Neighborhood a good place for expansion

Asian banks are crossing borders to serve millions of marginalized clients and the new superrich

As a growing and increasingly affluent consumer class emerges across most of Asia, regional banks are focusing on extending their reach.

Banks from almost every country in east and south Asia are planning to expand on their home turf and regionally. The largest banks from Japan, the Chinese mainland, Hong Kong, Singapore, Indonesia and Malaysia are even looking to expand globally.

In Japan, banks' cash vaults filled up as a result of an economic stimulus and a stock market rally last year. Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group all saw their profits spike.

Last November, the governor of the Philippine central bank, Amando Tetangco Jr, said the country's big players have to prepare to compete regionally as the Qualified ASEAN Banks (which will be given equal status to domestic banks across the bloc) will have the option to operate regionally after 2015.

Maybank of Malaysia, Bangkok Bank and United Overseas Bank of Singapore are among the strongest regional players within the Association of Southeast Asian Nations, according to the Asian Development Bank.

Global banks like Citibank, HSBC and Standard Chartered have even greater regional coverage, and all have sought to expand both within Asia and in China while fomenting links between the two.

Bangkok Bank, the largest bank in Thailand by assets, plans to open a branch in Cambodia and will look at opening branches in other countries, including more in Vietnam.

Things have been a bit more difficult for banks in South Korea, which have struggled to be more profitable in an environment of pervasively low interest rates. Kookmin Bank, the largest in the country, closed 55 branches in January.

South Korea's Financial Supervisory Service said the total net income at private and state-run banks was 4 trillion won ($3.85 billion) in 2013, about half the net income in 2012.

Standard Chartered's performance in South Korea helped lower profits at the global bank by 16.7 percent in 2013 from a year earlier to $3.99 billion. The bank's income in the country fell 12 percent while it rose 8 percent in the Chinese mainland and generally rose 6 percent across the Asia-Pacific region.

"We do not expect to deliver double-digit income growth over the next couple of years, given various pressures, not least (South) Korea," said Peter Sands, Standard Chartered's chief executive, in a statement in March.

But even in South Korea, banks are expanding, although in other areas. Hana Financial Group, for example, says it plans to merge its two credit card services to make them more profitable.

Banks in Asia are expanding among the rich and the less affluent.

At one end of the financial scale, banks are looking to expand among the growing population of the region's wealthy.

Some time this year, the Asia Pacific will become home to the largest concentration of high-net-worth individuals (HNWIs) in the world. The number of rich people in the region has grown by about a third since 2007, much faster than the rest of the world, according to RBC Wealth Management, a Canadian bank.

There are around 4 million HNWIs in the Asia Pacific who, by next year, should control almost $16 trillion in assets.

Around half of the region's total is estimated to be in Japan; more than 160,000 are in South Korea; while China is moving toward having three quarters of a million.

Banks are also looking to expand on the other end of the affluence scale.

Asian banks are reaching out to the 600 million people around the region that do not have access to banking services. According to the World Bank, which did a huge global study of access to financial services in 2012, 45 percent of adults in the region said they did not have a bank account.

The numbers vary a lot from country to country. The Global Financial Inclusion Indicators suggest only 4 percent of adults in Cambodia have a bank account, while more than 60 percent have one in Malaysia and the Chinese mainland.

The unserved market of hundreds of millions of people is a powerful incentive for banks to expand.

In terms of geography, banks are looking to reach further afield in their home markets and to tap into regional growth, particularly in China.

A recent acquisition in Hong Kong by Oversea-Chinese Banking Corporation (OCBC), Singapore's second-largest bank, underscores this trend but also highlights the dangers of this expansionary drive.

OCBC, which owns Bank of Singapore, announced on April 1 plans to acquire Hong Kong's Wing Hang Bank for HK$129 ($16.63) per share in cash, considerably more than the HK$84 per share that Wing Hang was fetching last September. The deal is worth HK$38.43 billion.

"Singaporean banks have been seeking expansion overseas, mostly in Southeast Asia," says Jonathan Koh, a bank analyst at UOB Kay Hian. Koh is quite positive about the OCBC deal and points out that the bank has been expanding in Hong Kong and the Chinese mainland since 2008.

OCBC's competitor DBS has also sped up its regional push since 2010. In 2011, Singapore's DBS Bank bought Hong Kong's Dao Heng Bank for HK$45 billion, 3.3 times its book value. That acquisition was not exactly a successful one, ending in a S$2.1 billion ($1.67 billion) write-down to DBS due to its deteriorating credit quality.

DBS is OCBC's biggest rival in Singapore and is now the seventh-largest bank in Hong Kong. OCBC has 16 branches in the Chinese mainland, one in Hong Kong and one in Taiwan.

The OCBC deal with Wing Hang, a solid Hong Kong bank with operations in the Chinese mainland, should give OCBC stronger footing there.

"OCBC Bank has been focusing its operations on capturing capital, trade, investment and people flows associated to China through its close relationship with its customers in the region, both onshore and offshore," said OCBC in a statement.

The impact of the deal on OCBC's bottom line will be almost immediate. For starters, it will increase the profits the bank earns in China from 6 to 16 percent. In large part, this is due to Hong Kong's role as the largest offshore yuan market.

But there are dangers, in particular the exposure to new groups of borrowers with uncertain prospects.

The day after the OCBC-Wing Hang deal, rating agencies Fitch Ratings and Moody's expressed doubts. The former put OCBC on "watch negative" and the latter downgraded the Singapore bank.

Standard & Poor's, another rating agency, gave OCBC a "stable" grade and pointed out that the bank could benefit from its strong market position and solid funding profile.

"At this early stage, the deal is credit-negative for OCBC because it needs to raise new capital for this large acquisition, and there is a risk that its capital raising might be delayed or reduced," says Eugene Tarzimanov, a Singapore-based vice president at Moody's.

"If OCBC successfully completes its financing plan for the acquisition, its creditworthiness should return to pre-acquisition levels. In the longer-term, this acquisition should improve OCBC's geographical diversification and product offering."

Founded in 1937, Wing Hang has 70 branches in Hong Kong, Macao and the Chinese mainland.

On April 8, the International Monetary Fund warned in a report that such exposure includes a series of potential risks.

"While deepening integration suggests that financial linkages will continue to grow, the large exposure requires close monitoring and cooperation with mainland supervisors," the report said.

China Daily

(China Daily European Weekly 05/02/2014 page14)