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CHINA PUTS SQUEEZE ON WEALTH BANKS HOW BANKS USE SOCIAL MEDIA STANCHART: UNDER PRESSURE ASIAN M&A: WINNERS REVEALED FOREIGN BANKS DETERRED BY INDON RISKS

BIG ISSUE Singapore banks to face headwinds in 2013?

SECTOR REPORT Banks struggle with consumer technologies

OPINION Privatising money in Asia

PAGE 22

PAGE 26

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ANALYSIS China whips wealth management products into line PAGE 18

FROM THE EDITOR Publisher & EDITOR-IN-CHIEF ASSOCIATE PUBLISHER Assistant Editor Art Director

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In this issue of Asian Banking and Finance, we give you comprehensive reports and updates on China’s banking industry, especially in terms of new regulations in the wealth management and local government financial vehicles sectors. Our channel checks reveal that bold new regulations seek to lower risks borne by Chinese banks offering wealth management products which are now valued to be a market worth RMB 9.5 trillion. The tightened oversight proposed should address the growing public concerns on the potential risks when investing in WMP products. Meanwhile, regulations are also imposed for stricter oversight and control requirements on local government financial vehicles or LGFVs. In fact, the China Banking Regulatory Commission recently distributed guidance that strengthened the supervision of loans to LGFVs, which the commission estimates totalled RMB9.2 trillion. In this issue we also give you our very first country report which explores the banking and finance industry in Indonesia. We found out that while fast-growing Indonesian banks are irresistible on paper, sizeable transaction risks are keeping buyers at bay. Find out how you can make the most out of the Indonesian market, which has emerged as one of the most attractive banking systems in Southeast Asia with low credit penetration, strong and resilient economic growth, and an expanding middle class. You can also find our regular sector reports which now tackle banking technology and how banks use the ever-growing social and digital media to their advantage. We asked banks from around Asia Pacific to know how they keep up with the rapid advancements in banking technology. Enjoy the issue!

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

ASIAN BANKING AND FINANCE | SEPTEMBER 2013

CONTENTS

SECTOR REPORT: banks struggle with consumer technologies

FIRST 08 No-hassle cancellation in Singapore

08 An alarming trend in transaction banking

09 China gets tougher on LGFV 10 StanChart: Where angels fear to tread

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 06-09 E, Maxwell House 20 Maxwell Road Singapore 069113 4 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

OPINION

wealth management products WHIPPED inTO line

Outlook mixed for Asian banks in second half

FEATURE

14 Privatising money in Asia 22 Singapore banks to face headwinds in 2013?

22 Can Chinese banks sustain profitability?

12 More Asian Companies

march west to go global

2012 marked a high point in mergers and acquisitions with fast-expanding Asia-Pacific firms going on a Western buyout binge.

28 Indonesia haunted by big transaction risks Indonesian banks, buoyed by strong growth prospects, should be irresistible on paper. But sizeable keeping buyers at bay.

For the latest banking news from Asia visit the website

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ASIAN BANKING AND FINANCE | SEPTEMBER 2013

News from asianbankingandfinance.net

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

LENDING & CREDIT

most read

China’s shadow banking sector now valued at over U$5.8t

MARKETS

Taiwan’s FSC concerned about new business tax Says it would cut weak profits in an unfavorable economic environment. Financial Supervisory Commission Chairman Chen Yuh-chang is questioning a proposal by lawmakers to raise the business tax on financial institutions to 5% from 2% to increase government revenues. RETAIL BANKING

UOB to suffer 5% profit dip to $662m Net interest income is still weak. According to CIMB, they expect UOB to report 1Q13 net profit of S$662m (down 5% qoq, in line with consensus). UOB 4Q12 results had a similar tone to peers – margins were still on a downward trajectory, NII was weak and revenue was supported by strong non-interest income. RETAIL BANKING

HK and Singapore banks fear losing key staff

petitors this year. TRADE FINANCE

How smaller transaction banks can challenge StanChart, HSBC, Citi Cumulative market share of the ‘Big Three’ is now down to 52.9%. According to East & Partners, tighter lending margins coupled with fierce competition for deposits have placed immense pressure on local and international banks in Asia to secure and maintain market share. RETAIL BANKING

Weak deposit growth hammers China’s banks Loans exceed deposits at

Nine in 10 banks and financial services firms also experience recruitment problems. A study conducted by recruitment firm Robert Half showed that 93% of Hong Kong respondents and 92% of Singaporean respondents were concerned about losing important employees. About eight in 10 said they worry about losing top performers to com6 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

a faster pace. China’s largest lender, the Industrial and Commercial Bank of China Ltd, and other banks are now paying more for savers’ money and are being hit by falling margins. ICBC said loans were growing at a faster rate than deposits. Deposits rose 4.5% while loans rose 5.2%, the bank said. Another Big Four stateowned bank, Agricultural Bank of China Ltd, reported similar numbers, with its loan book growing about 10% faster than its deposit base. RETAIL BANKING

Citi to open 6 more Asian desks for its corporate clients in the next 12

It’s 69% of China’s GDP. JPMorgan Chase said this total was equivalent to 69% of China’s gross domestic product and almost double what it was two years earlier. Previous estimates from other sources said the shadow banking sector accounted for 60% of GDP. JPMorgan said it is the rapid growth in shadow banking, instead of its size, that could generate systemic risk. Previous means estimates for the size of China’s sector have ranged from as low as 2 trillion to 3 trillion renminbi to a high of 30 trillion renminbi.

months Find out where the desks will be located. Citi recently announced that it plans to open six more Asian desks in the next 12 months to serve Asian corporate clients across the world tax. The desks will compliment the 13 already opened by the bank that are servicing Asia’s leading corporate clients. RETAIL BANKING

Here’s why DBS’ 1Q13 was mindblowing for analysts Loans rose by 6.2%. According to CIMB, they were blown away by DBS’ 1Q13. Net interest income grew 2.6% qoq as NIMs unexpectedly expanded and loans grew 6.2% qoq. Fee income was strong all around, particularly trade-related and capital-markets related fees. DBS HK sustained its turnaround with profits up 35% qoq.

ISLAMIC BANKING

India launches first Islamic equity index Provides a new benchmark for Islamic investors. The Bombay Stock Exchange said the Islamic equity index is based on the wide-measure S&P BSE 500 index. The new index comprises the largest 500 companies in the BSE. It adheres to Islamic finance principles such as prohibitions on investing in alcohol, tobacco and gambling-related businesses. RETAIL BANKING

Philippines increases MBO deposit limits by 63% Move intends to help promote financial inclusion in rural areas. The Rural Bankers Association of the Philippines said this initiative by the Bangko Sentral ng Pilipinas, the central bank, to increase the deposit limits of micro-

According to a statement, Bloomberg Markets, the leading provider of Business, Financial and Economic news has released its 2012 ranking of the World’s Strongest Banks, in which QNB has ranked as Number 1. The 2012 ranking included 78 banks worldwide, with QNB being the only bank in the MENA Region. RETAIL BANKING

Bank Danamon eyeing wholesale banking business expansion

banking offices (MBOs) will give rural depositors greater flexibility in saving their cash. RETAIL BANKING

How DBS beat peers in funding management game Net interest margin expanded by 2bp. According to CIMB, despite peers experiencing a 6bp NIM decline in 1Q13, DBS bucked the trend by expanding NIMs by 2bp. CIMB said that while the yield on interestbearing assets declined by 2bp in the quarter, DBS was able to lower funding costs (down 4bp) by taking advantage of cheap wholesale funding from the money market and reducing its reliance on high-cost fixed deposits. LENDING & CREDIT

Indian banks’ retail credit rises 14.5% Economic slowdown forces banks to push

retail loans. The Reserve Bank of India said banks’ outstanding retail loans grew 14.5% in March 2013 as against the 12.9% growth year-onyear. All other major banking indicators slowed during 2012-13 financial year, RBI said. Credit to industry grew 15.7% in March compared to 20.3% yearon-year. Credit in the priority sector grew 8.6% in March versus 12.1% year-on-year.

RETAIL BANKING

Philippines sues Maybank affiliate for tax evasion Philmay Property, Inc being sued for US$4.2 million in unpaid taxes. The v (BIR) claims Philmay accumulated a US$4.2 million tax deficiency, including surcharge and interest, consisting of some US$925,000 in income tax deficiency; US$1.8 millionin value-added tax deficiencies; US$382,000 in documentary stamp

tax deficiency and US$1.1 million in expanded withholding tax. RETAIL BANKING

OCBC Money Insights users reach 60,000 in just two months See what makes it a hit among customers. OCBC Money Insights is available on both OCBC Bank’s internet banking service and its iPhone and iPad mobile banking applications. It is integrated with customers’ savings, current and credit card accounts, hence it saves customers the hassle of manually updating their daily expenditure via spreadsheets or other standalone personal financial management apps. RETAIL BANKING

OCBC knocked off its top spot as the world’s strongest bank Guess which bank topped Bloomberg’s list?

