big deals are all done, there is not much left at the table.

Robin Challis, head of special situa-

“There has been an unparalleled influx of secondary debt liquidity into our market totaling around AU$5 billion since Babcock started trading in 2009.”

tions at The Royal Bank of Scotland noted that $1billion “has been traded in Centro in the last ten days.” But the focus is coming back to private placements. “There was recently a $100 million placement in a private situation and that is typical of what you will see over the next six months. If you asked me six months ago I would have said not. But now the opportunities in the secondary market are worth a lot less,” said Challis.

Burnt by private placements But according to Clifford Chance’s Bache, there are people still not prepared to go into anything private. “A lot of people in Asia have seen private deals go wrong and there will be skepticism about the private placement market going forward. China is still very difficult in terms of getting control over ownership and you are not able to do a proper restructuring. In India, a lot of the sponsors are very good litigators.” “What is most surprising is how good Indonesia has been at getting deals done. It’s not at western standards but it’s moving in the right direction,” said Bache. So who is doing the deals? According to Bache, a lot of distressed debt funds are bypassing the investment bankers and putting their own deals together with companies.

“There is still distressed debt here but it’s just not being traded and a lot of the original investors are just hanging on trying to work things out.”

If Asian Banking and Finance readers would like a copy of the report please email Naveet McMahon on Naveet.McMahon@mergermarket.com

Shipbuilding newbuild orders (DWT mn) Debt distressed by country

Ne w

In dia

Ja pa n

0 Au st ra lia

0 Ch in a

10

In do ne sia

10

Ho ng Ko ng

20

Ta iw an

20

Ph ili pp in es

30

M al ay sia

30

Si ng ap or e

40

Ze al an d

40

Th ail an d

50 No of company

60

Number of Company

debt US$ billion

50

So ut hK or ea

Debt

60

Source: Debtwire Asia Pacific

ASIAN BANKING AND FINANCE | MARCH 2011 17

OPINION CIO VIEW

BY TODd schofield Todd SCHOFIELD Global Head of Moblity, Standard Chartered

Why StanChart bought 15,000 iPhones

R

ight now, enterprise mobility is the new buzzword in business, particularly in consulting and financial services, and organisations are investing heavily in it. In fact, according to a new report by Global Industry Analysts, Inc., the global enterprise mobility market may reach US $168 billion next year.

Additionally, enterprise mobility has been quite resistant to corporate cost-cutting resulting from recent global financial market difficulties; in fact, large organizations as a whole have increased their year-on-year enterprise mobility investments. For example, a recent Forrester survey shows CIOs and IT leaders are making mobile expansion a priority, with 16 percent of them calling it “critical priority” and another 46 percent calling it “high priority.”

So how should you go about creating a mobile environment ?

Step 1: Analyse your workforce – does your staff need to be mobile?

Lost sometimes in all the clamour is probably the most fundamental question – is this really a benefit for your staff? Not every organisation needs to be mobile. Even at Standard Chartered, for example, there are a number of positions that must be on site, ranging from branch operations to IT, audit, administration and more. Is your organisation largely sales-based, or do the majority need to be in the building on a daily basis? A few influential people pushing for smartphone accessibility is not always the best reason for upending your IT department and spending months fitting all of your critical software and functionality into a device, no matter how cool it may seem.

Step 2: Choose a platform – what will work best for your organisation?

At Standard Chartered, we chose to go with iPhone for a 15,000-person global deployment.

This was not because the iPhone is “trendy” right now.

Our decision was based on an honest assessment of the functionality and security we required, coupled with the ability and commitment to make bespoke apps to help financial consultants work better. Right now Apple, Android and BlackBerry are all creating compelling platforms and solutions.

18 ASIAN BANKING AND FINANCE | MARCH 2011

Step 3: Research your customers and your employees – what applications will help them?

What type of applications do your employees need in order to better serve their customers? What applications are best left to being done on a fullsize computer? Again, be realistic.

Step 4: Be creative Once your organization has decided to make the leap, don’t just expect that the job is done. Just as on the internet, without good content, users are not fully engaged, and it’s unlikely that the perfect application and tools for your specific organisation are out there already.

At Standard Chartered, we admittedly went a bit above and beyond in this department, as we have not only created consumer application with Frog Design, but have actually founded our own application studio in San Francisco to make customised application for our employees and organisation. Not all enterprises may want to go this route, but it’s important to keep all doors and possibilities open when looking for ways to make tools and applications which are as useful to your workforce as possible.

Step 5: Ensure consistency Finally, to make this work, it has to be a long-term commitment. Organisational buy-in is key, not only for the excitement of the launch, but over several years as your mobile strategy goes through its phases.

Would you like a loan with that ?

“

We founded our own application studio in San Francisco to make customised apps for our employees and organisation.

ASIAN BANKING AND FINANCE | MARCH 2011 19

OPINION

Emma Charnock Employers fight for local talent

O

ver the past few months the number of vacancies has been steadily increasing within the banking and finance sector across Asia. While this is great news for the jobs market, many employers are finding it difficult to source candidates with the right level skills and experience locally.

We advised employers who hadn’t already done so to quicken their recruiting process and many are now doing just that.

However, with the lack of available talent, this strategy alone may not suffice. In order to fill vacancies, some employers are increasing compensation levels to attract the best talent. Many are also more open to relocating people with the right skills.

We recently asked candidates across Asia what they believe is the best way for a company to retain their employees and 57 per cent selected structured career reviews.

