Asian banks take the lead in local funding

Emerging Markets, ADB editions, Madrid, May 2008

In December, a Taiwanese curtain and blinds manufacturer called Nien Made Enterprise changed hands, in a rare example of a private equity LBO going through in a choppy market. But the significance of the deal – a NT$18 billion purchase by CVC Capital Partners Asia Pacific, with a NT$14.22 billion financing behind it – was arguably not its scale, but the people providing the money.

Citi and JP Morgan were the leads, but take a look at the team they assembled as equal-status arrangers: ANZ, Bank of Tokyo Mitsubishi UFJ, Chinatrust, DBS, E Sun Commercial Bank, Hua Nan Commercial Bank, Industrial Bank of Taiwan, Shanghai Commercial & Savings Bank, Taishin International Bank, and Taipei Fubon Commercial Bank. Ta Chong Bank and Mizuho chipped in too.

In short, when the leads had to syndicate their deal, every single participating name they brought in was based in the region. No Europeans, no other Americans, but Singaporeans, Taiwanese, Chinese, Japanese and Australians.

The increased importance of Asian banks in such financings is largely because these banks weren’t badly hit by subprime. Unlike American and European lenders, they have not had to rein in their funding, and in fact have found an opportunity to build relationships and earn fees that had previously been denied to them.

“Contrary to what you’re seeing and hearing in North America, banks in Asia are actually looking to lend,” says Ismael Pili, head of regional banks research at Macquarie in Singapore. “The reasons for that start from the top-down picture, especially in southeast Asia: there are healthy reserve positions, appreciating currencies, a lot of countries that are becoming less dependent on export cycles and more on intra-Asian trade, and for the most part the banks are very liquid too in terms of loan to deposit ratios.”

He adds: “It’s bad to use the word decoupling, because that never seems to be the case. But there’s certainly a greater resilience to these economies, and giving their developing nature, a lot of the banks there still want to lend.”

It is an increasing trend. When Supernova, part of Citigroup Venture Capital International, needed a $200 million facility to cover its purchase of Seksun, a manufacturer of specialised metal components in Singapore, it went to Chinatrust (from Taiwan), and DBS and UOB Asia (both Singaporean) as lead arrangers and bookrunners; Singapore’s OCBC and First Commercial Bank, from Taiwan, also committed funding. When Macquarie launched an LBO of Miclyn Express Offshore, another Singaporean group, its US$261 million LBO financing featured ICBC (China), Chinatrust (Taiwan), OCBC (Singapore), First Commercial (Taiwan), Aozora and Mizuho (Japan) and AMP Capital Investors (Australia), with just a handful of European banks alongside.

Quantifying the shift in funding is difficult, but there are some very clear indicators. In 2007, according to Dealogic, the three leading banks in ex-Japan Asian syndicated lending were Standard Chartered, Citi and HSBC. In 2008 up to March 28, they were Bank of China, SBI Capital Markets (from India) and DBS (from Singapore), with a top 10 that also featured OCBC, Korea’s Kookmin Bank and Woori Finance, and two Japanese. In fact only two foreign banks (Stanchart and HSBC) make the top 10 so far this year, compared to eight, including the top four, in 2006.

It’s not that local lenders necessarily undercut foreign rivals in their bidding; if anything, the locals report that the low bidding was a foreign invention. “The pricing is less aggressive than before,” says K Kwan Lee, Group Treasurer at CIMB, the Malaysian bank, speaking now of local currency markets. “This is prevalent not just in Malaysia but also in Indonesia, Singapore and Thailand.” And the impact of this foreign withdrawal from funding? “Well, it makes life slightly easier for us.”

At the same time, these local currency markets are becoming more important and more attractive in their own right. Asian corporates have long since learned the lesson from the Asian financial crisis: that funding in a foreign currency carries considerable dangers if the exchange rate moves quickly and drastically. So ever since, Asian currency bond and loan markets have become far more important sources of capital for Asian borrowers, helped by an increase in Asian domestic savings rates which has underpinned liquidity. “For most corporates in this part of the world, the understanding now is very clear that funding in local currency markets is much safer and more sustainable than in overseas markets,” says Lee. “Local savings rates have always been reflected in bank deposits, but now the institutional pool is getting bigger. And there’s much less liquidity risk: if you borrow in a non-local currency, your central bank can’t help you out much.” This trend, naturally, plays to the advantage of locally domiciled banks, though there are certainly several foreign houses (most notably Citi, HSBC and Standard Chartered) who can hold their own in most local currencies in Asia.