Corporate lending is only 11% of its loan book. According to OCBC Investment Research, Bank Danamon aims to expand its wholesale banking business, particularly lending to corporate borrowers, which makes up just a small portion of its loan book now (11% at 31 Mar 2013). RETAIL BANKING

Axis Bank to open first branch in China

Will also be the first Indian private sector bank branch in China. India’s third-largest private sector bank, Axis Bank, Ltd said it has received permission from regulators in both countries to open a full branch in Shanghai within the next three months. TRADE FINANCE

Citi to open 6 more Asian desks for its corporate clients in the next 12 months Find out where the desks will be located. Citi recently announced that it plans to open six more Asian desks in the next 12 months to serve Asian corporate clients across the world. The desks will compliment the 13 already opened by the bank that are servicing Asia’s leading corporate clients.

ASIAN BANKING AND FINANCE | SEPTEMBER 2013 7

FIRST “In fact, the gap is widening, with satisfaction ratings for both Short Term Debt and Liquidity Management falling significantly in the most recent research. Not only that, but of the nine products which are rated, satisfaction rankings improved for seven, and fell for two – the two ranked as the most important,” said East & Partners.

No-hassle cancellation in singapore

Nearly 9 in 10 Singaporeans feel that a 30-day review period will strengthen their confidence in a bank’s products. In response to these survey results, HSBC launched Singapore’s first 30-day cancellation period for its customers in Singapore. In an exclusive interview with Asian Banking and Finance, Paul Arrowsmith, Head of Retail Banking & Wealth Management at HSBC, said he believes it is in the best interests of their customers as well as the long-term interest of the bank’s relationship with them to offer the flexibility to adjust their investment decisions and wealth management plans within an extended window period of 30 days. “This is the longest period in the market here which is also over and above what is stipulated under regulatory requirements, giving our customers a longer period of time to reconsider their product purchases,” says Arrowsmith. The 30-day Service Pledge programme was first launched in Hong Kong in May 2012. The 30-day Service Pledge is available to customers who purchase Unit Trusts (Lump-sum Openend Authorised Funds), Unit Trusts (Monthly Investment Plans), all individual life insurance policies (including investment-linked insurance policies, and Personal instalment Loans. 8 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

An alarming trend in transaction banking

recent survey revealed that Asia’s top 1000 corporates are dissatisfied with transaction banking products and services in Asia. And worse, the criteria customers rate as the most important are also the ones they are most dissatisfied with. Banking research and advisory firm East & Partners asked the corporate, usually represented by the Chief Financial Officer or Group Treasurer, to rank nine transaction banking products in order of importance. Satisfaction ratings gap widening The report revealed that the most important products for them are Short Term Debt and Liquidity Management, the very bedrock of transaction banking. Both of these are ranked of equal importance, with Internet Banking and Account and Transaction Facilities next in line. But when asked how satisfied they are with these same products as provided by their Primary Transaction Banker, the CFOs and treasurers said that the two products rated as most important are the two with which corporate users are most dissatisfied.

The CFOs and treasurers said that the two products rated as most important are the two with which corporate users are most dissatisfied.

Dissatisfied with services The report revealed that it’s a pattern repeated in the area of service attributes like Value for Money and Credit Approval Turnaround Times. Though the corporates’ satisfaction rating for the service attribute of ‘understanding a customer’s business’ improved, it is puzzling why this ‘understanding’ does not translate to the banks satisfying the needs of the customer. “It is natural that if a customer rates a product or a service as a priority, then it is probable they will find that delivery or fulfilment will fall short. But the message from East’s research is consistent and unequivocal. Banks are not delivering on four products and services which Asia’s Top 1000 corporates view as the most important,” said East & Partners. According to independent business analyst Justin Harper, Asia has been playing catch up on Western markets when it comes to transactional banking and this survey highlights it still has a long way to go. “I’m not surprised to hear that there is a gap in expectations when it comes to shortterm debt markets as this is definitely behind the curve in Asia. But the region has been leveling the playing field with Western banks steadily and has much better standards of compliance and money laundering which is a positive,” says Harper.

Total satisfaction ratings of products

Source: Asian Institutional Banking Markets Program - Nov2012

FIRST guarantees on LGFV bonds, among other measures. Katie Chen, analyst with Moody’s says, “We expect it to strengthen control of LGFV-related risks within banks and improve regulatory monitoring of the loans’ risk system-wide, a credit positive for China’s banks.”

China gets tougher on LGFV loans

egulators are imposing stricter oversight and control requirements on local government financial vehicles (LGFVs). The China Banking Regulatory Commission (CBRC) distributed guidance that strengthened the supervision of loans to LGFVs, which the commission estimates totaled RMB9.2 trillion, or 14% of total bank loans, at year-end 2012, according to Moody’s Investors Service estimates. Loans to LGFVs have been

growing in recent years as local governments raced to meet the central government’s growth goals, and market observers have been raising the red flag on what they see as increasing bank exposure to poorly designed projects that have no hope of repaying their debt. Stricter guidelines China now plans to limit the exposure of banks to these worstcase default scenarios through the set-up of new risk management systems, as well as a ban on bank

CBRC is also preventing banks from lending to weaker LGFVs that are more likely to default on payment.

Restricting lending CBRC is also preventing banks from lending to weaker LGFVs that are more likely to default on payment. New loans will only be approved to LGFVs with a cash flow coverage ratio above 100%, a liability-tototal-asset ratio of lower than 80% and collateral that complies with regulations. “The CBRC’s new guideline on LGFV loans and bonds will further curb the funding provided to the LGFVs with weak financial position and repayment ability,” agreed May Yan, equity research analyst at Barclays. The new guidance comes as LGFV bonds are on the rise. Yan cited Wind data, at end-2012, which showed LGFV bonds increased 53% year-on-year to RMB2.7 trillion. At end-2012, total government trust cooperation products reached RMB 512bn, up 98% year-on-year. Non-bank financing has been increasing, as have the risks associated with them. This has led CBRC to impose a total ban on guarantees for LGFV bonds, which Chen believes will insulate banks from contingent liabilities arising from the said bonds.

THE CHARTIST: japanese banks’ foreign currency liquidity The capital positions of the Japanese mega-banks improved significantly in FYE3/2010 and FYE3/2011, owing to large issuances – JPY4.5 trillion in total – of common stock during 2008–2010 and earnings accumulation, according to Moody’s Investors Service. Their capital positions are comparable to those of their global peers, while their liquidity positions are much stronger. But in terms of foreign currency liquidity, the mega-banks’ profiles are modest and constrained by their approach to funding their overseas businesses.

Japanese mega-banks’ overseas loans and foreign currency funding

Japanese mega-banks’ consolidated tier 1 ratios

Source: MUFG, SMFG and Mizuho

ASIAN BANKING AND FINANCE | SEPTEMBER 2013

FIRST The Analysts’ call

Is Standard Chartered the laggard in Hong Kong? Alliance Bernstein - Mike Werner

StanChart: Where angels fear to tread These continue to be good times for StanChart as it capitalises on the withdrawal of European financiers from the market to grow its share of the pie. And nowhere is it more important for the group than Hong Kong, where it generates 22% of its profits out if its ‘thinner but taller’ headquarters next to HSBC on Queens Road.

on assets remains mid tier in region compared to peers whereas its return on equity continues to be higher driven by the high levels of leverage. To keep growing at double digits and still hold 15% RoE ambitions in a Basel III world will be exposing the bank to a lot of tail risk. The operating environment for Hong Kong banks remains challenging with low interest rates making it difficult for banks to make much of a margin and loan The operating environment demand remains weak. There are also fresh reports that for Hong Kong banks remains Hong Kong banks offshore challenging with low interest rates. RMB businesses appear to be under pressure due to high But recent results suggest the bank competition for deposits and weaker will struggle to both grow its assets demand for RMB loans due to the and its return on equity at the same recent appreciation of the RMB. time as the Asian markets remain StanChart is also highly reliant on very competitive. First half results both fee and trading revenue, which for 2012 show that the bank’s return are notoriously fickle.