So unless employers have communicated career development plans clearly, employees are likely to question their future and begin to explore the rising number of opportunities on the market.

In China, economic conditions continue to improve, so there is a renewed enthusiasm to recruit.

However, skilled candidates are in short supply despite the number looking for a new role. While employers remain selective, most realise they need to move quickly to secure the best talent.

• There is a continued focus on risk management so candidates with experience in compliance and internal control are highly sought after.

• Demand is also high for Finance Executives with IT or system knowledge as most companies across all industries are now using management software programs.

skills in particular are sought by foreign banks trying to enter the market.

Employers in Hong Kong are also increasing headcount. While this is great news for the job market, many are finding it difficult to source candidates with the right level skills and experience locally. They will not only consider, but are encouraging, candidates to move from other markets.

• Candidates with current experience in International Financial Reporting Standards (IFRS) are highly sought after due to recent changes in regulations.

• Product Control, specifically equity derivatives, is a rapidly growing market in Hong Kong and there is strong demand for skilled candidates in “The best way for a company to retain their this area.

• With the rapid growth in China, there employees is with selected structured career are a lot of Chinese companies wishing to go public. M&A activity is also on the rise. This reviews.” is creating demand for corporate finance advisory candidates, from Analyst to MD level with • Due to the rapid change of tax regulations in China transaction experience.

China, senior tax professionals with strong local • With the constant flow of capital from west to government relationships and knowledge of China east and the increased corporate finance activity we tax are sought after. are predicting increased trading activity in equities • Candidates within the commercial banking sector and also in money markets, resulting in high demand are in short supply. within these areas.

• Those with PRC experience and English language 20 ASIAN BANKING AND FINANCE | MARCH 2011

Emma Charnock Regional Director Hays in Hong Kong and China

What motivates you in your choice of a new job?

• Salary - 14.8% • Company environment - 19.0% • Career development - 64.7% • Title - 1.5% In your view what are the characteristics of a “winning” company?

• Job security - 5.8% • Career development - 32.8% • Company environment and public image - 39.8% • Profitability - 21.6%

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opinion

OPINION

Anatoly Loginov Technology offers banks a path towards global competitiveness

Anatoly Loginov Chairman BPC Banking Technologies

A

sia-Pacific is green field for banking technology adoption. Banks in the AsiaPacific are where the action is when it comes to investing in technology. So says open standards e-payment solution provider BPC Banking Technologies, which has held the last three of its world-wide annual Client Conferences in the region – in New Zealand, Vietnam and Singapore – to woo banks in this part of the world.

Anatoly Loginov, Chairman, BPC Banking Technologies, said that 20% of the business is currently from the Asia-Pacific region, where the company has ten customers out of an installed base of 63 in the New Zealand, the Philippines, Singapore and Vietnam.

“We expect 50% of total revenues to come from the Asia-Pacific in the next two to three years. It is a huge territory,” he said.

Banks in the Asia-Pacific region have to compete against the international banks like HSBC, which are well-established and have the most up-to-date technology, he noted. “Local banks must be able to support their product lines with capable technology and yet support that technology with lower total cost of ownership (TCO),” he said. “To compete you need to innovate, and quickly. You can’t do that with legacy technology.”

At the same time, consumers in the region have become more demanding, and banks have to respond with new products to retain existing customer while attracting new ones. “Asian consumers are becoming more e-commerce savvy. They want to have more payment channels and more sophisticated payment tokens, not buying with cash alone,” said Rajan Narayan, Managing Director, Asia Pacific, BPC Banking Technologies, pointing to the growing use of contactless payment cards in Singapore and contactless payment at petrol stations in Vietnam as examples. “The banks need to upgrade.”

as examples of standards that banks have to comply with today. “Both India and Malaysia have come up with new payment schemes. At the national level it’s forced banks to do things differently.”

BPC’s SmartVista platform may be one of the solutions for banks as it can slash development times for new products to two weeks, down from eight to nine months with legacy systems. The lead time required from a legacy system could make the introduction of new products a tough proposition, both interms of cost and time-to-market.“You can say ‘I want this interest rate and credit limit’, literally tick boxes on the Web interface, and SmartVista creates the product. It is only limited by your imagination,” said Loginov. Another feature of SmartVista can prevent fraud at the point of transaction ‘We expect 50% of total revenues to come through a combination of neural technology from the Asia-Pacific in the next two to three and rules provided by the bank, so the system becomes more accurate over time. years. It is a huge territory.’

Alfa-Bank in Russia saved about $1 million The future looks equally challenging as new trends per month through adopting the technology, BPC take hold at banks, says the company. Consumers may officials disclosed. NETS in Singapore also decided to go to the bank in future for person-to-person payment use SmartVista when they saw that the software would services, as offered by companies like Western Union, enable lower TCOs as well as new payment channels. or sign up for cards that offer multiple applications, Meanwhile, BPC is committed to putting its money such as a credit card that also pays for transit fares. where its mouth is. The company is looking to build “Every market has its own priorities, but compliance a development centre in Singapore and expects to will matter,” added Narayan, listing PCI DSS and EMV expand further in India in the coming months.

22 ASIAN BANKING AND FINANCE | MARCH 2011

“To compete you need to innovate, and quickly.”

