Asiamoney, - Wed August 1, 2012

Asian banks seek regional growth amid Western rival withdrawal

A combination of financial crises and political pressure has forced Western banks to retreat from Asia. Regional lenders are proving quick to fill the gap, and some could go further and become truly international players. Elliot Wilson reports.

The global financial crisis of 2008 and the subsequent eurozone disaster have had many ramifications. A less-obvious one is the potential for Asian banks to become some of the world’s most influential lenders.

Early signs are already evident. Financial woes and tighter regulations have forced European (and a few North American) financial institutions to retreat from Asia and shore up capital at home.

Nick Chamie, global head of FX strategy and emerging markets research at RBC Capital Markets, estimates that Western lenders have sold US$12 billion worth of equity stakes in emerging markets over the past two years. And more than half of that sell-off has been in Asia.

It’s not over yet. In a May 23 note titled “Who is vulnerable to decline in bank liquidity,” Viktor Shvets, an analyst at Credit Suisse in Hong Kong, warned that a “growing home bias” among Western banks cut lending lines to emerging markets, notably Asia, by US$400 billion in 2011. Quoting figures from the Bank of International Settlements (BIS), he warned that the same lenders would withdraw a further US$1 trillion this year and next.

The International Monetary Fund (IMF) warned in its annual Global Financial Stability Report in April that European banks would shrink their balance sheets by US$2.6 trillion over the following 18 months, dumping 7% of assets.

In high-growth Asia, one bank’s departure is another’s opportunity. Aggressive and well-financed Asian lenders have responded to the Western withdrawal, buying assets at bargain prices and raising their local and regional presence virtually overnight.

In June, Malaysia’s CIMB finalised a deal to buy most of Royal Bank of Scotland’s (RBS)’s Asia investment banking and cash equities business for US$142 million. Meanwhile Australia’s ANZ, which bought the bulk of RBS’s most valuable Asia retail banking assets in 2009 for US$550 million, is now eyeing several assets in Thailand, where ING is expected to sell its holdings in TMB Bank, and General Electric is likely to exit its one-third stake in Bank of Ayudhya.

Troubled ING, which has sold assets in Taiwan and mainland China in recent months, is seeking to divest its 26% stake in an Indian insurance joint venture with local battery producer Exide Industries.

Even HSBC, ostensibly one bank well placed to benefit from an Asian lending push, is selling assets. In January it sold its credit-card business in Thailand to Bank of Ayudhya for US$115 million.

“Europe is facing many challenges and further reforms will be needed to address structural fiscal deficits, and though the American banks are recovering, they are still saddled with significant problems,” says Darren Tan, chief financial officer of Singapore’s Oversea Chinese Banking Corp (OCBC). “This has created opportunities for well-managed Asian banks like OCBC as, unlike European or American banks, we have the liquidity, capital and operating ability to meet customers’ needs.”

Asia’s banks are taking advantage of the once-in-a-generation weakness of their Western counterparts, building market positions.

This is systemically de-Westernising Asia’s financial markets, and could yet lead some of the region’s better players to carve out a piece of the world’s banking pie.

Retreating from growth

The partial or full exit of many European banks from the world’s economic growth engine is virtually unique.

This deleveraging is mainly down to a combination of balance-sheet weakness, political pressure and regulatory bullying in their home markets.

RBS and ING, for example, have pulled back from Asia as an ongoing consequence of forced nationalisation or deep indebtedness. Meanwhile French and German banks are cutting international lending to help meet new Basel III rules that demand Tier I capital levels of at least 9%.

Inevitably, political and regulatory pressure has led them to prioritise lending to key clients at home, while regions like Asia have been deemed the most politically expendable, growth prospects or not.

On April 26, the BIS released its fourth-quarter figures for 2011, showing that the consolidated claims of European banks on Asia fell by 5.9% quarter on quarter, widening from a 2.7% drop the previous quarter.

On the same day Nomura economist Rob Subbaraman noted that foreign (mostly European) bank claims in Asia fell or remained static in all major economies bar Malaysia during 2011, where they rose slightly. Claims fell the most in Japan and Taiwan, by 15% and 16.1% year-on-year, respectively.

Several Asian lenders are making inroads

CIMB chief executive officer (CEO) Nazir Razak, who spoke to Asiamoney in the last edition, wants to build on his RBS acquisition, boosting the group’s market capitalisation 75% by 2015, to US$31 billion. The RBS purchase, which adds more than 260 staff in Hong Kong, mainland China, India, Australia, New York and London, means that “we instantly get scale”, Razak said.