Standard Chartered Asia margin

Source: Company data, Barclays Research

10 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

Standard Chartered was the clear laggard of the major international/regional banks operating in Hong Kong with regards to its 2H12 earnings performance. In terms of the absolute profitability levels, the rank-order for the group’s ROE was similar to that of the banks’ ROAs, with two notable exceptions – StanChart and Dah Sing. While StanChart’s ROA ranked the second from the bottom in the group, it was the second most profitable bank in terms of its ROE, coming in at 16.5% in 2H12. The difference was driven by the high leverage ratios that StanChart maintains in its Hong Kong operations of 20.1x vs. 10.6x, on average, for the other HK banks. The bank with the next highest leverage ratio is BOC(HK), which had a leverage ratio of just 11.8x, well below the level of StanChart. Meanwhile, the smallest two banks we examined, Wing Hang and Dah Sing, also continue to have the lowest reliance on fee income at just 17.3 and 17.9%, respectively.

Barclays - Sharnie Wong

For Standard Chartered we forecast 10% annual RWA growth, implying an acceleration from current footprint weighted volume growth. At the same time we estimate that the company can increase the payout ratio to 40% or a little higher and still build its core Tier 1 ratio to a very healthy 12.3% in 2015. [This] suggests RWA growth of $50bn$160bn and attributable profit of $17bn$20bn over the three years to 2015.

Maybank Kim Eng - Todd Martin

Management expected expense related to regulations will continue to grow. By geography, Hong Kong was still the biggest contributor. Net interest margin in Hong Kong dropped from 1.8% to 1.6% in FY12, a difference from the trends witnessed in some local banks which released FY12 results. Management said it is just mainly because loan grew at a faster pace than deposit. SCB has reported unbroken income profit and growth for 10 years, reflecting the management’s execution ability.

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ANALYSIS: ASIAN M&A

More Asian companies march west to go global 2012 marked a high point in mergers and acquisitions with fast-expanding Asia-Pacific firms going on a Western buyout binge.

n what analysts are noting as an aggressive shift in attitude, capital-rich companies in AsiaPacific who have spent the last decade expanding in the region are now on the prowl for strategic and bargain acquisitions in North America and Europe. The reason for hunting outside the region is two-fold: AsiaPacific companies are now looking to establish a Western presence in order to go global, and Asian M&A targets are becoming prohibitively more expensive. Asia-Pacific companies also seem more willing to wield their growing financial clout. Around 36%, or more than a third of Fortune Global 500 companies in 2012, came from Asia-Pacific, the largest from any

“Asia-Pacific companies feel they are ready to step up as global players, and M&A activities offer the fastest way to reach their grand growth targets.”

18 HONG KONG BUSINESS | APRIL 2013 12 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

geographical region, ahead of Europe (33%), North America (29%), and Latin America (2%). Compare this to five years ago, in 2006, when only 24% of the Fortune Global 500 companies came from Asia-Pacific. In half a decade the region’s companies, predominantly from China, catapulted to the list and bumped off the stagnant giants from Europe and North America. Why M&A is increasingly preferred Asia-Pacific companies feel they are ready to step up as global players, and M&A activities offer the fastest way to reach their grand growth targets. “More and more, Asia-Pacific multinationals are using M&A to expand, finding top spots on deal

charts and causing a shift in global M&A capital flows,” said Andrew Heard, managing director, Asia Pacific Benefits at Towers Watson. Flush with capital and driven by ambitious global expansion plans, Asia-Pacific companies increasingly prefer to engage in outbound M&A activities rather than in joint ventures or greenfield investments, outside of a combination of the three. Asia-Pacific companies previously preferred greenfield investments, valuing its safer and studied approach of expanding overseas from scratch. But now, these same companies who were averse to risk seem more willing to forge ahead with M&A deals, valuing the quicker results and promise of total control compared to time-consuming greenfield investments or compromise-ridden joint ventures. “In the increasing flood of globalisation, M&A serves as a path of rapid expansion into new markets and operational capacity abroad, and Asia Pacific is no different,” said the Towers Watson report. “With many Asia-Pacific companies having grown organically and sufficiently scaled-up through intra-Asia-Pacific acquisitions, many are now turning outward to non-Asia-Pacific nations in Europe, the Americas, the Middle East, and Africa,” it added. North America is the most popular target market for outbound regional expansion among Asia-Pacific companies, said Towers Watson, citing an Asian Traiblazers survey where 37% of the respondents chose North America as the most important region for their future growth. This was followed by a preference for Latin America (31%), Africa (30%), Central and Eastern Europe (19%), Western Europe (18%), and the Middle East (16%). Rising M&A outbound activity Towers Watson cited data from mergermarket, an M&A intelligence service, which show that outbound M&A volume from Asia-Pacific companies reached an estimated 464 deals in 2012, the highest ever in the past decade, and the third straight year of growth for the region. Companies based in Asia-Pacific

ANALYSIS: ASIAN M&A ramped up M&A activity outside the region by an average of 20% yearover-year between 2003 and 2011, experiencing an annual growth rate of 37% in terms of value over the same period, merger market data also showed. There was a brief decline in outbound M&A activity in 2009 as companies became more cautious following the global financial crisis, but the following year in 2010, deals spiked with a vengeance. Total value grew a whopping 176% year-on-year from 2009 figures, a growth trend which has continued until 2011. 2012 proved to be a watershed year because for the first time on an annual basis, Asia-Pacific has seen more outbound M&A than inbound activity, said Towers Watson. Japan and Australia, in particular, continue to lead the region in outbound M&A deals value, but China has been catching up. “Chinese activity outside of Asia-Pacific has eclipsed Australia’s share of M&A outside the region, as Chinese bidders are pushed abroad by insatiable demand from China’s domestic economy as well as encouragement from the PRC government’s 12th Five-Year Plan to expand abroad,” said Towers Watson. It will take years though for China to overtake Japan in terms of deal value, especially given that Japanese firms now heavily rely on outbound M&A to drive their growth in the face of slowing domestic markets. Chinese bidders also still have a lot to learn on deal negotiations, which has hindered them from clinching more high-

profile deals. Towers Watson highlighted how RBS rejected a bid in 2012 from China Development Bank for RBS Aviation despite posting the highest offer. RBS reasoned that CBD failed to pay enough visits to the RBS Aviation headquarters, which led to the deal ultimately closing in favor of the Japan-based Sumitomo Mitsui Financial Group in June 2012 for $7.3 billion. Favorite targets, notable deals On the whole, acquisitive AsiaPacific companies have been most interested in the Industrials & Chemicals, Energy, Mining & Utilities, and Technology, Media, & Telecommunications (TMT) sectors, according to Towers Watson. But in terms of money spent. They have funneled the most to Energy, Mining & Utilities, with 2011 being a particularly strong year as the sector made up 17% of deal volume and 54% of deal value annual totals. The energy sector also saw the largest deal of 2011 with BHP Billiton’s $15.5 billion acquisition of US-based Petrohawk Energy Corporation in July 2011. The Australia-based global energy and resources giant was looking to enhance its position in the exploration, development, and production of natural gas properties, and so it purchased Petrohawk’s roughly 1 million acres in Texas and Louisiana. Another large deal of 2011

Asia-Pacific outbound M&A volume

Source: mergermarket

“2012 proved to be a watershed year because for the first time on an annual basis, Asia-Pacific has seen more outbound M&A than inbound activity.”

involved Hong Kong-based Cheung Kong Group’s successful $7.8 billion bid for the listed UK-based water utility Northumbrian Water Group Plc, a deal which closed in October 2011. In 2012, Asia-Pacific bidders also flocked to the Western European consumer sector. China-based Bright Foods acquired a 60% stake in Weetabix Limited, a UK-based company producing and selling breakfast cereals and bars, for $1.2 billion. Towers Watson said the acquisition will allow Bright Food to expand its business in UK as well as the international market, and will help Weetabix strengthen its business in China. Slowdown in 2013? The brisk pace of 2012 outbound deals could slow down this year, if 1Q 2013 data is any indication. Japan, for instance, saw its outbound volume plummet 69% quarter-on-quarter to $5.8 billion in 1Q 2013, from $19.1 billion, according to Dealogic. This is the lowest quarterly total for Japan outbound M&A since 2Q 2010 ($5.7 billion) with US targeted volume recording the largest decline, down 93% to $654 million compared to $9.5 billion in 1Q 2012. In Singapore as well, overseas acquisitions from Singapore companies remained flat as deal value reached US$3.1 billion to date, slightly lower by 1.4% from the first quarter period in 2012, and witnessing its third quarterly decline since 2Q 2012, according to Thomson Reuters. If it is any consolation for AsiaPacific countries, the sluggishness in M&A deals – both outbound and inbound – seems to affect most other world regions. Dealogic reports that even if Global M&A volume reached $596 billion in 1Q 2013, up 2% on the $584.2 billion recorded in 1Q 2012, it was down 34% on 4Q 2012 ($906.2 billion). The Americas was the only world region to see an increase on 1Q 2012 ($248.1 billion), up 34% to $331.3 billion in 1Q 2013.