OPINION

opinion

Egidio Zarrella Egidio Zarrella Partner KPMG Advisory

I

It’s time to be hands-on

t is tough being a CEO in a Financial Institution in these times. It is not that public has a view of bankers which may not help, but how does a CEO negotiate these challenging and turbulent times? It is the strategic issues which give many sleepless nights. It does not matter, whether or not one leads large national, regional or global banks, the issues are similar.

This is a time where many Banking CEOs are faced with setting their strategic directions for the next three to five years and coming up with a way forward which will lead them through these turbulent waters.

There is recognition we are yet to go through a lot more. Some economies are grappling with large domestic issues.

The Context Financial Services both globally and regionally has changed dramatically. The landscape has changed where now three of the world’s largest banks are Chinese. We have most of the Western Banks still working through bad loans and toxic assets. This will take the system a while to work through. Some key questions CEO should ask include: • Have you altered your business model for a postcrisis environment and redefined your strategy in terms of market share and positioning?

• Is your business model positioned to withstand a gradual recovery, characterised by continued market austerity and potentially some further economic shocks?

• Do you understand how your risks have been affected and how the strategies of key customers, suppliers and partners may have changed as a result of the downturn?

The Business Model This downturn and even post-crisis has given many executives across Asian Financial Institutions time to think about the opportunity to dispose of underperforming, non-core assets and generate cash to support core business. This is a time to strengthen the balance sheet.

Some key questions CEO should ask include: • Are different divisions within the bank all working towards a common strategic vision?

• Have you fully addressed legacy infrastructure issues in the bank, possibly arising from strong growth prior to the financial crisis?

• Have you considered strategies such as outsourcing as a way to create a lighter and more agile business model?

The Markets While many global and regional Financial Institutions remain cautious in entering new markets, many do recognise Asia’s

continued importance as a region of opportunity that will shape developments in the global economy.

Many organisations may wish to shift their strategic focus away from the more developed markets, where growth is likely to be slower than they previously forecasted. I find many Asia-Pacific CEOs faced with considerable pressure to grow the top line while managing the costs very tightly.

Some key questions CEO should ask include: • Has the Bank used the downturn as an opportunity to take difficult decisions and refocus towards new growths markets?

• Is your strategy for growth through M&A or JVs based on real strategic parameters or just a quest for market share?

• Have you a definition of the value of your business in different emerging markets and do you know where the skills and talent that you need for your business to reside?

Funding the business model Where previously there was ample capital available, now it is critical to consider whether capital is being allocated appropriately, efficiently and competently. In the new environment no Banking CEO can just rely on the CFO or even Finance team to answer this question and should seek to understand capital management issues more thoroughly.

This is definitely tough times for a Banking CEO. As we move through this post-crisis the ability of Banking CEOs to hire, motivate and retain good people, including the right local talent, is important to take advantage of the growth opportunities for us in Asia. It also helps maintain a competitive edge over industry peers.

ASIAN BANKING AND FINANCE | MARCH 2011 23

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OPINION

OPINION

Andrew Dickinson Andrew Dickinson Banking Sector Leader KPMG in Australia

Watch out for Bank Levy

A

lthough Australia has specifically rejected the idea of a global bank levy to help defray the costs of past and future financial sector bailouts, local institutions could still be caught by bank levies imposed elsewhere.

Proposals for a global bank levy, tax or, to use the terminology favoured by the International Monetary Fund, a ‘financial stability contribution’, have been around for some time. Such a levy would be imposed on bank liabilities and its proceeds used to help cover the cost of taxpayer-funded assistance to financially troubled banks.

One of the aims of some currently proposed levies is to influence the behaviour of financial institutions by, for example, discouraging excessive risk taking.

Thus certain balance sheet items such as Tier 1 capital and certain retail deposits are excluded from some of the proposed levies.

Australia has already rejected such a levy while the US version of the levy — a proposed ‘financial crisis responsibility fee’ — was dropped by Congress from the final version of legislation to reform bank regulation.

The recent G20 meeting in Toronto also appeared to abandon the notion of a global bank tax, instead settling for a common set of guidelines.

However, elsewhere the idea is alive and kicking.

The EU is pushing for the introduction of the levy, although cannot agree how the funds raised should be used.

Germany and France have put specific proposals on the table, while Hungary and Sweden already have legislation in place. In the UK, the new coalition government has announced it intends to legislate a banking levy to raise up to £2.5 billion annually. The UK levy is proposed to operate from next January and will apply to the global liabilities of UK banks and

determining the future domicile of some banks and other financial institutions. It may also result in the transfer of riskier activities to countries without a levy, such as Australia.

Those jurisdictions implementing levies are pushing for a universal levy to be agreed upon to prevent such relocations.

As proposals currently stand, unless countries introduce specific measures, or adapt existing international agreements, the problem of double taxation cannot be relieved under traditional mechanisms for dealing with the issue.

‘The existence or otherwise of a banking (Foreign bank levies could become a levy could be an important factor in permanent cost to Australian banks because they would be unlikely to be able to claim a determining the future domicile of some foreign tax offset in respect of such levies.)

Other differences that could have practical banks and other financial institutions.’ implications include the rates at which the tax is levied, the caps and thresholds that might apply, the UK liabilities of foreign banks. and situations in which a levy is deductible in one Based on proposals so far, it appears Australian jurisdiction and not another. Different computational banks with operations in these countries will pay the rules could also apply. levy on their activities or liabilities in those countries.

