Friday, 25 May 2018

Asian banking is ripe for disruption

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  • Jonathan Rogers
Consolidation and innovation are on the menu for the region’s financial sector, says Jonathan Rogers

We all know that banking across Asia Pacific is going through upheaval. Until around three years ago, the industry enjoyed solid GDP growth across Asia, frothy returns on equity, constrained NPLs and a steadily growing client base. Add to this rampaging regional commodity markets, you had what was for a long time the “perfect storm”.

That rosy picture inevitably gave way to the altogether more challenging backdrop of collapsing commodities, testing the debt service capacity of many companies in Asia’s commodity sector and forcing banks to make hefty provisions for potential losses.

Not helping has been the gradual erosion of net interest margins thanks to a low rate policy among many of the region’s central banks principally those of Japan, China, Australia, Hong Kong and Singapore. What to do?

Asia’s banking bigwigs are employing a variety of strategies.

Ramping up fee income is a fine ambition, until customers shop around and competitors squeeze margins. Engaging more comprehensively with the underbanked SME and micro-finance segments is also a growth opportunity, but one that brings with it additional risks.

Meanwhile, terrified by the disruptive potential of fintech and new sources of finance, many Asian banks are investing heavily in these sectors, and in the case of the former are increasingly making it one of the cores of their mission statements.

Then there’s always old-fashioned investment banking and broking for those banks that possess the capacity. Talk is that IB fees might be on the turn as global competition for capital ramps up in the face of the nascent infrastructure boom. Certainly a record-breaking first quarter in Asia’s G3 primary debt markets and a stirring regional loan market suggest there is no shortage of takers on either the sell-side or buy-side.

Ironically that comes at a time when many of the region’s local and international investment banks have been engaging in cost-cutting, via outright redundancy or “juniorisation” – which used to be known in the very good old days as constructive dismissal.

You never know, there could be a wave of retirees from the industry in Asia – they certainly have the skill set to face a rampant IB bull market head-on – who are more than ready to bring on a second act.

IT COULD BE argued that such a bull market will follow a wave of deregulation, beginning in the US with the abolition of the Volcker and Dodd-Frank rules, which were formulated to reign in irresponsible excess in global investment banking. Both rules were well-intentioned, but they sure as hell tied up capital, and banks have been struggling ever since to achieve a half-way decent return.

Meanwhile one imagines that “serious” bankers operating at the top of the industry spectrum will be more than a little jealous at the large Chinese banks’ government support to tide them over through any rough times without having to call on regulatory capital or emergency bailouts.

And that helps explain one of the most radical disruptions to the status quo in Asian banking since the end of the miracle decade: the entry of the big Chinese banks into the regional investment banking, corporate and project finance landscape. They seem to do a solid job from the execution point of view, although industry stalwarts grumble that loan pricing is often off the mark or covenants too loose, all to the benefit of the borrower or project sponsor.

Mind you, all this, barring a major catastrophic accident, will take rather a long time to pan out, assuming the gripes have some interpretative basis.

OVER-LENDING IN Asia to the oil and gas and shipping industries started to gain traction in around 2003, as Chinese demand for commodities became turbo-charged. The realisation of reversal and excess began to dawn around three years ago and these industries are not out of the woods yet.

But there is cause for optimism. A range of full-on offshore debt restructurings are ongoing and it seems that caution has been prevailing among the region’s lenders.

Still it’s hard to escape the conclusion that Asian banking is in need of a radical reinvention. It cannot simply be business as usual: hit and hope and pray that markets do the rest. They might well do, of course, as evidenced by the recent comeback in commodities. But you cannot rely on that as a plank of your underlying long-term strategy.

What many banks in Asia who are hip to the game are doing is expanding into frontier markets in the region in search of a more diversified client mix.

But longer term, rampant consolidation is required in over-banked Asian markets. Japan, Australia and Singapore did that a few years back. At least they provided the template of what a matured bank market resembles, however tough it will be for developing Asia to emulate.


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