HONG KONG BUSINESS | APRIL 2013 19 ASIAN BANKING AND FINANCE | SEPTEMBER 2013 13

OPINION

MOORAD CHOUDHRY

Privatising money in Asia

by MOORAD CHOUDHRY Professor Department of Mathematical Sciences Brunel University

any commentators have pointed out the circle of money that is quantitative easing and which has been responsible, ultimately, for the record highs observed this year of the Dow Jones and FTSE equity indices. Central banks print money, which is used to buy government bonds. In other words the central bank funds the government’s deficit. But the central bank and the government are left and right hand of the same public sector entity. And the ocean of liquidity supports equity markets who think this largesse will never end. What’s wrong with this picture? If I funded my borrowing with my own printing press, no-one would have a problem understanding the obvious flaw. Don’t get me wrong, QE did a vital job of preventing depression and even deflation during 2009 after the worst of the crash, but the longer it goes on the harder it will be to unwind without causing another recession. Why is it only central banks have the right to print money? Why can’t any bank print it? After all, it isn’t difficult to think of examples private sector banks that exhibit a better credit rating than their host sovereign authority. This isn’t a new idea. The 1974 Nobel laureate Friedrich Hayek suggested that “the government monopoly of the issue and control of money” was “the source and root of all monetary evil”. Like the idea of a flat tax, this debate should be aired at the highest level, to determine if it would benefit an economy. And would it? That banks do fail is why we have the “lender of last resort” and public sector bailout mechanism, observed in action so memorably in 2008. But customers already take a bank on trust when they deposit cash with it; this trust of credit quality would be no different if they held the bank’s own notes, whose quality and reliability would reflect the reliability (read: balance sheet and liquidity strength) of the issuing banks. The point of public money is meant to be that the central bank is a guarantor of value. That’s why central banks have inflation targets. But inflation targeting is a recent phenomenon (except in Germany). Sterling has lost over 90% of its value since the 1970s: hardly a good advertisement for the stability value of public money. The US dollar has fared no better in this respect. The rise of post-war inflation has been inexorable. 14 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

Another thing that has risen since the 1970s is the consensus that private sector production creates more (and better) value than its public sector equivalent, but more to the point more stability in value. This is true in just about all goods and services where there is genuine competition (thus allowing exceptions for health services, water utilities and railways). It is logical to expect that private money would be more reliable than public money. An issuing institution that was deemed unreliable would not be able to find buyers for its notes. Banks or other firms that did issue currency would find it in their own interest to maintain the value of their liabilities as much as possible, just as they do the other goods and services they produce, otherwise taxpayers will not hold them. To continue the private sector versus public sector analogy, competition preserves those goods and services that are reliable and reflect quality and value-for-money. This should not be different for currency. In other words, the private money market should be expected to thrive. Who might be a natural issuer of private currency? Perhaps a global financial institution with a strong balance sheet, which includes banks but also companies such as Visa. Or indeed nonfinancial global firms such as Google. Issuers may choose to link their notes to gold, to preserve the value, or may simply ask the customer to take their balance sheet strength on trust. How popular and liquid might a currency issued by such firms be? I think we might be pleasantly surprised.

Competition preserves those goods and services that are reliable and reflect quality and value-formoney.

OPINION

BETTY WILKINSON

What you can do to improve access to finance

id you know that there are over 2.5 billion people without any bank accounts in the world, and most of them are in Asia? And less than one quarter of the world’s 2.4 billion poor have a bank account. Managing their money using formal financial services – savings accounts, loans, insurance, and remittances -- is a wonderful, terrible, impossible dream for many, many families.If so few people are included in formal financial systems, what has changed and why are we more optimistic about improving access to finance for the poor? What are ADB and other development partners doing about it? And finally but most importantly, how can you help? There are three reasons why we can be hopeful. First, we know a lot more about the poor and their money. Stuart Rutherford in his wonderful book called Portfolios of the Poor reminds us by his research that the poor live rich diversified financial lives, largely using informal finance. They borrow and save with neighbors, send money home to the village, take advances on wages, leave money with others to prevent using it for immediate demands, insure each other. And most of these people don’t have access to formal services. A woman in Bangladesh in his book says, “Unless you manage your money, you can’t manage your life.” Second, we know a lot more about the relationship between money and poverty. The research clearly shows that in places where there are more varied financial services that reach more people, economies grow faster. Everyone gets richer, and (nice surprise) the poor become less poor a bit faster. Economic growth is more inclusive, and more families benefit, when finance works for the poor.Because we know more, we can do more. The Group of 20, or G20, is a group of finance ministers and central bank governors from 19 of the world’s largest economies and the European Union. Their mandate is to promote growth and economic development across the globe. In 2010 the G20 set up a key program for worldwide financial inclusion, complete with a set of nine Principles, an Action Plan, and a Global Partnership with real money and tools. Technology is helping us improve access, particularly with something called mobile banking. In the Philippines people without a bank account can open an electronic money “wallet” virtually in their cell phone. They can put in money, take it out, send money, make 16 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

by BETTY WILKINSON Director for Public Management, Financial Sector, and Trade Division, Central and West Asia Department Asian Development Bank

payments, all by texting on their mobile phone and working with mobile banking agents in small stores everywhere. Mobile banking is secure, helps people manage money, and gives them access. Banks and insurance companies are starting to provide additional services to these clients by using agents. Mobile banking is now widespread in countries such as Brazil and Kenya, even in the most isolated areas. In Kenya there are far more people with mobile money wallets than people with bank accounts. Third, what can you do to help ensure people can choose to engage in a wide range of affordable, understandable, useful financial services? The most important thing is that you are reading this. You are informing yourself and trying to understand. You can also read – there are some great resources, CGAP has focus notes of one to five pages on a wide variety of topics so they can also help. Just Google them. You can put access to finance into your own ways of thinking about your work and your life. How do you use financial services? How will people physically pay for the electricity or clean water supply you are helping generate? Can you include financial education in the curriculum of the education or social protection work you are doing? Can you buy or sell to people using mobile money? Can you give your time or your money to help? Can you encourage those you work with to better understand this topic and share with others? Make people without access to finance real and you can find ways to make a difference for them.

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ANALYSIS: china’s bank regulations

Wealth management products whipped into line

Bold new regulations seek to lower risks borne by Chinese banks offering wealth management products.

ost analysts view the landmark controls as a long-term positive for the burgeoning RMB 9.5 trillion wealth management products (WMPs) market. The tightened oversight proposed should address the growing public concerns on the potential risks when investing in WMP products, which investors once thought to be guaranteed moneymakers – that is until recent sensational comments emerged likening it to a “Ponzi scheme,” and a multi-million-dollar default put WMP investors on edge.

“China Banking Regulatory Commission (CBRC) announced new regulations for Chinese banks’ WMP business.”

New WMP regulations On March 27, the China Banking Regulatory Commission (CBRC) announced new regulations for Chinese banks’ WMP business. This marked the first time the banking regulatory agency had put in place controls for the booming segment. 18 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

The set of new regulations, which were issued collectively as CBRC Notice No. 8, will increase oversight of the growing WMP market which recorded RMB 9.5 trillion in peak assets under management (AUMs) in the first quarter of 2013, said Mike Werner, senior analyst at Bernstein Research. The notice will also place limits on WMP exposure to non-regulated credit assets while improving the transparency and operational structure of the market. Werner and other analysts said the new restrictions are not meant to curtail the market’s growth potential, but are instead meant to protect banks from the increasing credit and capital risks attached to WMPs. “We believe the ultimate purpose of these measures is to ensure that the WMPs originated by the banks are limited in their risk exposures,” said Werner.