These differences promise to present opportunities KPMG believes the existence or otherwise of as well as create distortions. a banking levy could be an important factor in

Solid building of universal bank levy

ASIAN BANKING AND FINANCE | MARCH 2011 25

2011 OUTLOOK

2011 is all about risk management

By Philip Rodd, Partner in Ernst & Young Financial Services - Advisory practice

R

isk continues to be a hot topic among the financial services industry, and we are increasingly seeing financial institutions globally and in Asia, revisiting their ‘three lines of defence’ model, with particular emphasis on the importance of front line staff. While many of these conversations are focusing on risk, the real value lies in considering the balance between risk and reward and explicitly engaging the front line in active management.

A number of common issues caused risk management failure When we say that failure in corporate governance and risk management was a root cause of the financial crisis, what we really mean is that in many cases executive management 26 ASIAN BANKING AND FINANCE | MARCH 2011

“A new class of senior risk management professionals with direct operational experience is emerging.“

had limited visibility of the risks being taken across the business. Risks were either not properly understood or their potential impact across the entire organisation was unclear.

There were a number of common issues across the financial services sector that contributed to this situation. Risk management frameworks and processes had been developed but not adopted effectively across the whole organisation. Data was kept in silos in various operational units without common naming conventions or methods to easily consolidate information across the group, which made it difficult to understand the cumulative impact of issues across an institution. Reports were either too detailed for management to absorb or failed to flag key exposures. Roles and responsibilities for managing risks

were poorly defined or understood, so accountability was unclear.

What is clear is that risk management activities tended to focus on a cycle of processes, systems and compliance rather than assisting in understanding the consequences of risks and their potential impact on business outcomes.

Most financial institutions have been investing heavily to resolve many of these issues. However, fixing systems, reports and processes is much easier than effecting lasting change within the workforce. Building the confidence of front line staff to take risk, while ensuring this is done within clearly defined tolerance levels, is a key challenge that financial institutions must address to grow and prosper.

Getting back to the basics There is evidence to show that Boards and CEOs are no longer just relying on risk management and the audit functions to build world class frameworks and provide independent assurance. They are also reinforcing risk management accountabilities and re-embedding risk into frontline operations.

2011 OUTLOOK This refocusing of activity can take many forms but common initiatives include revisiting risk appetite and associated tolerance levels that underlie business decisions to ensure front line staff can understand and interpret them; and developing risk reports that provide appropriate analysis of the many risk data sources across an organisation. Reports now focus on giving executives a single version of the truth across the organisation and contain appropriate commentary so organisations can develop contingency plans that take into account extreme events and emerging risks.

Most institutions will be well aware of these elements and will be working towards improving them. However, many are still grappling with

model to corporate governance. The first line of defence lies within every risk-taking business unit. On the first line, ownership and accountability for any risks taken resides with the executives of each business unit. The second line is the risk management and compliance functions that coach and provide oversight and challenge to operations. The third line of defence includes internal audit, which provides independent assurance to the Board and various Board Audit and Risk Committees.

Whilst this is not a new concept, some companies are re-invigorating this structure. In the past, the model was relatively unsuccessful in ensuring frontline staff understood the trade-off between risk and reward.

“While management has long had nominal responsibility for risk they have often struggled to link their implicit understanding of commercial risk to the risk management framework. “

Some financial institutions are revisiting the ’three lines of defence’ approach. the behavioural change that will ensure these tools and processes are embedded and used appropriately by staff across the organisation. Some financial institutions are revisiting the ’three lines of defence’ approach to corporate governance to do this, an approach that firmly places risk management responsibility and accountability with front line staff, and clarifying the roles of risk management teams and independent audit professionals.

Three lines of defence Most financial institutions broadly operate a ‘three lines of defence’

Roles and responsibility for managing risks were unclear and accountability for the effectiveness of controls was ambiguous.

Clear roles and responsibilities While management has long had nominal responsibility for risk they have often struggled to link their implicit understanding of commercial risk to the risk management framework. As a result, there has been confusion between the role of risk functions (the second line) and accountability within business units themselves.

Many chief executives are now

Philip Rodd

clearly delineating responsibilities between front line staff, who must understand and manage day-to-day risk, and divisional risk and compliance teams that provide coaching, supervision and oversight. Clear boundaries are now emerging between each line of defence with information flowing freely between them.

Individual performance incentives are now being explicitly linked to risk based measures, so these accountabilities are clearly understood. This change in behaviour is also being enforced by global regulators.

The right people with the right skills Many organisations are now reinforcing the need for their leadership teams to provide clear direction and to challenge the business on risk management related activity. A new class of senior risk management professionals with direct operational experience is emerging.

These new risk professionals build strong rapport across frontline teams, focus on making risk management relevant to the business, and provide more comfort that staff understand and operate within agreed risk appetite and tolerance levels. Senior risk managers are shifting their focus from measuring past performance to providing real time measures of key risk limits and tolerances to understand if they are under stress or may be exceeded.

Teams are discussing the impact of evolving risk exposures and trends more regularly and addressing issues proactively as they discuss business opportunities.

A more risk aware first line of defence is now being seen as an enabler of growth that can be used to help banks, insurers and other financial institutions to understand the environment within which they operate and as a mechanism to support competitive advantage.

In addition, organisations that can effectively embed risk awareness and management will be better positioned to convince regulators, shareholders and rating agencies that their governance and risk management initiatives are strong and are aligned to both internal and external thinking. Embedding risk management in the first line of defence should now be a key focus for all Boards.