Nomura is hiring aggressively at its corporate solutions and financing group (CSFG), and within debt capital markets (DCM). This, says Philip Lynch, the Hong Kong-based chief executive in charge of Nomura’s Asia operations, “is where the opportunity exists for us in origination: we can go in, provide financing to companies, and then distribute that paper”.

The Japanese bank is not faring well in all aspects – its investment banking and equity capital markets (ECM) operations in Asia are lacklustre, judging by league-table rankings. But over the past 12 months its CSFG division has doubled its active origination and execution bankers to 30. “We expect revenues from this business to double this year,” says Lynch. “This is probably the biggest pan-Asia strategic opportunity we have invested in over the last 12 months, and we are continuing to reallocate significant resources there.”

These banks are following in ANZ’s footsteps, which under former HSBC executive Mike Smith has become a player in Asia’s retail banking market once more. Its swoop for RBS’s retail and commercial bank operations in 2009 means it is now active from India to Taiwan and Korea to Indonesia.

On becoming ANZ chief executive in 2007, Smith targeted generating 20% of group revenues from operations in non-Australia Asia by the end of this year. It looks set to miss that objective – ANZ generates just 15%-16% of its sales outside its home market – yet Smith has raised the bar to a whopping 30% of all revenues by end-2017. He is clearly more bullish about ANZ’s prospects in Asia following the eurozone and global financial crises.

Changing of the guard

The declining prevalence of Western banks in Asia is reflected in the corporate lending space.

Total lending by banks into three key developed Asia markets – Australia, Singapore and Hong Kong – hit US$67.2 billion in the first half of 2012, comparable to US$70.5 billion over the same period in 2007, before the global financial crisis.

But in the first half of 2007, the top-10 loan bookrunners comprised six Western banks, according to financial information provider Dealogic. Citi was ranked third, UBS fourth and Credit Suisse fifth, behind ANZ and National Australia Bank (which still leads today).

By 2012 though, just two Western banks were present: HSBC and Standard Chartered. And both London-listed lenders trace their foundations back to Asia. Citi had slipped to 14th, with Credit Suisse and UBS out of the top 20.

Meanwhile Singapore’s DBS jumped from 20th to sixth between 2007 and 2012, with OCBC inching up from 14th to 10th and United Overseas Bank (UOB) leaping up 25 places to ninth. Japan’s Sumitomo Mitsui Financial Group progressed from 12th to seventh over the same period, Mizuho inched up four places to 12th, and Malaysia’s Maybank jumped from 29th to 11th.

John Corrin, global head of loan syndication at ANZ in Hong Kong, is amazed at how fast the presence of Western lenders in Asia has shrunk.

“Before the financial crisis, particularly in the debt capital markets, it was assumed that universal Western banks would increasingly take greater market share,” he says. “This seemed inevitable. Now you look at the league tables around the region, and you wonder where the European and US banks are.”

Western banks retain their edge in areas where financial heft takes a back seat to innovation and global presence, such as ECM. Thus, Asia ex-Japan’s ECM tables continue to be dominated by US and European brokerages for the first half of 2012, just as in 2007.

But even in areas like ECM, mission creep is setting in as marginal Western players retrench or depart. Names like RBS, BNP Paribas and Crédit Agricole, solid players in the Asia ex-Japan ECM rankings five years ago, have disappeared from the top-20 rankings (see tables below and on opposite page).

Meanwhile the tally of Asian ECM bookrunners has risen from eight in the first half of 2007 to 11 names for the first half of 2012, including nine mainland China brokerages (four of which appear in the top 11) and two from Malaysia.

Going global?

The retreat from European commercial banks doesn’t just mean a rebalancing of the Asian financial order; it could also offer opportunity for local players to become truly pan-regional, and even dream of more.

It’s hard to tell which banks could attain such heights, but leading Asian bankers and financial experts (many of whom anonymously offered Asiamoney their views) have some contenders in mind.

Singapore’s DBS and ANZ are prime candidates to grow, as are Nomura and a select group of fellow Japanese lenders, notably Mizuho Financial Group and Sumitomo Mitsui Banking Corp (SMFG).

DBS, and to a lesser extent its Singaporean peers OCBC and UOB, are good at funding firms in Singapore and around Southeast Asia. All are keen to grow.

As OCBC’s Tan notes: “We will continue to capture more opportunities to deepen our market presence and expand our market share in our key markets of Singapore, Malaysia, Indonesia and Greater China, by leveraging the existing platforms that we have established in the region.”

However, the Singaporean companies have less presence around Asia and are often seen as underfunded and provincial. One KPMG consultant notes that Singaporean banks are “doing what they always do best”: private banking, wealth management, and to a lesser extent corporate lending. They are markedly less keen on retail banking or investment banking, at least on a regional scale.