“The regulator attempts to avoid the scenario where WMP defaults cause a number of banks, in order to protect their reputation, to backstop investor losses on these products. By introducing the measures in Notice No. 8, the CBRC is mitigating the risk that banks will use depositors’ funds as a backstop for the risk-taking activities of investors.” The worst-case scenario Werner described above – of WMP defaults and the possibility of banks using depositor cash to pay them off – came to fore late last year with a highprofile WMP default in Huaxia bank. The bank failed to pay off investors that were promised double-digit rates of returns by November last year for their estimated $22.5 million WMP deposits. Public protests ensued that triggered discussions on the trustworthiness of WMPs as an investment vehicle. It did not help that Huaxia bank’s default came just a couple of months after the Bank of China ex-Chairman Xiao Gang likened WMPs to a Ponzi scheme, a fraudulent investment operation, further shaking confidence in the short-term, high-return products. Chinese banks often market WMPs

ANALYSIS: China’s bank regulations as higher-paying alternatives to deposits, but investors often assume wrongly that they carry comparably low risks. While deposits are guaranteed up to a certain amount, WMPs are often not in the event of defaults. Before the new regulations were rolled out, banks that suffer from a WMP default faced the dilemma of either yielding to public pressure to cover the repayment or risk a big reputational hit that may ultimately lead to bank runs. Smaller banks feel the pinch CBRC is hoping that the new controls imposed by its Notice No. 8 will lower these credit and capital risks inherent in WMPs. But there is a price to pay for the transition to a more regulated regime – one that smaller Chinese banks will primarily bear, according to Bernstein Research’s Werner. CBRC imposed a new regulation where the total size of non-standard assets should be kept below 35% of the outstanding balance of WMPs, or 4% of total assets on the banks’ audited prior year financial statements, whichever is lower. Werner said all of the large “Big 5” banks, namely Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, and Bank of Communications, were already in compliance with this. But many of the smaller listed banks were not in compliance and had substantially higher non-standard asset levels due to their aggressive

participation in issuing WMPs. “The size of non-standard assets packaged into the WMPs they issue breach the upper limits set under Notice No.8,” said Werner of smaller listed banks. “We estimate the breached amount of nonstandard assets to be RMB 750-800 billion, equivalent to 9% of total WMP AUMs but less than 1% of the total RMB 100 trillion of credit outstanding in China.” The Bernstein Research analyst cited how non-standard assets at Minsheng, CITIC Bank, and Merchants Bank breached the upper limit by RMB 52 billion, 28 billion and 11 billion, equivalent to 1.6%, 0.9% and 0.3% or their respective asset base. “Smaller banks will need to change the mix of their WMP AUMs to comply with the new rules,” warned Werner, adding that smaller banks will also suffer from revenue headwinds and margin pressure as they implement costly credit management and administrative systems to ensure compliance. Growth slowdown The new regulations will also have an unintended effect of temporarily decelerating the fast-growing WMP market, said Werner. “Not only will Notice No. 8 slow the growth of the WMP market in the near-term, but cost of full compliance by the banks will erode the profitability of the business.” But the profit hit will not be big enough to dissuade Chinese banks.

Non-standard assets of the industry, biggest 5 banks & smaller banks

Source: Bank IR teams, corporate reports, PBOC, CEIC, Bernstein analysis

“CBRC imposed a new regulation where the total size of non-standard assets should be kept below 35% of the outstanding balance of WMPs.”

This is because WMP operations have naturally high margins, which should make the business still very attractive to banks after they fully comply with the regulations. The lucrative income on WMP products is just one of the several key drivers to the trillion-yuan banking business, according to May Yan, equity research analyst for Asia ExJapan Banks at Barclays. Growing demand Its market expansion is also motivated by growing demand from investors looking for low-risk investment products whose yields exceed time deposit rates. China has a prevailing low-negative real interest rate environment, and many cash-flush Chinese have been lured to WMPs with the promise of high average rates of returns at a conveniently short payback period. Yan said aside from individual investors, there is also strong financing demand from property developers, small- and medium-sized enterprises and local government financing vehicles. Banks themselves are pushing WMPs aggressively in the face of intensifying deposit competition and funding needs for banks’ off-balance sheet lending under the tight loan quota and loan-to-deposit ratio requirement of 75%. Yan said banks are also very keen on diversifying their non-interest income revenue streams, a gap which high-margin WMPs fill up nicely. The new rules should cool the heels of banks in this last regard, as banks face tighter restrictions in their ability to funnel their WMP proceeds to trusts. “This will hurt trust companies’ ability to obtain cheap funding through the banking channels and will weaken liquidity at the trust companies as they lack access to cheap financing,” said Bernstein’s Werner of the WMP notice. Werner cited the new rule which specifically prohibits banks from providing direct or indirect, explicit or implicit guarantee or buyback promise on any non-standard assets. He then said this new rule is expected to cover “rights to income” – a term created by trust companies that basically enables banks to finance the trust asset projects using WMP

ASIAN BANKING AND FINANCE | SEPTEMBER 2013

ANALYSIS: china’s bank regulations proceeds, circumventing previous restrictions – as part of regulated nonstandard assets. Werner confirms that banks have complied with the new rule by no longer channeling funds from the issuance of WMPs to trust companies. As a result, CBRC will have effectively clamped down a huge chunk of funding for trust businesses. “Funds channeled from bankoriginated wealth management products represent the cheapest source of funding for trust companies. If they were to issue third party products instead, then trust companies would need to offer substantially higher yields to investors or else face weaker margins. This would certainly add to their overall funding costs,” said Werner. This reduction of funneled funds to trusts is considered by some analysts as a step forward to combating the risks of China’s shadow banking system. Jian Chang, economics researcher at Barclays, said regulators are now facing the challenge of balancing the economy’s financing needs against the rising financial and fiscal risks from both shadow banking activities and the local government investment vehicle debt build-up. The response to this challenge in 2013 will be notable regulation, but far from the milestone strides seen in the past, said Chang: “While we expect greater regulatory oversight of the shadow banking sector and local government borrowing, we do not envisage any tightening as significant as that during 2010-11.”

Positive investment impact Overall, analysts expect the new rules to shape up WMPs into less riskier and more attractive investment options. Banks will also benefit by reducing the risk premium they bear by offering WMPs. Some analysts even foresee the tighter regulation regime as helping propel China’s long-term economic growth as the market sheds its fears of a WMP-led financial crisis. “We view the recent release of Notice No. 8 by the CBRC as a positive for the systemic nature of this business. And while the small banks may see minor revenue and earnings dilution as a result of the measures, the measures go a long way to improving the structure of the market and reducing overall credit risk of these products,” said Bernstein Research’s Werner. Investor concerns “This should ease investor concerns that: One, the banks will backstop investor losses in these products; two, the WMP market exposes the banks to systemic risk; three, there is no transparency in this market; and four, the practices by some banks’ WMP businesses are little different form a ‘ponzi scheme,’” he added. “While the equity market’s reaction to the new measures has been negative for the Chinese banks, our views on the banks have improved as a result of Notice No. 8. The measures in the notice will improve the structural foundation of the WMP market and improve its transparency. We believe this will have the effect

Amount of non-standard assets in breach of the industry, biggest 5 banks & smaller banks

Source: Bank IR teams, corporate reports, PBOC, CEIC, Bernstein analysis

20 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

“New regulations address the major risks surrounding China’s financial innovations.”

of reducing the risk premium on the Chinese banks as these rules make it significantly less likely they will be forced to bail out investors in these products,” he said further. There are fears though that the new rules will pummel bank earnings, which were dismissed by Ting Lu, a china economist at Bank of America Merrill Lynch. “Markets seemed to be shocked, believing that these new controls on bank WMPs would hit the sector’s earnings severely, tighten credit supply and deal a severe blow to fixed asset investment and commodity demand. But we believe the scare is overdone.” Higher investor confidence Lu said that new CBRC rules on WMPs, by themselves, will have little impact on system-wide credit supply and thus have very limited downside impact on China’s growth in 2013. Instead, he viewed the new rules in a more positive light, predicting it will boost the country’s long-term growth potential through higher investor confidence in the health of China’s financial system. Lu explained that new regulations address the major risks surrounding China’s financial innovations, such as the incorrect belief of small investors that their investments in bank WMPs and non-bank channels such as trust companies are guaranteed by the government similar to bank deposits, and the tendency of small banks to take advantage of this confidence by cheating them into buying highly risky products. “That is why we believe the CBRC’s new measures will benefit the longterm stability of the Chinese economy in general and the financial sector in particular,” said Lu. “To put it another way, innovation without catching-up regulations could lead to a financial crisis, while overly strict regulations without innovation would result in economic stagnation, in our view.” “Overall, we believe the new regulations are a move in the right direction. The cost of those new measures is that some efficiency could be lost as smaller banks’ room for expansion will be affected. However, markets will at least perceive a lower probability of financial crisis in China, in our view.”