ASIAN BANKING AND FINANCE | MARCH 2011 27

OPINION

David Cohen

Hong Kong’s ‘Dim Sum’ market poised for take-away growth

A

significant development that is currently unfolding is the evolution of the CNY into a more international currency.

China has begun relaxing historically tight restrictions on convertibility, and use of CNY outside of its borders. One motive for liberalization is their hope to encourage increased use of CNY when settling trades with China, still largely settled in USD, EUR, and JPY. Beijing last year unveiled new measures permitting increased CNY balances in Hong Kong, allowing Hong Kong to play the role of offshore money market for CNY. By permitting CNY to circulate in the interbank market, and facilitating emergence of a CNY-denominated bond market, Hong Kong will serve as a laboratory for Beijing to test the waters before establishing full currency convertibility. PBoCHKMA accord in July 2010 allowed banks to offer CNY loans and deposits, while freeing them from previous restrictions on CNY conversion. Relaxed rules are boosting offshore CNY circulation in HK, though they can still only flow freely cross border through trade settlement or via 20,000 CNY daily conversion cap. Yuan deposits in Hong Kong more than tripled to 280 billion CNY by November from 89.7 bln CNY in June, and should surpass 1 tln CNY by 2013. Together with allowing CNY to accumulate in Hong Kong, PBoC-HKMA has been opening up channels for investors to access Chinese domestic market. Historically, overseas investors have needed special quotas to buy mainland assets, but last August, China said it would allow overseas financial institutions to invest yuan accumulated outside the country in China’s interbank bond market.

These facilitated emergence of an offshore market in CNY-denominated debt, the so-called “dim sum” bond market in Hong Kong. Foreign investors, prevented from buying domestic CNY debt by strict

was welcomed as helping establish a benchmark yield curve in Hong Kong, and highlighted disparity with the onshore market - - HK coming in over 100 bps inside the on-shore curve, reflecting appeal of CNY assets to foreign investors.

For borrowers, the offshore CNY bond market provides an opportunity to fund on-shore operations at an attractive rate. Last year saw offerings by government-related issuers as China Development Bank, and Export-Import Bank of China, along with Asian Development Bank and World Bank’s IFC unit.

McDonald’s last August became first nonfinancial foreign company to issue CNY-denominated bond in HK to finance Chinese expansion, followed in November by Caterpillar, to fund its mainland leasing subsidiary. Total offerings totaled 40.7 billion CNY in 2010, according to Bloomberg, which could more than double to exceed 100 bln CNY this year.

Another aspect of currency liberalization is emergence of an offshore fx market, after trading in CNY had been confined to the state-run exchange in Shanghai. ICAP and Thomson “For borrowers, the offshore CNY bond Reuters electronic trading platforms have market provides an opportunity to fund onbegun accommodating offshore yuan, quoted under the symbol CNH (for HK) shore operations at an attractive rate.” rather than the standard CNY, legally distinct capital controls, face no such obstacles here, providing from fx on the mainland. As there is no free flow of a new way to bet on CNY appreciation, enhancing yuan between the two markets, spot yuan in Hong appeal amid expectations for continued appreciation.

Kong has consistently traded at a premium to onshore Bloomberg put the amount of outstanding yuanyuan. Outlook for the offshore market appears bright denominated debt in Hong Kong at about 55 billion as continued inflow of yuan into Hong Kong will yuan in early December. support growth in CNY-denominated debt issuance Beijing signaled intention to promote development and offshore fx-trading. Reforms implemented of offshore market last November by issuing 8 bln last year represent notable steps in evolving CNY of government bonds of various maturities. This internationalization of the CNY. 28 ASIAN BANKING AND FINANCE | MARCH 2011

David Cohen Director, Asian Forecasting, Action Economics

CNY VS basket and USD-CNY.

FEATURE service, reduce cycles times online and enable them to manage their risk better against their standard set of reports and have a view of any one customer or multiple customers across multiple regions; thus, cutting down on re-work time and internal processing time.

Taking banking across the globe

Graeme Beardsell, Experia’s Managing Director for South Asia, elaborates their effort to help the banking industry By Tim Charlton Tell us about the HSBC Announcement with Experian.

We’re very very excited about the deal that we’ve just announced with HSBC. It’s a global deal called “Connect Plus” where we provide HSBC with our unique technology to connect to any credit bureau that they wish to connect with anywhere in the world. So it’s a global deal but it’s starting here in Asia-Pacific. We’ve announced that we’re beginning in four countries in Asia, so Singapore, Malaysia, India and Thailand.

And what we’ll be able to do is provide not only a standard connection to credit bureaus but also provide the bank with the standard set of analytic tools, so they can analyse the risk and the propensity to take on more risk of all sorts of customers particularly customers who have cross-border business, so it’s very important to the bank and very exciting for us to be supporting that.

How does HSBC benefit from Experian Connect Plus?

Well, the benefit is back to what I said

“Top 200 banks around the world have different Experian products.”

a minute ago, just to elaborate on that, it’s giving them a standard interface to all number of bureaus. Experian can bring an access to over 200 different credit reports, 200 different interfaces and credit reports with over 80 bureaus around the world. We can also standardise the platform and the output of the bureau information so that HSBC have common user interfaces that work across all of their different countries. It enables them to have standard processing plus we can also put in our tools underneath like strategy manager. It gives them a very consistent way to analyse risk and analyse their capacity for loans, for businesses and individuals in one market or many markets.

Why did HSBC see the need for data analytics and aggregation tool?

