Asia banks turn regional

Institutional Investor, January 2013

Asia’s biggest banks are increasingly trying to build on their domestic scale to cement a regional presence. Doing so gives them the potential to tap into increasing intra-regional trade and wealth movements – but at the same time brings considerable logistical and capital headaches.

Leaving aside the global banks of Asian origin and priority but British domicile, HSBC and Standard Chartered, the flag-bearer for a home-grown Asian regional presence has long been Singapore’s DBS. The merits of its 2001 acquisition of Hong Kong’s Dao Heng Bank will forever be debated, but it was a pivotal transaction in that it created the first attempt at a pan-Asian, Asia-based, institution.

In fact, it was not DBS’s first acquisition overseas – that was Kwong On Bank, also in Hong Kong, in 1999 – and was certainly not the last: subsequent acquisitons have included the good assets of Taiwan’s Bowa Bank in 2008, a stake in Thailand’s Thai Danu Bank (subsequently rolled into Thai Military Bank), 9.9% of Bank of the Philippine Islands, a joint venture in India (Cholamandalam DBS Finance, since sold to the JV partner) and most recently a $7.2 billion bid for Indonesia’s Bank Danamon. There would have been still more had previous CEO Jackson Tai got his way with a bid for Korea Exchange Bank. And all of this is on top of more organic expansion in Indonesia, where it owns almost all of PT Bank DBS Indonesia; Malaysia, including the Hwang-DBS venture; and China, where a growing presence is anchored off the old Dao Heng business.

“As a bank born and bred in Asia, we know Asia,” says Piyush Gupta, CEO of DBS. “We are committed to Asia, we understand the terrain and the ins and outs of doing business here.” Still, when he took the top job in November 2009, he says he found a lack of strategic clarity in what exactly DBS wanted to be, so held a three-day management offsite and came out with a clear picture. “We want to entrench our leadership in Singapore, re-energise Hong Kong and diversify our earnings base in Asia. We also want to build leading franchises in wealth management, SME banking, transactional banking, and treasury and markets.”

Since DBS set out on its cross-border path, other banks, particularly Malaysian, have set about building regional presences of their own. The most well-known is CIMB, which over the last 10 years has bought the Singaporean broker GK Goh, Bank Niaga in Indonesia, most of SICCO Securities in Thailand, and a stake in Bank of Commerce in the Philippines. Then, in March, it signed a memorandum of understanding to buy most of the Asian cash equities, ECM and corporate finance businesses of RBS. “We have gone quite public on the fact that we want to be the top regional universal bank – meaning southeast Asia,” Dato’ Charon Wardini Mokhzani, CIMB’s deputy CEO, told the author earlier this year.

Then Maybank, also from Malaysia, bought the Singapore-based regional brokerage Kim Eng Holdings in 2011, and announced grand further ambitions. “Maybank Kim Eng wants to be a regional financial powerhouse by 2015, the number one in stockbroking for all the main markets and top five in the region for all categories,” says Tengku Dato’ Zafrul, group chief executive, naming M&A, syndicated loans, bonds, equity and rights offering as specific areas.

It’s not as if all regional ambitions work out. Samsung Securities, for example, set up a regional investment banking business in Hong Kong in 2011 – only to shut the vast majority of it down again in 2012. But still, the ambition is clearly there.

What’s the key? “In order to succeed and take market share, you need to have a couple of characteristics,” says Stephen Andrews, head of Asian financial institutions at UBS Investment Bank. “One is that you have to have the regional network – a proper footprint. Second is a Basel 3-compliant capital base so you’ve got the capital resources to be able to put to work. And third, very importantly, you need access to US dollar funding, because most trade finance is dollar denominated. Where some domestic Asian banks suffer when trying to expand regionally is because of that lack of access to plentiful dollar funding at a competitive rate.”

Andrews’ reference to trade finance is important, because this is perhaps the most obvious trend that ought to drive Asian banks to expand. Piyush Gupta, DBS’s CEO, talks often about profound changes in Asian trade patterns. Specifically, in the 80s and 90s, the growth of Asia was built on a supply chain of manufacturing and exports through which Asean countries would send materials to China to be assembled and be shipped out to the west. Since then, as Asian consumption has grown, the pattern has started to change: Asian companies supplying Asian demand. Hence for DBS, tapping trade flows is considered a key part of the regional opportunity, one which it intends to exploit with a focus on SMEs.

Apart from growing Asian wealth, there are also efforts taking place at the policymaker level to make cross-border business more straightforward. The Asean trade group has been steadily streamlining regulation for many years, although it’s slow progress, and the endgame is intended to be a relatively harmonised economic area. That all supports a regional trade finance business.