But on top of that, the pricing is getting much more appealing for local currency borrowing too. This is particularly evident in the debt capital markets. Sanjeev Nanavati, chief executive officer for Malaysia for Citibank, reports that for highly rated credits – AA and above – they could issue in ringgit today and swap it into dollars and come out with a cost 40 basis points cheaper than if they issued in dollars directly. “That’s a combination of credit spreads and local liquidity,” he says.

Lee at CIMB notes the “big disparity between local currency spreads and US dollar spreads,” and “the cross-currency basis: that has widened quite a bit.”

One can find evidence of this in the fact that foreign institutions are coming to those local markets. Malaysia again serves as a strong example. Export-Import Bank of Korea (Kexim) raised M$1 billion in five and 10-year bonds in March, allocating to 40 local accounts; the lead manager was Malaysia’s RHB Bank, with two joint lead arrangers, Malaysia’s CIMB and Singapore’s OCBC, although one global name, Merrill Lynch, did take a role as a global financial advisor. So again, the strength and attraction of local currency debt markets bolsters the standing of local banks.

Broadly, though, the capital markets – and in particular the international capital markets – have receded as a funding source, particularly for any corporate with a rating lower than AA. Instead, it’s lending that’s going to underpin Asian corporate expansion in the near term. “Nowadays corporate are renewing their relationships with bankers,” says Pili. “Working capital and capex will have to be funded more by bank loans than other types of financings.” Pili expects loan growth of 22 to 25% this year in Indonesia, a huge increase considering the global environment. But then, Asia doesn’t really resemble the global environment. “One thing a lot of these countries have going for them is some semblance of fiscal stimulus packages going through,” he says, from Malaysia’s Ninth Malaysian Plan to the new leadership in Thailand, fiscal reform in the Philippines, a revamped banking sector in Indonesia or even the multi-billion dollar integrated resort developments going up in Singapore. “That helps buoy lending.”

There are, though, several counterpoints to this. One is that foreign banks have not disappeared completely: in fact, on the really big deals, they’re still dominant. On Tata Motors’ takeover of Jaguar and Land Rover from Ford, arguably the most significant acquisition financing this year at US$3 billion, there are seven mandated banks, and they’re mainly foreign: Citi and JP Morgan (also the M&A advisors to Tata), BNP Paribas, Calyon and Standard Chartered, with two Asian names (Mizuho and State Bank of India) making the top line too.

Another is the fact that everything could go right back to normal once the credit crunch finally unwinds and multinationals regain their appetite for lending. “In the medium to long term, we will go back to a more competitive environment,” says Pili. “Margins will get competed down as more liberalisation takes place and foreign banks will take a more aggressive stance.” In the meantime, though, Asian banks have a chance to regroup, and have in any case been spending years revamping their business models to try to boost fee income rather than the traditional reliance on interest.

One sees this across the region, in particular with the development of wealth management divisions. Fubon Financial Group, the Taiwanese financial services enterprise, doubled both revenue and profitability from wealth management in 2007. “In our business, the area that has been growing the most in the last couple of years is in wealth management,” says Victor Kung, president and chief financial officer in Taipei. “We believe this trend will continue. Taiwan is gradually moving in terms of its demographic distribution… the savings pool is accumulating very fast. It creates opportunities for banks and life insurance companies to distribute wealth management products.” In mainland China, banks are racing to launch private banking divisions: Bank of Communications, for example, is in the process of launching a new pilot private banking business in five cities to complement its previous offering for affluent customers; China Merchants Bank and China CITIC Bank are both setting up more and more wealth management centres nationwide; and of the big four, Bank of China, ICBC and China Construction Bank have all put great effort into the launch of wealth management businesses.

Another trend is a focus on lending to small and medium enterprises. And alongside it, one sees examples of Asian banks wanting to go regional, and expand beyond their own borders.

DBS has long been Asia’s standard-bearer in this regard, first through its purchase of Dao Heng in Hong Kong, and also its stake in what has now become TMB Bank in Thailand, but more recently with its takeover of an ailing Taiwanese bank, Bowa Bank. But, to give a handful of other examples, CIMB in Malaysia owns Singaporean brokerage GK Goh; Taiwan’s Fubon Bank finally looks likely to be allowed to acquire a stake in a bank in Xiamen, China; and Yuanta Financial in Taiwan owns part of Singapore’s Kim Eng Securities. Most recently Korea’s Kookmin Bank has announced plans to spend W623.1 billion on a 30% stake in CenterCredit in Kazakhstan, while Malaysia’s Maybank is to spend US$1.5 billion on purchasing Sorak Financial Holdings, a venture which in turn holds 56% of the equity interest in Bank Internasaional Indonesia.

With valuations diminished but with Asia’s banks liquid and unimpeded by sub-prime, we should see more consolidation in the coming years. It may be that by the time foreign lenders come back to the market in earnest, they find the landscape considerably changed.