Because HSBC is dealing in a lot of different countries and they wish to aggregate the credit information that they get on their customers in one place on a consistent standard. They believe that that would give them a chance to deliver better customer

What technologies and related benefits can Experian’s Decision Analytics offer banks?

So Experian is one of the world’s leading software companies and solutions companies dealing with banks around the world. All of the top 200 banks around the world have different Experian products. The Decision Analytics line, specifically the products that we’re getting a lot of interest with here in Asia and around the world, are the products that are focused on customer management, customer segmentation, cross sell and up sell, risk in analytics, and also our products that deal with SMA lending.

In that product range, we have things like strategy manager, which HSBC is using underneath this Connect Plus Solution to give them a lot more detailed information about how their strategy is working with their customers. We also have a product called Probe which looks after customer management. We have a product called Transact, which manages the day to day relationship with customers or again customer relationship management. Both Probe and Transact can be used to help with cross sell and customer profiling.

Who are your banking customers in Asia-Pacific?

In Asia Pacific, we have over 30 banking customers and about half a dozen insurance customers. A lot of them don’t allow us to talk about our solutions with them because it’s key to competitive advantage but some of the ones that I can name include most of the banks in Australia. Commonwealth Westpac and ZED are all good customers, in the North of Asia, obviously, HSBC who also operate in Australia, and banks like Rakuten in Japan,and Guandong Development Bank in China.

This is also a very flexible technology platform around which we can build specific customer analysis needs and specific credit bureau connections.

ASIAN BANKING AND FINANCE | MARCH 2011 29

Y R A L SA EY SURV 1 0 20

SPECIMEN

Corporates need to defend their money

institutions may not have always complied. And while incidents like the above are not common, it does happen. The question really is: Is this just the tip of the iceberg and a sign of bigger problems?

Businesses’ “three lines of defense” may not be strong enough to withstand the next lapse of controls. By Duncan Edwards and Chris Feret

So what went wrong?

In the above case, £33.3m is a colossal amount for what one could argue was an “administrative oversight”.

Upon closer inspection, it reveals weak internal controls and a lack of coordination among the “three lines of defense” within the organization.

The “three lines of defense” commonly refers to the way a business manages its risks. The “first line of defense” is the line management who assume ownership of risks across the business. Their job is to identify major risks and implement robust controls that safeguard both the business and its customers.

The “second line of defense” consists of the risk management, legal, compliance and, in insurance companies, actuarial functions.

These groups of people should develop an effective risk management framework that enables them to continually monitor risk exposures, and support and advise the line management. The “third line of defense” is internal audit, whose role is to provide

I

f a financial institution collapses, who comes first? You, the customer; or a long list of creditors? And as management of the financial institution, what do you have to worry about?

In June 2010, a global financial institution received the largest fine in the UK’s Financial Services Authority’s (FSA’s) history at £33.3m (S$70m).

The fine was for failing to put as much as £16b (S$34b) of customers’ funds into segregated accounts protected with trust status. This would have protected the client funds in case the bank became insolvent. In what was described as a “serious breach” of rules governing the segregation of the bank’s money and its customers’, had the bank become insolvent at any time, these customers’ monies would have been at risk of loss to the customer.

30 ASIAN BANKING AND FINANCE | MARCH 2011

“Many multinational financial services institutions have grown organically, with ad-hoc acquisitions and without structured planning.”

Margaret Cole, Director of Enforcement and Financial Crime, Financial Services Authority in the UK said, when publically announcing the fines: “Customers should be able to assume that authorized firms have the right systems and controls to safeguard their assets.

To put clients at risk of significant financial loss by failing to segregate client money appropriately for a period of two years - this is simply unacceptable. It is essential for firms to adhere to our client money rules and recent action in this area shows that our focus has intensified.

Firms should be in no doubt that if they fail to get their house in order in this regard we will take action against them.” She also said that they had “several more cases in the pipeline”.

So even with regulations and safeguards in place that serve to protect the interest of customers, financial

ENDING the PEG independent and objective assurance over the effectiveness of the first and second lines of defense.

However, many view the internal auditors as causing periodic disruptions to the business and adding little value to the organization, beyond ensuring compliance.

In reality, internal auditors are in a position to play a strategic role by generating ideas for process and control improvements, and should be involved in any strategic business investment where a missed risk could dampen earnings or reputation. Internal audit should be looking at the bigger picture.

It should not be auditing lowerlevel risks, rather auditing the risks that truly matter and to that end, have a seat in the boardroom to explain the risks and gaps that need to be addressed.

The desired transformation of the role of internal audit will, in itself, warrant a step to change everyone’s mindsets.

So with the “three lines of defense” in place, how could things still have fallen through the cracks? One of the possible reasons is that many multinational financial services institutions have grown organically, with ad-hoc acquisitions and without structured planning. Over time, as departments and functions evolve, duplication – or worse – gaps of activity or con-

trol occur among the three lines of defense through lack of awareness, inadequate risk mitigation or simple complacency.

Further, the situation is exacerbated by how the “three lines of defense” upwardly report. Typically, each of them reports independently to the board and executive management.

With each of them having different definitions of risk in terms of terminology, importance, likelihood etc., and making differing assessments of the business in silos, boards and executive management are often handicapped by the lack of a single, clear

Duncan Edwards and Chris Feret

“Many countries without the peg can let interest rates and/or their currencies rise, but we can’t, and this has pushed property prices up.”

picture of where the real issues lie.

