Banks faced with growth constraints in mature and saturated Asia-Pacific markets have been expanding offerings in less developed regional markets.
Banks in the developed economies of the Asia-Pacific region (APAC) faced with growth constraints in mature and saturated local markets have been spreading their wings in the region. Their focus has been the banking and financial services industries of emerging countries or those with underdeveloped banking markets.
The long-term strategy is to ride the wave of positive GDP growth dynamics, auspicious age demographics and a rising middle class in their target countries—in the process, releasing higher margin potential and profitability than found at home.
The dynamic that propels this overseas adventurism by the region’s banks and bank holding companies particularly applies in Japan, Hong Kong, South Korea, Taiwan and Singapore, given their relatively low population growth, prolonged eras of profoundly low interest rates and the attendant impact on return on equity (ROE). Bulge-bracket standouts in this “emigration” are the major Singaporean banks, the Japanese megabanks and the four main South Korean banks.
Singapore’s banks have led the charge, with over 50% of the city-state’s system loans originating outside the country—where bank penetration of its population of nearly 6 million is a vertiginous 98%. Its large banks have embarked on an ongoing acquisition spree in APAC, focused on wealth management.
The aggregate offshore exposure of the Singapore banking system to the large Asean economies, such as Malaysia, Thailand and Indonesia, amounts to around 10% to 25% of loan books according to Standard & Poor’s, against which there is a positive backdrop for GDP growth ranging from 6.3% this year in Malaysia, to 3.6% in Thailand and 5.6% in Indonesia, which should boost profitability and reduce NPL risk according to the ratings agency. Meanwhile, DBS’ and Oversea-Chinese Banking Corporation’s (OCBC’s) loan books are heavily exposed to China, at 30% and 24% of total loans respectively, according to Fitch, illustrating starkly the geographical ‘outreach” strategy of the Singapore banks in recent years.
DBS has been the most active in the APAC acquisition stakes. Over the past 18 months, it has amalgamated Lakshmi Vilas Bank in India; in China, it has acquired a 13% stake in Shenzhen Rural Commercial Bank; and at the start of this year, DBS acquired Citi’s consumer banking business in Taiwan. Its local peer OCBC moved into the Indonesian insurance market, eyeing cross-sell synergies with its banking operations.
“We have been relying on digital expansion in our key overseas markets—China, India, Indonesia and Taiwan,” says Piyush Gupta, CEO of DBS Group, in Singapore. “However, our experience has shown that a digital-only strategy has been difficult to monetize adequately and a ‘phygital’ [digital coupled with appropriate physical scale] approach results in a better customer selection and path to profitability.”
“Building such scale through inorganic transactions has always been a consideration. Unfortunately, the regulatory environment made this difficult through much of the last decade,” he says. “The discontinuities of the past couple of years have provided new opportunities in this regard, and we have been fortunate to be able to use this window to make meaningful advances through three major transactions.”
The collaboration and growth potential for DBS are clearly displayed in its acquisition of Citi’s retail operations in Taiwan, purchased for 2.2 billion Singapore dollars (about $1.6 billion).
“Citi’s customer base, which has a higher average income than DBS Taiwan’s existing customers, would significantly increase DBS’ customer base in the affluent and high-net-worth individual segments,” says Priscilla Tjitra, associate director of Financial Institutions at Fitch Ratings in Singapore. “This presents significant cross-selling revenue opportunities with existing DBS products.”
The acquisition will also enhance DBS’ funding profile and competitiveness in Taiwan, Tjitra believes. “The Citi portfolio has a high proportion of low-cost deposits—over 70%—and this will reduce DBS Taiwan’s reliance on wholesale borrowing, as well as lowering its funding cost to boost the bank’s competitiveness in its institutional lending business in Taiwan,” she says. “From a profitability standpoint, the Citi business generates a higher ROE than DBS’ existing business in Taiwan.”
Strategies, projected risk profiles and impacts on banks’ operating environments vary: from mergers with local banks in markets where foreign banks already have branches and have become wholly owned subsidiaries focused on corporate banking; to equity injections for minority stakes, acquiring retail operations and leasing businesses.
From the point of view of investment banking, DBS’ access to a deposit base in Taiwan through its recent acquisition makes all the difference in terms of margin and all-in cost.
“Doing business in countries where you don’t have natural access to deposits is a challenge. It’s tough to take on the local banks; and in overbanked markets such as Taiwan, the competition is cutthroat in the institutional lending business. Fees and margins are razor thin,” says John Corrin, head of Corporate Finance, International, at ANZ in Hong Kong. “In the developing markets in Asia, bureaucracy is a huge obstacle to doing business.”
The expansionary dynamic has been enabled within the Association of Southeast Asian Nations (Asean) by the adoption of a regional banking framework—the Asean Banking Integration Framework (ABIF)—which was agreed on by the area’s finance ministers in 2015. ABIF allows banks greater access to other markets within Asean and greater flexibility in operating in those markets. It is this flexibility that has created an enabling tailwind for bank expansion within the region.
Meanwhile, South Korean banks have been active with acquisitions in Cambodia, Vietnam and Indonesia, with their loan book growth in Southeast Asia outpacing domestic loan growth by almost 20% over the past few years. And Japanese banks have also booked acquisitions in India, Indonesia, the Philippines and Vietnam. APAC loan books have grown steadily over the past decade, driven by wider net interest margins and overall profitability.
“Much of the Asian bank expansion will be built around explicit targets such as minimum 10% ROE; and if you are close to large accounts such as the private equity players, there is still some meat on the bone,” says ANZ’s Corrin. “Increasingly, in the bond and loan markets, banks are questioning just what return they get from their top 100 clients and are happy to reduce the client list to focus on profitability.”
Japan’s megabank SMBC demonstrated clear-edged strategic thinking last June with its acquisition of a 5% stake in the Philippines’ RCBC, the country’s sixth-largest lender by assets. Half of RCBC’s lending is to corporates. The bank also focuses on small and midsize enterprises (SMEs), a sector that has grown rapidly in strategic significance due to the impact of Covid-19 and its powerful boost to loan demand.
The Japanese bank’s overseas digital ambitions will be enhanced via the acquisition, with RCBC set to establish a digital banking subsidiary using funds from SMBC’s equity injection.
In all this, business risks remain: concentration in vulnerable sectors such as real estate—particularly pertinent in China—and SMEs, still struggling in the face of a Covid-induced growth slowdown; fierce competition from fintech startups; and the burdens of integration of environmental, social and governance (ESG) considerations on bank customers and the banks themselves.However, in countries with strong disclosure frameworks in relation to ESG, such as Singapore, the chances are that regional expansion will enable banks in such jurisdictions to bring best practices with them to the benefit of host countries.
“The main ESG impact would be that some ESG policies for Singapore-headquartered banks, such as the MAS [Monetary Authority of Singapore] Environmental Risk Management Guidelines and the SGX [Singapore Exchange] climate and board diversity disclosures for listed banks, are applicable on a group level—including overseas subsidiaries,” says Nneka Chike-Obi, APAC head of ESG Research, Sustainable Fitch, in Hong Kong. “In the case of acquisitions in regions that lack or have looser requirements, the quality of ESG risk management throughout the region could improve through the export of Singapore’s standards as a result.”
“Rising exposure to overseas markets, to more-volatile emerging markets, will increase banks’ risk profiles over time, potentially posing challenges to asset quality and raising operational complexity,” says Fitch’s Tjitra. “However, we believe these may be somewhat mitigated if banks apply similarly strong underwriting standards and risk controls as they do at home.”