That’s in stark contrast to building on-the-ground mainstream banking in foreign markets. “When it comes to full banking licences that enable you to offer a broader suite of products and compete in areas such as deposit gathering on an equal footing, that is still much more challenging,” says Andrews. Foreign banks in China are limited in the number of branches they can open each year, and there are ownership restrictions in India; with Indonesia, particularly for Singaporean banks, there are political questions about reciprocal access, which became an issue in the DBS bid for Danamon. Similarly, while Singapore has given qualified full bank (QFB) licences to two Chinese banks, Bank of China and ICBC, it has done so with a requirement that those banks put S$1.5 billion of capital into Singapore. “There is still a degree of nationalism involved when it comes to these national champions,” says Andrews.

Another area where banks have sought to expand internationally is wealth management – again, a DBS priority, as it is for all Singaporean banks in what is the region’s key hub for private banking. Aside from DBS’s efforts, the most eye-catching expansion here was when OCBC of Singapore bought the private wealth assets of ING, a US$1.5 billion purchase that took place in 2009. Those assets were then turned into a whole new OCBC-owned bank, called Bank of Singapore, creating an instant regional private bank.

The ING sale is illustrative of a common trend for regional bank expansion: taking advantage of withdrawals from Asia by troubled western institutions. “Most wealth management acquisitions you’ve seen have been as a result of western financial institutions shedding assets to raise capital buffers back home and simplify their business models,” says Andrews. More recently, UOB bought ING’s funds business in Thailand; asset management is another area of natural expansion for local banks.

Investment banking, a key part of the CIMB strategy, seems a bigger ask. “It has been a long time since we saw a successful entrant into investment banking,” notes Andrews. “But what’s different this time around is that there is a gap to fill from a lot of the international banks that are pulling out and deleveraging. The domestic banks, often with big commercial banking operations, are typically more willing to use their balance sheets to win investment banking deals. That does give them an advantage when bidding for business.”

And brokerage, which Maybank and CIMB have both invested heavily in on a regional base, may be tougher still. “Deals on the broking side are often very hard to do,” Andrews says. “Turnover on many large global exchanges is very low. You can get it to work if the prices paid are sensible, but for many brokers that have been acquired in various parts of the world, the purchaser has had to pay for the business twice: once for the franchise, and then again to retain key employees.” At this point it’s worth mentioning Nomura, the Japanese heavyweight that sought to buy scale in Asia Pacific business through its purchase of Lehman Brothers businesses; staff retention has been a huge cost for Nomura, and a considerable cause of tension among those who were already at Nomura before the Lehman deal.

Still, Zafrul has no doubts Maybank is targeting the right areas. “Our increased focus on investing banking has translated into our higher league table positions in our core markets, resulting from the deeper penetration of our key clients and increased strategic dialogue with them,” he says, adding that he expects growth in Malaysia, Singapore, Philippines, Indonesia and especially Thailand – where the group has a 14% market share in broking – next year.

Another interesting area is Islamic finance, which is a large part of the reason many Malaysian banks have sought to grow scale in Indonesia. Malaysian banks have decades of Islamic finance expertise but their home market is becoming saturated; Indonesia, with a far bigger population, has not yet enjoyed much penetration of this approach and represents a huge long-term opportunity.

Whatever the business area, Asian banks have to make a choice between expansion based on acquisition or on organic growth. “Our priority is organic growth,” says Gupta. “It is important and will shift the needle. We have successfully built a regional franchise largely on organic growth.” But, he says, “we also recognize there is a place for inorganic growth.”

One interesting area to watch will be the expansion of Chinese banks. Despite being the largest banks in the world by market capitalisation, they have tended to be overwhelmingly domestic so far, though there are signs of that changing, particularly at ICBC and Bank of China.  ICBC’s purchase of a 20% stake in South Africa’s Standard Bank Group in 2008, while clearly not an Asian deal, was considered a landmark and also very interesting: a stake not in a troubled western house but one at the heart of commodity-rich frontier markets.

“As always with China, they dip their toe in and test the water before making any dramatic shifts,” says Andrews. “You’ve seen a slow and steady expansion of footprint, not the mega headline-grabbing deal where they buy a large stake in a large western banking group or something that would involve them issuing equity to fund.” Chinese banks, more than any other in the region, most be wary of politics; any attempt to buy a big western, or even Asian, institution would be extremely sensitive.

It’s not always a given that going regional will bring growth. A study by Oliver Wyman Financial Services, part of the Marsh & McLennan group, this year found that internationally active banks in Asia have underperformed on average against mainly domestic banks by about 5% per year. The report puts that down to the complexity of local markets, governance structures, retaining talent and maintaining commitment over the long term. But those that have ventured this way are not turning back. “Asia’s economic cycle has reached its trough, and the region should rebound next year,” says Zafrul, citing improvements in the US economy, stronger intra-emerging market trade and domestic demand as accelerants. China’s slowdown can also be viewed as a positive, he says; “serving the purpose of reorienting its economy towards consumption, which will create a new source of demand for the rest of Asia.”

DBS concludes with a positive macro view. “This is Asia’s time, and Asia in the next 10 or 20 years is going to be a lot different from the last 20.”