Asian banks are in a good position to survive the crisis and expand their business as long as they are willing to make tough decisions on reshaping their business models and invest in the necessary IT platforms.
By Andrew Smart
12 Feb 2009
John F. Kennedy, America’s 35th president, observed in a speech in Indianapolis, Indiana, that “the Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for ‘danger’; the other for ‘opportunity’. In a crisis, be aware of the danger, but recognise the opportunity.”
Kennedy was obviously not speaking to the management of Asia’s banks on that April day in 1959 but his words may help these executive to resist the natural urge to be reactive in the current crisis at the expense of longer term growth opportunities.
Danger lurking
The current global crisis has hit Asia hard and local bankers must be feeling a sense of danger.
Trouble with US over-the-counter (OTC) derivatives such as collateralised-debt obligations (CDOs) quickly spread to global credit markets, engulfed all asset classes reliant on high leverage and cheap money and created a real economic crisis for Asia’s export tigers.
The Economist reported that gross domestic product (GDP) fell in the fourth quarter of 2008 by an annualised average rate of 15 per cent in Hong Kong, Singapore, South Korea and Taiwan; with exports plunging by more than 50 per cent at an annualised rate.
Domestic consumption has also collapsed as firms cut investment and staff and stock and property prices tumbled. Retail sales over the past 12 months have fallen by 11 per cent in Taiwan, 6 per cent in Singapore and 3 per cent in Hong Kong.
With reduced lending opportunities and rising default rates, Asian banks may feel it prudent to deleverage their balance sheets to protect profits and focus lending activity on quality clients within their core competencies.
But with their Western competitors scrambling for survival, opportunities exist for Asian banks to capture market share and increase margins over the medium term through improved product development, operational excellence and risk management.
They must resist the temptation in 2009 to cut strategic capital investments in IT solutions that will help deliver these opportunities over the next two to three years.
Favourable trends
PwC identified seven emerging themes in financial services at its media briefing ‘The Day After Tomorrow’ in Singapore on 6 February, two of which may bode well for Asian banks: the shift in global power towards the East; and the rise of the nouveau classic banking model.
First, new patterns of world trade and investment will emerge from the crisis that will be different from the US-centred system.
“We are moving to a multi-polar world,” noted Nigel Vooght, PwC central cluster financial services leader, “where Western financial centres could be bypassed. Successful globalisation has always followed its customers and therefore banks will follow their customers’ natural trade routes. As the East invests to protect the natural resources, it needs to fuel its economies; the banks will follow this investment.”
This is particularly significant for Singapore and Hong Kong as financial and trading hubs, where exports as a percentage of 2007 GDP was 186 per cent and 166 per cent respectively.
Second, disintermediation that reduced transparency and increased risk in the banking process will give way to the dominance of the universal banking model.
“The renaissance of the classic banking model,” commented Dominic Nixon, PwC east cluster financial services leader, “where banks seek to retain a larger part of their origination and take on more responsibility for the due diligence to ensure credit quality will mean that Asian banks must remain on their path towards greater transparency and strengthen their risk management culture.”
Many leading Asian banks are well capitalised and continue to enjoy access to inexpensive deposits from savers through local branch networks. They are well positioned to expand their origination and distribution activities.
Opportunities exist
The Structured Products market in Asia has been one of the fasting growing markets (more than 100 per cent annually since 2002) with new issuance in 2007 at approximately US$250 billion, according to survey statistics from Structured Products.
However, highly publicised cases in the region, including DBS High Notes 5 and Lehman Mini-bonds investments (originated by International Banks but distributed by local banks in Asia), have severely damaged investor confidence and revealed weaknesses in the product origination, distribution and compliance practices within the industry.
Despite this, “the structured products business is not going to get smaller (in Asia)”, asserts Sandra Lee, head of retail structured products at Societe Generale Hong Kong, in Asian Investor. “But the credit crisis will catalyse changes regarding distribution, product quality and investor education.”
“The industry can restore confidence by ensuring Corporate and Wealth clients that their best interests are the priority, notes Andrew Au, principal at AG Delta, a Singapore-based solutions provider to the capital markets and wealth management industry. “To achieve this, the new financial services landscape will require business solutions that can manage a more sophisticated financial regulatory framework, while still efficiently and responsibly distributing financial products to the market.”
“Asian financial institutions that make early investments to meet these challenges will position themselves to capture the lion-share of opportunities as Asian Corporate and Wealth customers look for a ‘back to basics’ approach to managing wealth and market volatility,” adds Au.
Recent regional industry forums have focused their attention on Conventional Treasury and Islamic Financial products, two categories seeing a strong pick-up in demand as investors and corporates move away from less-understood complex investment products and hedging structures towards simpler yield enhancement and capital protected structures.
Leadership required
Asian banks are in a good position to survive the crisis and expand their business as long as they are willing to make tough decisions on reshaping their business models and invest in the necessary IT platforms. This will require decisive leadership.
“As technology gets better, your ability to make choices improves. And the ability to make choices improves to the extent that, unless you are in the top two or three in your chosen markets, why would you ever be successful as number four or five,” cautions Nixon. “There are some real issues about how many global players do we really need to win in this market. How many regional players do we need to win? What niches can you go into to be successful?”
“You’ve really got to think about those issues and the shape of the business you want to create, because unless you are in the top four or five, you’re not going to win,” adds Nixon. “You’ve got to have that strategy to get to that point.”
To sell and deliver the business value of new initiatives in today’s investment environment, it may be prudent for IT directors to propose a ‘pilot project’ approach to test and prove the business case with the minimum initial investment. This will enable banks to take advantage of the new emerging market opportunities while scaling up investments in line with project profitability and return-on-investment objectives.
Rising stars
Undoubtedly, there are Asian banks that are already well down this path and punching above their weight. To those banks, I ask you to email me or MIS Asia’s editor, Ross O. Storey, to obtain an application form for our IT Excellence Awards 2009. We want to share your story.
You may also email us about any outstanding up-and-coming Asian vendors you believe are growing rapidly or have a unique value proposition. We will review these vendors for our inclusion in the ‘Rising Stars’ section of our Strategic 100 annual in November 2009.
Andrew Smart is the regional director of Fairfax Business Media and publisher of MIS Asia.