CO-PUBLISHED CORPORATE PROFILE

DongA Money Transfer stands out in Vietnam It reached remittance revenue of USD 1.5 billion and continued to hold 15% share of the remittance market in Vietnam. The year 2012 is considered a year of volatility and challenges due to the prolonged and widespread economic crisis. However, according to the latest official statistics of the World Bank, remittances to developing countries reached USD 406 billion, an increase of 6.5% compared to 2011, Vietnam particularly attracted USD 10 billion in remittances and is considered among the top 8 countries that receives remittances the most in the world. As the leading name in the market, in recent years, DongA Money Transfer has placed great importance on the remittance service and has focused its resources on building brand and trust in Vietnam. With clear directions and solutions, DongA Money Transfer reached remittance revenue of USD 1.5 billion and continued to hold 15% share of the remittance market in Vietnam. Delivering happiness In all business strategies of DongA Money Transfer, improving service quality is the number-one strategy. All service processes is synchronized and controlled across the nationwide system. Also, shortening payment time is DongA Money Transfer’s special concern. Currently, counter pickup payment time is 10-minute and home delivery remittance is within the day. With a team of hundreds of employees

nationwide, DongA Money Transfer is always ready to deliver cash to customers in the shortest amount of the time at any time and any where. In special cases whereby the customer needs cash urgently in order to settle hospital fee, the company always has special support policy for the beneficiary. Home delivery service of DongA Money Transfer is the competitive edge of the company. To date, DongA Money Transfer has expanded its network in 63/63 provinces nationwide, with a branch network of 250. With a network of partners and widespread payment points, DongA Money Transfer takes pride on doing well the honor responsibility of “Delivering happiness” to its customers and on serving as a connection bridge between overseas and domestic Vietnamese. In order to achieve such results, DongA Money Transfer has continuously invested in system development and installing advanced technologies into daily operations. Besides, the company constantly expands cooperation with global partners and thus

“Delivering happiness” to its customers and on serving as a connection bridge between overseas and domestic Vietnamese.”

making it possible for customers to remit money from any country in the world to DongA Money Transfer. In the past year, DongA Money Transfer has successfully connected with new partners in the Asian and European market. This has contributed towards bringing more remittances into Vietnam. With the goal more benefits to customers, besides good quality service, DongA Money Transfer launches promotions frequently. Some of the successful promotions were one that was designed specially customers who receive remittances from Asian market and “Win a new cool motorbike this Tet” promotion. Human resources development strategies Other than bring more benefits to customers, DongA Money Transfer also focuses on human resources development strategies. In particular, the company organizes training programs, professional trainings throughout the year for each and every department. Besides that, the company also successfully implemented the professional evaluation system of KPIs in order to conduct objective assessment and have proper career direction for the company’s staffs. Investment in human development is one of the specific solutions of DongA Money Transfer to improve customer service. Achievement As a result of the above achievements, DongA Money Transfer is recognized by prestigious international financial institutions and was honored through awards such as “Best Finance Company in Vietnam” and “Best money transfer company 2012”. This has proved the scale and reputation of DongA Money Transfer to be on part with international financial institutions in the future.

CONTACT

Mr. Tran Van Trung - Director

Company’s name: DongA Money Transfer Address: 122, Phan Xich Long St.,Phu Nhuan Dist.,Ho Chi Minh City T: (848) 3517 8525 – F: (848) 3517 8017 Email: namth@dongabank.com.vn ASIAN BANKING AND FINANCE | SEPTEMBER 2013

BIG ISSUE 1 are in fairly open economies like Singapore, Malaysia and Hong Kong, which are sensitive to developments in trade and financial markets. “However, we believe that the banks’ generally sound risk management and diversified loan books and earnings would help them cope with difficult operating conditions. The government is also likely to take extreme measures to protect the country against external shocks. These factors, alongside the banks’ high levels of core capital and reserves, underpin their likely resilience through economic cycles,” notes Chan.

Singapore banks to face headwinds in 2013? Analysts reckon the banks’ credit profiles could be threatened.

he Singapore banks’ NIMs are likely to continue declining in 2013 but analysts at DBS Vickers note that with Basel III rules on liquidity requirements likely to be relaxed, pressure on funding costs should start to ease. “What remains under pressure is loan re-pricing of newer lower yielding loans vs older ones which have run down and persistent excess liquidity with limited opportunities to be deployed given the low interest rate environment.” Apart from declining NIMs, Singapore banks face a lot of other headwinds. According to Ivan Tan, director for financial services ratings at Standard & Poor’s, the slowdown in advanced economies this year, including the U.S. and Europe, will continue to hurt Singapore’s export-oriented sectors, such as manufacturing and wholesale trade. He adds that regional economies such as China, India, Indonesia, and Vietnam offer notably higher growth potential and better margins. “We expect Singapore banks to continue expanding in these economies to counter domestic saturation and margin pressure. The banks’ 22 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

“Singapore banks are already quite selective in their lending and underwriting, and the new property measures may curb the buildup of potential threats to the credit profile of Singapore banks.”

financial profiles are likely to come under pressure as their exposure to emerging economies increase,” says Tan. Weak demand for mortgages Meanwhile, Alfred Chan, director for financial institutions at Fitch Ratings reckons the Singapore government’s measures to cool the property market, including higher stamp duty and tighter conditions for mortgages, could dampen demand for mortgages for residential investment and commercial properties. However, he notes that Singapore banks are already quite selective in their lending and underwriting, and the new property measures may curb the build-up of potential threats to the credit profile of Singapore banks. “This is important for the Singapore banks, as they hold close to half their credit portfolios in property-related loans. Residential mortgages are a particularly large component, accounting for around 30% of their loan books.” Chan adds that lingering global uncertainties may also hurt Singapore banks’ performance as a majority of their operations

Single-digit sector earnings Looking ahead, Kenneth Ng, an analyst with CIMB, forecasts sector earnings growth to be only 1-2% for 2013. The banks guide for 6-10% loan growth and NII could be flat as falling margins douse some of the volume impact. Margins should still contract in 1H13, though Ng says NII upside exist later the year if the yield curve steepens convincingly. Meanwhile, the inflated non-interest income base in 2012 leaves a higher hurdle to beat. The saving grace to counter single-digit topline growth is muted cost pressure and relatively benign asset quality. “Management of three banks gave loans growth guidance of 6-10%; lower than the previous year’s high to double digit growth guidance. This is likely to come from overseas markets, given the recent slew of measures to cool asset inflation in Singapore.” Ng also predicts that S$ mortgage demand, a major loans growth driver in 2012 is likely to moderate in 2013, after the latest property cooling measures. “We think that business loans in Singapore is likely to slow in 2013, as companies grapple with higher labour costs as they reduce reliance on foreign labour and focus on increasing productivity. From our channel checks with contacts in MNCs, we understand that it is already getting increasingly difficult to renew working visas for skilled foreign labour and many have been sent packing home,” says Ng.

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SECTOR REPORT: BANKING TECHNOLOGY

Banks struggle with consumer technologies

Find out how Westpac, BPI, and CIMB use social media and what they do to keep up with the rapid advancements in banking technology.

he rate of technological advancement in Asia has been increasing rapidly that risks of some institutions failing to keep up arise. For the banking and finance industry, technology is crucial in that it can make or break an institution’s operations .In today’s environment where nearly every customer has already coped with the ‘digitalisation’ of almost everything, the banks’ strategies in social and digital media have inevitably been reviewed and improved constantly. Nick Wilde, managing director at Fiserv Asia says social and digital media can allow banks to communicate with niche segments and targeted audiences. So how can a bank best use these mediums to reach out to a particular group of clientele?

“Similarly, it makes it easier to gather analytics and do market research, including monitoring customer insight and detecting developing trends.”

Using social media According to Harry Wendt, general 24 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

manager digital at Westpac, social media provides another medium for customer engagement through dialogues. Rather than doing face to face interactions or communicating through traditional media, consumers now prefer to use and access social and digital media. Manuel Tagaza, SVP and group head for electronic channels at Bank of the Philippine Islands, reckons this actually works in the bank’s favor because using social and digital media for marketing and advertising is definitely faster and more cost-effective. “Similarly, it makes it easier to gather analytics and do market research, including monitoring customer insight and detecting developing trends. Furthermore, a presence in social and digital media also gives bank customers an alternative customer service channel.” When asked about how best a bank can use these mediums to

reach out to a particular group of clientele, CIMB’s group deputy CEO and head of consumer banking Renzo Viegas says we first need to identify what would add value to that particular group of clientele and how best these mediums can provide that value. Credit card customers, for example, are looking for a bank that can communicate their deals and promotions to them in a relevant and convenient manner. To do this, Viegas notes that social media helps because it allows a bank to look at its customer’s demographics or “likes” and propose deals that are most relevant to that customer therefore showcasing deals to our customers which they would be interested in. Multi-channel to omni-channel As banks currently employ a multi-channel environment to serve customers, the next challenge would be how to shift to a true omni-channel experience and redesign new experiences across different channels in branches, online, and at contact centres. Fiserv’s Wilde notes that financial institutions need to take into account two crucial aspects regarding channel experiences – firstly that the