What can you do?

Before the next lapse in controls occurs in your organization, as management of a business, it is timely to consider if your “lines of defense” are integrated and if internal audit is focusing on the risks that matter. It pays to ensure that there is a cohesive and coordinated approach to managing your risks, and that there is leverage, not duplication, among your lines of defense to provide a harmonized picture of your risk exposures.

The advantages of providing a more integrated assurance approach are clear – lower risk, lower costs and greater competitive advantage.

If you are an Audit Committee or board member, challenge the risk coverage in the organization. Examine if the organization is identifying the high impact risks or just making incremental changes to existing risks.

Question when an independent review of the effectiveness of the internal controls, such as the safeguards for client monies, last took place.

And if you are a customer of a financial institution, it is in your interest to take control of the concentration of your monies, and to always ask the right questions before you park your funds with any institution.

The writers are Duncan Edwards and Chris Feret, Executive Director and Manager, Risk, Ernst & Young Advisory Pte. Ltd. The article represents the personal views of the authors and does not necessarily reflect the views of Ernst & Young.

ASIAN BANKING AND FINANCE | MARCH 2011 31

opinion

OPINION

larry haverkamp Larry Haverkamp

Is Fidrec fair?

The biases are subtle, hidden and substantial

C

Financial columnist and adjunct faculty in Finance, Economics and Statistics at SMU

onsumers depend on Fidrec, the Financial Industry Disputes Resolution Centre.

Its job is to mediate disputes between customers and financial institutions. But is

it fair?

Fidrec is somewhat of a monopoly since consumers with a financial dispute have almost nowhere else to turn. The Small Claims Tribunal does not hear financial cases. One can take a case to the courts -even after losing at Fidrec – but it’s expensive. Costs can easily exceed the damages sought. Contrary to popular perception, Fidrec is not a government body.

It is a limited liability company, registered in 2005 and listing over 400 “subscribers” on its web site. All are financial institutions like banks, brokers, insurers and financial planners. Most prominent are the 130 banks.

Fidrec hires, fires and reviews the performance of its adjudicators. It also pays their salaries, which come primarily from the financial institutions. They provided start-up capital and pay $500 per case, while plaintiffs must pay only $50.

On the one hand, the lower cost benefits small investors. On the other hand, it may hurt them as well since Fidrec relies on the financial institutions -who are defendants -- for its financial survival. Does this introduce a subtle bias at Fidrec in favour of the hand that feeds it?

Some of the adjudicators are retired judges and Fidrec’s web site shows that most who heard structured product cases are from big law firms.

Lamb vs wolf negotiations How many of these law firms have financial institutions as clients or potential clients? How many if any have excused themselves because of actual or potential conflicts? These key questions have never been addressed.

Fidrec’s most well-known cases involved structured products like Lehman Brothers’ Minibonds and DBS’s High Notes 5. Those and all other cases require that plaintiffs make an effort to resolve their complaint with the financial institution before bringing it to Fidrec. It sounds reasonable but presents two problems: First, it is unusual for a plaintiff to turn over all his evidence to the defendant and get nothing in return.

The financial institutions can use the evidence against the plaintiff if the case eventually goes to Fidrec or the courts.

Second, a financial institution, like a bank, would receive a complaint from a customer and then review 32 ASIAN BANKING AND FINANCE | MARCH 2011

the customer’s file. It would look at the bank’s total relation with the customer including loans, deposits, investments and the length of time they have been a customer.

If it’s a highly profitable relationship, the bank may find it worthwhile to offer a generous settlement to keep the client. If it’s not, the plaintiff has less bargaining power and may receive less compensation, if any. This makes sense from the bank’s perspective.

From the client’s point of view, it could help or hurt but it has nothing to do with the merits of the case. It favours the rich and well-connected. It hurts the less affluent.

A second problem is consistency. Courts, for example, are transparent. In contrast, Fidrec requires that its plaintiffs sign a declaration not to disclose anything about the case’s proceedings or its outcome.

Other arbitration cases (non-Fidrec) may have non-disclose clauses, but these are agreed to by both sides. They are not gag orders imposed by an arbitrator, which happens to be a private limited company owned by the defendant. Common law relies on precedents for fairness and consistency.

They make it likely that similar cases will be settled similarly. It is hard to establish precedents, however, without knowing the outcomes of cases and no Fidrec case is publicly available.

Defendants are large financial institutions with a legal staff and a history of how similar cases were adjudicated or settled by their own firm.

It is a powerful advantage and gives the financial institution at least a partial history of precedents plus expert advice on how to interpret them.

Lehman’s Dick Fuld Would you like a default with that Minibond ?

“

It is hard to establish precedents, however, without knowing the outcomes of cases and no Fidrec case is publicly available.

OPINION OPINION

Jordan Griffiths & Pascal Gautheron

T

Can Risk and Finance really come together?

he [US]$2.5 trillion in market value losses between January 2007 and October 2008 incurred by the world’s top 200 banking players and the new wave of regulation and government intervention, which is resulting in higher capital ratios, the need to de-leverage balance sheets and higher nonperforming loan provisions are creating an urgent need to change.

This new environment is forcing banks to seek new ways to improve the consistency, transparency and quality of their finance and risk information.

While the pressures are mounting, the capabilities of banks have not changed dramatically since early Basel II implementations.

Risk systems and processes have traditionally been independent and unable to give senior executives an overall picture of bank-wide risk, across all risk types.