Nevertheless it’s notable that on June 30, DBS tripled the size of its existing US-dollar commercial paper programmes to US$15 billion, from US$5 billion, to boost its lending in Singapore and across Asia.

Analysts say DBS wants a greater presence across Asia in corporate and institutional banking, a traditional geographic area of weakness, as well as trade and project finance.

ANZ’s aspirations

Meanwhile ANZ has most prominently set itself the goal of becoming “Asia’s universal bank”. Talk to internal staff and it’s clear such ambitions are more than just spin.

Yet as stated, a fraction of its revenues come from Asia – “ANZ earns more from New Zealand than Asia,” snorts a Sydney-based bank analyst. Added to this, the bank has no meaningful presence in China, a hindrance for any bank wanting to conquer Asia.

This is placing pressure on Smith, hired in 2007 to diversify the bank into Asia. Speculation has begun that this could jeopardise his position unless Asian revenues improve soon.

Malaysian banks Maybank and CIMB are also growth contenders, and Razak imparted as much to Asiamoney in his June interview, while Tengku Dato’ Zafrul Tengku Abdul Aziz, the CEO of Maybank Investment Bank, tells Asiamoney: “The reality is that Asian banks, such as Maybank, are much stronger fundamentally today than ever before and will continue to improve their foothold in the region.”

But rival bankers remain sceptical, arguing that for all their acquisitions the two lack scalability in retail, corporate and investment banking across the region.

“There’s no history of Malaysian banks succeeding far from their shores, and their corporate and banking culture is often too inflexible,” says one prominent Singapore-based banker. “I would be surprised [if they became] real regional banks.”

Japan’s new banking push

Japan’s top lenders could have the most chance to succeed across Asia.

Despite 20 years of poor or zero growth in Japan’s economy, its lenders remain among the world’s largest banks. And there is a dearth of domestic lending opportunities, while almost zero interest rates mean returns are negligible in any event.

They certainly appear keener to grow, particularly in corporate lending, where Nomura is active, as are Mitsubishi UFJ Financial Group, Mizuho Financial Group and SMFG. The latter three are pushing into South Korea as European and US lenders pull back from funding the global aspirations of South Korean chaebols.

Loans by Japan’s three biggest banks to South Korean firms rose 28% year on year to end-March 2012, to US$13.3 billion. On July 9, Reuters quoted Takahiko Yasuhara, Seoul branch general manager at Mizuho Corporate Bank, as saying: “As European lenders face hard times, the status of Japanese banks is on the rise.”

One example is SMFG, which bought RBS’s aviation unit earlier this year for US$7.3 billion, renaming it SMBC Aviation Capital. On July 6 it announced that it intends to boost Asia’s largest aircraft leasing fleet by 20% to 400 planes in three years and merge the unit with its two other aircraft leasing divisions.

A step too far

While opportunity abounds to grow market share in Asia, it’s far from certain that banks can convert this into truly pan-regional expansion.

Most bankers spoken to for this story note there is no precedent for a purely Asian bank to become genuinely regional. HSBC and Standard Chartered are the closest examples but both are a mixture of Asian and foreign culture, legacies of the British Empire.

Stumbling blocks for other aspirants include a lack of experience – but this will come – along with a reluctance to pay high salaries, although western banks are finding public opinion moving against them on this too.

It’s hard to underestimate regional resentments either. Many countries directly compete with their neighbours, while others share bloody pasts that they are unwilling to forget, proving difficult for aspiring pan-regional banks.

In the longer term regional players will emerge – DBS, ANZ, SMFG are contenders to watch, possibly along with a Chinese lender (see box right) – but this could take 10 years or more, and much will depend on how well China copes with an ageing population and slowing growth.

A bright, if limited, future

Ultimately every banker Asiamoney spoke to agrees that European banks are already losing out to Asian rivals.

However it’s wise not to completely discount a resurgence by Western institutions. True, many will take years to rebuild balance sheets. But some remain healthy.

Maybank’s Zafrul notes that it is slightly “premature” to assume Asian banks will dominate, given European uncertainty. But he appears quietly confident. “With uncertainties in Europe and with the ongoing downgrades in credit ratings of such financial institutions, there is growing awareness on the financial strength of Asian banks,” he says.

“Corporates and multinationals looking to do business in Asia [particularly Asean] would undoubtedly seek out financial institutions that have strong credit ratings and the balance-sheet strength to support their operational and funding needs.”

For the medium term at least, Asia’s financial future looks increasingly likely to be in the hands of its own banks.

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