SECTOR REPORT: BANKING TECHNOLOGY customers are having experiences tailored to a specific channel, and secondly that customers can enjoy a seamless omnichannel experience. Consumers use specific channels for specific financial tasks, and these channels should therefore be adapted to facilitate such tasks with maximum efficiency. Mobile transactions are often completed swiftly and on the move – for example a quick payment or balance check. The channel needs to reflect this, with an easily navigable interface that allows customers to get the job done quickly. In contrast, banking via a PC should be a much more feature-rich experience reflecting the choice that consumers have made to spend time assessing finances, allowing customers to set up payments and receive advice. Omni-channel’s importance For the markets ready for more advanced services, Wilde adds that financial institutions must also factor these insights into their strategies, priorities and investments, ensuring they invest appropriately in each digital channel – tablet, online and mobile – as each is a distinct channel with its own needs and requirements. He says, “Clearly, an omni-channel capability is also very important, with customers able to start a process on one channel and pick it up again later on another. This means information must also be clear and consistent across channels. If financial institutions can offer this level of capability they will be providing an excellent level of service to their customers.” The challenge for banks now, according to BPI’s Tagaza, is to deliver a seamless and integrated/holistic experience across all of their channels. Since the experience will be consistent across all channels, customers should be able to use these channels interchangeably or even concurrently. A transaction can begin in one channel, but can be completed in another channel. A customer should not concern himself with any back-end intricacies involved in the shifting from one channel to the other during a singular transaction. “With a focus on seamless integration, marketing

efforts should also be synergized and unified rather than focusing on each channel separately,” adds Tagaza. Coping with technology So with various challenges surrounding the strategic use of digital media and channels, how are financial institutions actually coping with the pace of adoption of consumer technologies? Westpac’s Wendt reckons the pace of change of new technologies and digitisation is not unique to banks as it influences all aspects of society. Like any change this presents risk, but also creates new opportunities. He adds that organisations need to adapt to meet these changing demands to remain relevant to their customers. “Remaining focused on the customer outcomes you are trying to achieve is critical, while also ensuring your technology and business strategies remain closely aligned. A good example is the changing role of the branch, moving away from a transaction centre to being an advice, sales and service centre,” says Wendt. Most banks have already recognized the rapid growth of mobile technology and the consumer dependence that stems from it. BPI’s Tagaza reveals some challenges that they are facing in developing these facilities include optimizing the performance of their mobile offerings to the level of the full website and having to choose be-

Manuel Tagaza

Nick Wilde

Renzo Viegas

tween sustaining a mobile version of their online banking website vs. developing a native mobile banking application for smartphones. “Regardless of which path they want to take, banks should not have to make a compromise between efficiency and providing a smooth user experience. If they can’t be integrated into one mobile product offering, a bank should at least have a mobile product portfolio that can offer either one,” Tagaza adds. Meanwhile, the rapid pace of technological change is forcing financial institutions to look at how they deploy services across digital channels – online, mobile and tablet. The resulting dilemma, according to Wilde, is how to ensure a consistent and tailored user experience across these channels. Consumers have come to expect an experience similar to the one they would get from a business outside of the traditional banking space – such as a retail company like Amazon, for example. This experience is intuitive, integrated and caters to the consumer’s wants and needs. Wilde reckons tighter integration of the online, mobile and tablet channels is the way to address this challenge. “Financial institutions must work toward delivering consistent financial information across channels as part of an omni-channel experience, while also providing a user experience that is tailored to the channel and the device.”

ASIAN BANKING AND FINANCE | SEPTEMBER 2013

BIG ISSUE 2 quality should fade by mid-year; the consideration that the region’s very low interest rates -- while providing further reassurance that an asset quality shock is unlikely -are also creating longer-term risks; and the expectation that Chinese banks although will avoid a hard landing, longer-term issues remain unresolved.

Outlook mixed for Asian banks in second half

Find out the most prominent issues in Asian banking that we should watch out for this year.

rise in cyclically-low credit costs due to a less buoyant macro environment will be easily absorbed in most circumstances, thanks to Asia Pacific banks’ strong profit and sound capitalization, according to Mark Young, managing director & head of Asia Pacific financial institutions group at Fitch Ratings. There are sound funding structures as well and risks in countries such as Australia and Korea are coming down, though there have been sensitivities in these countries before. China and India under pressure According to Young, Fitch’s concerns over the effect of China’s rampant credit growth on bank credit quality and solvency are now becoming evident. India’s more protracted slowdown means that the credit fundamentals of state-owned banks are also under pressure after a build-up of risk concentrations and rising nonperforming loans. “Hong Kong’s strong economic 26 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

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

ties with China, and its banks’ growing exposure to the mainland, mean its banks are also sensitive to these potential downside risks. A moderation of regional credit growth trends due to lower GDP growth would help to reduce the potential for a further build-up of risk,” says Young. Meanwhile, Stephen Long, managing director for Moody’s financial institutions group in Asia Pacific, says the broad credit outlook for banks in the Asia Pacific region in 2013 is stable on the expectation that they will remain largely insulated from the negative credit pressures affecting their peers in many Western economies. According to Moody’s “Asia Pacific Banking Outlook 2013”, on an individual basis, a total of 11 show stable outlooks, where the Philippines exhibits a positive outlook, and India and Vietnam negative outlooks. Moody’s report further examines six key themes for banks in Asia in 2013, including: the expectation that the modest cyclical deterioration apparent, in asset

Meeting Basel III standards In addition, Moody’s argues that Asian banks are well-placed to meet the capital standards of Basel III; the banks will carry on with their overseas expansion, though at a more moderate pace than that evident in 2012; and while the region’s regulators will focus on ensuring that new-generation capital instruments meet Basel III requirements, they will still refrain from seeing any urgency in pressing ahead with broader resolution tools that could impose losses on creditors. “For banks in several exportrelated economies, such as Hong Kong, Singapore, Taiwan, Malaysia, Korea and Thailand, macroeconomic recovery will mean that any cyclical rise in non-performing loans (NPLs) will be modest. However, tightening liquidity (except for Korea, where Moody’s expects loan-to-deposit ratios to continue to decline) will remain a feature as these banks’ dollar loan books will keep outstripping deposit gathering in their own currencies.” He adds that the outlook for banks in Australia and New Zealand remains stable as these economies continue to exhibit good growth prospects in the near-term, driven by ongoing resources-sector investments in Australia and earthquake reconstruction in New Zealand. With the positive outlook for the Philippines, Moody’s says its banking system will remain relatively immune to global shocks and continue to benefit from steady credit growth. Indonesia shares many of these positive attributes, but Moody’s stable system outlook includes more policy uncertainty, as well as greater risk of asset quality pressures due to relatively rapid recent loan growth.

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COUNTRY REPORT: INDONESIA

Indonesia haunted by big transaction risks

Indonesian banks should be irresistible on paper but sizeable transaction risks are keeping buyers at bay.

he Indonesian banking system has emerged as one of the most attractive in Southeast Asia. Macroeconomic conditions such as low credit penetration, strong and resilient economic growth, and an expanding middle class are propelling bank growth, said Iwan Wisaksana, Director, Financial Institutions, PT Fitch Ratings Indonesia. “Most major Indonesian banks are well capitalised and have sound lossabsorption capacities,” she added, but noted that “the sub-investment-grade Viability Ratings of most local banks reflect some structural issues typical of high-growth markets and the operating environment risks.”

“Most major Indonesian banks are well capitalised and have sound loss-absorption capacities.”