The Value of Integration Boards and Executive Teams of large universal banks are asking themselves questions like: • Have we priced all of our risks adequately? Can I price them by customer and product types?

• What is the profitability of a business unit, portfolio or activity when allocated capital and risk are taken into account?

• How can I rationalise my decision process on risks and investments?

• Can I compare the performance of my business lines according to their risk profile?

• I know my risk, but how can I improve the return for that level of risk?

• Why do I get finance and risk reports on the same business which do not align?

• Which risks should we be taking to grow our profit?

What if both risk and finance teams could work together to answer all these questions and resolve root causes behind some of these issues? If they could, we believe that they would deliver a potential increase in Economic Profit (risk and capital adjusted) of 1–5 % 1. Providing reconcilable and drill-down information through Finance & Risk Integration (data, IT, reporting & processes) could generate up to 0.5% increase in EP 2. Focusing on the right customers through risk based customer analytics could drive up to 3% increase in EP 3. Factoring in cost of capital and risk into front line pricing & decision could enable up to 1%

increase in EP 4. Embedding economic capital drivers into KPIs/ reporting / incentives could generate up to 1% increase in EP. Integrating Risk and Performance Management An integrated risk and performance management (IRPM) capability can add value by enabling better decisions and making a significant impact on overall profitability.

In the past multiple barriers made it impossible to implement this integrated risk and performance management vision.

Today, we’re seeing large institutions attempt to break traditional barriers down and tackle the vision head-on.

First, executives now have a shared intent, often driven by the desires of their boards, to have risk and finance collaborate to achieve the economic profit benefits described above and to provide greater certainty and transparency in dealing with regulators.

Second, the data complexity and quality issues, often uncovered while the banks tried to become Basel II compliant, are now being addressed either by technology programs which substantially simplify the bank’s core data, such as core banking programs, or through new technologies allowing banks to take abstract of their legacy data through a master data model.

Third, the disparity of analytical models which before led to different assumptions, model outcomes or scenarios being applied to the same data is being addressed by more mature and comprehensive technology solutions - in particular from SAS, Oracle and SAP - which allow finance and risk teams to build once only and share assumptions, models and scenarios.

Finally, finance and risk teams now understand that the planning, target settings, operating and monitoring activities they undertake can follow a similar pattern and therefore can be linked to deliver an integrated result.

Better decisions come after IRPM capability

ASIAN BANKING AND FINANCE | MARCH 2011 33

Last word Emanuel Hiou

Moving towards a tax level playing field for Islamic finance The review of tax treatment of Islamic Finance products is one of the main tax recommendation of the Report on Australia as a Financial Centre.

One of the main tax recommendation of the Report on Australia as a Financial Centre prepared by the Australian Financial Centre Forum chaired

by Mark Johnson (the Johnson report) was the review of the tax treatment of Islamic finance products to ensure parity of tax treatment with conventional finance products.

The Board of Taxation has been asked by the Federal Government to undertake a review to ensure that Australia’s tax laws do not inhibit the expansion of Islamic financing and investment products in the Australian market.

The Board will provide its report and recommendations to the Assistant Treasurer by June 2011. The Board of Taxation recently issued a discussion paper seeking views on any tax impediments.

The Middle East and Southeast Asia Islamic region has emerged as a potential source of funding for Australian financial institutions and market for investment products offered through Australian intermediaries such as funds managers.

The Islamic finance market has been experiencing rapid growth with funds flowing into global bond, managed funds and insurance markets.

Islamic finance and investment products are governed by certain Sharia law principles. This has created considerable uncertainty about the

“The Board of Taxation has been asked by the Federal Government to undertake a review to ensure that Australia’s tax laws do not inhibit the expansion.” taxation consequences of various products offered to Islamic financiers and investors by Western or conventional issuers and counterparties.

For example, Sharia law

principles prohibit the payment of interest, require the sharing of profits and losses, require an underlying tangible asset, prohibit financing of certain industries such as gaming, alcohol and tobacco, and investments must be certified Sharia compliant. The Australian tax consequences of Islamic financing and investment products that involve profit mark ups, or pre-agreed profit splits or that produce gains or profits that are not interest in legal form are uncertain.

The Board of Taxation’s discussion paper includes several case studies using Islamic financial arrangements which highlight various uncertain Australian tax outcomes for issuers and investors.

These arrangements may be characterised as debt or equity for tax purposes. The existing regime for the taxation of financial arrangements generally applies to debt products and, in limited circumstances, to equity products. Certain timing elections may affect the timing of the recognition of gains and losses under this regime. Many of these elections require various conditions to be satisfied.

If the arrangements are treated as hire purchase arrangements, they may be taxed as a notional sale and loan with a component, of the payments treated as a finance charge. If the arrangements involve cross border payments which include a finance charge or a profit component these may be subject to interest withholding tax.

However, it is uncertain as to whether they would be able to qualify for the interest withholding tax exemption available for interest paid on conventional debentures and bonds issued in wholesale funding markets.

Where the arrangements involve the transfer of underlying tangible property the possible application of certain transaction related taxes such as capital gains tax, goods and services tax, stamp duty and land tax will need to be considered.

The Board of Taxation will need to consider whether it is possible to rely on an administrative response involving the issue of interpretative guidance by tax authorities on the application of existing tax law to Islamic products.

Emanuel Hiou, Banking Tax Partner, Deloitte

34 ASIAN BANKING AND FINANCE | MARCH 2011

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