BTPN deal Media reports in late April spurred rumors that Japan’s Sumitomo Mitsui Banking Corp. (SMBC), the country’s third largest lender by assets, was in deep talks to purchase a 40 percent stake in Indonesian 28 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

lender Bank Tabungan Pensiunan Nasional (BTPN) from private equity firm TPG Capital. It has also been suggested that Bank of TokyoMitsubishi UFJ was interested in TPG Capital’s $1.6 billion non-controlling stake. Wisaksana said this latest rumored deal only highlights the keen interest in the country’s banking system due to its growth potential. Japanese banks are especially eager to snap up shares as part of a massive investment spree in the high-growth Southeast Asian region. But a couple of things are giving acquirers some pause. Wisaksana said that high prices and regulatory restrictions on bank ownership increase transaction risks for Sumitomo and other potential buyers into the Indonesian bank sector. “We believe that overpayment in the absence of synergistic benefits could increase the risk of goodwill write-offs for the acquiring institutions. Several European

banks took large write-downs on acquisitions made in the run-up to the financial and sovereign debt crises,” said Wisaksana. One glaring example is Italy’s Intesa Sanpaolo which had to take a €10 billion write-down last year related to its 2007 creation from the purchase of Sanpaolo IMI by Banca Intesa. Wisaksana implied that the risk of goodwill write-downs partly stems from what it called as a “lack of potential efficiency benefits and business model fit” should the Japanese mega banks successfully acquire an Indonesian bank stake. Because of this lack of efficiency and synergy, even large, well-funded Japanese mega banks may find it discouragingly expensive to acquire an Indonesian banking license without securing a controlling interest. “We expect synergies resulting from acquisitions of Indonesian banks to be limited, particularly if a buyer does not gain control,” insisted Wisaksana. It is not helping that Japanese mega banks and other interested buyers are being made to go through considerable hoops to obtain controlling interest. “Rules on bank ownership introduced last July limit holdings in

COUNTRY REPORT: INDONESIA local banks at 40%, although Bank Indonesia has discretion to lift this cap. This makes it tougher for buyers to gain control of an Indonesian bank,” said Wisaksana. In July 2012, the Indonesian central bank introduced a so-called “40-3020” rule on shareholding in retail banks, which caps single ownership for banks, non-bank entities and individuals at 40-30-20%, respectively. Banks are the only ones that can possibly own more than 40% of shares in an Indonesian bank, but only under special circumstances, and after going through a rigorous twostage acquisition process, said Bank Indonesia in separate circular. The first step involves taking up 40% of the target bank’s shares. If successful, the two Japanese mega banks will have fulfilled this first step requirement. But then they will have to obtain approval from Bank Indonesia to exceed its shareholding limit beyond the cap. Acquiring banks must meet a stringent list of minimum conditions, including a “commitment to support Indonesian economic development,” before Bank Indonesia even considers lifting the cap. Bank Danamon takeover The actual application of these rules will be tested in the case of Singapore’s DBS Group and its takeover bid for Bank Danamon, Indonesia’s sixthlargest bank by assets. While an initial stake purchase of 40% was approved in mid-April, the rest of its $7.3 billion bid to acquire the whole bank is still being deliberated by Bank Indonesia. If approved, the DBS takeover of Bank Danamon will be the largest Indonesia - Projected GDP Growth

Source: CEIC, OCBC Bank

acquisition in Indonesia’s history, but the central bank has held off on a decision as it scrutinizes the financial health of DBS and, negotiates for more favorable investment conditions for Indonesian lenders looking to expand in Singapore. “The central bank’s pending decision on whether Singapore’s DBS Group can take over Bank Danamon is likely to set a precedent for whether buyers can take an initial stake and then build up a majority holding,” said Wisaksana. DBS Group is crossing its fingers that the deal will go through despite the snags to make the purchase, which according to some analysts was overpaid, worth the hassle. “Southeast Asia’s biggest bank is already under pressure for having overpaid for Indonesian bank Danamon,” said Avis Wang, Private Client Manager, IG Markets Singapore, in a market update in late April. “It is caught between a rock and a hard place. Forced to expand overseas as the domestic market reaps fewer profits, it has ended up overpaying as it has little choice when it comes to foreign acquisitions.” Another reason why control has become a central issue for acquirers is the global adoption of Basel III banking regulatory standards. “Basel II has made the issue of control more important for banks looking to acquire in markets where ownership restrictions apply, such as Indonesia,” said Fitch Ratings’ Wisaksana. “An acquirer bank has to partially deduct 10%-50% holdings in financial institutions from its regulatory capital. Therefore, under the new rules minority holdings are

“Southeast Asia’s biggest bank is already under pressure for having overpaid for Indonesian bank Danamon.”

potentially a very inefficient use of capital and some banks have already disposed of stakes where there is no clear prospect of gaining control.” Growing prospects and pressure While most acquirers are focusing on the outcomes of the BTPN and Bank Danamon deals, for good reason, other top Indonesian banks are also catching the attention of investors due to their rising profitability. Bank Mandiri, Indonesia’s largest lender by assets, recorded a net profit of INR4.3 trillion ($443 million) for the first quarter of 2013, up 26% from IDR3.4 trillion ($350 million) in the same period last year. The bank attributed the double-digit growth spurt to gains in micro-finance lending, which has been booming in parallel to ravenous domestic consumption. Similarly, second-largest bank Bank Rakyat Indonesia posted a net profit of INR5.1 trillion ($524 million) for the first quarter of 2013, up almost 19% year-on-year, also on the back of micro loans expansion. The rest of the top 5 largest Indonesian lenders – Bank Central Asia, Bank Negara Indonesia and CIMB Niaga, decreasing order of size by assets – also posted doubledigit annual profit growth rates and widening net interest margins. Indonesia’s much-vaunted economic growth is a critical factor driving Indonesian bank expansion and attractiveness, but the latest data shows bumpiness as investment growth snags. The Indonesian economy grew 6.0% year-on-year in the first quarter of 2013, slightly lower than market consensus of 6.1% year-on-year, and the previous quarter’s 6.1% annual growth. OCBC Research analyst Selena Ling said this was below their 6.3% estimate. “All components of GDP registered a slower pace of annual growth in the period, except for the slight recovery seen in fiscal spending,” Ling said. All eyes now are on the next two quarters to see whether economic fundamentals hold up to support Indonesia’s strong growth momentum, and whether a dip coupled with unfavorable developments in the BTPN and Bank Danamon deals will push investors to sit and wait in the sidelines.

ASIAN BANKING AND FINANCE | SEPTEMBER 2013

BIG ISSUE 3 questioned their ability to keep up the growth pace in the coming years. One cause for worry is the deteriorating asset quality in the sector.

Can Chinese banks sustain profitability?

Analysts are sounding the alarm on soon-to-be sputtering profit drivers.

n early March, the China Banking Regulatory Commission released its annual set of banking indicators, which showed overall profit growth of 19% for the banking system – a seeming triumph in the face of the domestic economic slowdown and narrowing interest margins plaguing the sector. But the threat of deteriorating asset quality, thinning interest margins and stricter regulations have convinced pessimists that Chinese banks’ profitability will continue to worsen unless they implement aggressive fee income and lending changes. Surprisingly strong 2012 The banking system’s 19% profit growth in 2012 managed to impress observers as it trumped gloomy market expectations. “While the profit growth was down from a record 39% in the previous year, it still exceeded our expectations (about 9%) by a wide margin due to better-than-expected NPLs,” said Stephen Schwartz, Chief Economist for Asia at BBVA Research. 30 ASIAN BANKING AND FINANCE | SEPTEMBER 2013

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

Schwartz said the better-thanexpected profitability was driven by adequate liquidity and slightly increased capital following the implementation of capital replenishment plans by several banks. Liquidity and capital ratios held up well, banking indicators showed. The system’s overall loanto-deposit ratio edged up to 65.3% at end-2012, from 64.8% the previous year. Banking liquidity also remained adequate as the People’s Bank of China implemented cuts in the reserve requirement ratios and adopted expansionary open market operations. Meanwhile, the overall capital adequacy ratio increased to 10.6% from 10.2% during the same period, which Schwartz attributed to the successful implementation of capital replenishment plans, as well as reductions in dividend payout ratios of a few state banks, including Industrial and Commercial Bank of China, Bank of China and China Construction Bank which all saw a 5% percentage point cut. Despite the notable profit resilience of Chinese banks, analysts

Long-term profitability questioned “Despite the strong performance, profits and asset quality are likely to decline,” said BBVA’s Schwartz. He pointed to a number of factors that could possibly drag bank profits in the coming years. The first are narrowing net interest margins (NIMs) due to ongoing interest rate liberalization and tighter competition among the banks, as represented by government pilot programs on financial reform that will effectively lower the barriers for entry for new private banks. Second, there is no denying that growth is slowing down significantly. In recent years, Chinese banks have posted high doubledigit levels of growth which are now widely expected to hover around 8% in 2013-14. Third, Chinese banks continue to bleed financial losses from shadow bank lending activities. Finally, tighter regulations in the form of Basel III implementation and government intervention on rapid credit growth will likely raise costs in the banking sector. “In view of these factors, we maintain our projection of bank profit growth slipping to singledigit levels over the next five years,” said Schwartz, further noting that slower profit growth will constrain the ability of banks to raise capital through retained earnings. For her part, Charlene Chu, head of China financial institutions at Fitch Ratings, said that low impairment charges have been a key factor upholding profitability. However, Chu reckons this comes at the expense of lower loan loss reserves and weaker lossabsorption capacity, and is only temporary. Longer term, banks will have to significantly raise fee income and increase their lending to higher-yielding SME borrowers to preserve earnings, although the latter will also require higher provisioning.