Asian banks rethink their role as regulation tightens and fintechs grow strong, inspiring new mergers and new approaches.

Author: Jonathan Rogers

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There has long been talk of integrating the banking industry within the Asean economic region; and while long-range plans exist for formal integration, the process itself has been quietly underway over the past few years due to M&A, increased cross-border financing and the radical dynamic presented by financial technology.

Implicit protectionism has been the modus operandi in the Association of Southeast Asian Nations—which comprises 10 countries, including Singapore, the only developed nation in the group, as well as developing economies such as Malaysia, Thailand, and Vietnam; and frontier economies Myanmar and Laos—with banking acquisitions having a history of being blocked by concerned financial authorities.

Whitcroft, Illuminate Financial: Banks are very much supported by a regulatory approach that is supportive of fintech start-ups.

But recent acquisitions in the private banking industry have proceeded unchallenged, representing the opening of financial borders that were previously closed. In May, Singapore’s OCBC acquired National Australia Bank’s Singapore and Hong Kong wealth management operations, in a move which echoed Development Bank of Singapore’s acquisition last October of ANZ’s retail and wealth management operations in Singapore, Hong Kong, China, Taiwan and Indonesia. The latter country previously stymied DBS’s attempt to acquire a local bank four years ago.

At the same time, Asia’s banks, much like their Western counterparts, are questioning their basic business models in the face of declining returns on equity amid fierce competition from fintech-driven startups and nonbank corporations. So-called challenger banks—which aim to capture the business of smartphone users—are worrying the large incumbent banks.


Meanwhile, investment banking in the region is rapidly transforming, in the face of increasing cost of capital and the entry of players willing to specialize in areas of the capital markets that larger competitors no longer see as cost-effective for their overall business. “As far as Asia is concerned, from the perspective of capital markets activity, the cost of capital for the bulge-bracket players has increased and leverage remains relatively high,” says Michel Löwy, co-founder of independent fixed-income specialist SC Lowy. “There has been a full-scale reassessment by these firms of the resources they can deploy in certain markets, and this leaves a void to be filled by leaner companies able to bring sharper focus.”

Founded in 2009, during the global financial crisis, SC Lowy’s story underlines how start-ups with an aggressive focus, unencumbered balance sheet and low all-in cost of capital are closing in on the incumbent major players. “Our model is based on the discretion which comes from a relatively lean headcount, the use of a balance sheet and a willingness to research and make firm prices, all in contrast to the approach at the bulge-bracket firms,” says Löwy.

Löwy, SC Lowy: The cost of capital for the bulge-bracket players has increased and leverage remains relatively high.

Regulatory capital constraints stemming from Basel III’s implementation, together with balance sheets compromised by nonperforming loans at European banks, help explain this dynamic. Fintech is also upping the ante for the established players, with banks and financial companies in Asean arguably likely to feel its disruptive potential more than their western counterparts.

“For much of Asia, it’s true to say that the banks are not as big or as complex as their western peers,” says Mark Whitcroft, a partner at London-based private equity firm Illuminate Financial and former co-head of debt syndications at Deutsche Bank in Singapore. “There is a leanness there, enabled in part by lighter regulation, freedom from the burden of legacy technology systems and a less hierarchical approach when it comes to decision-making. That adds up to the reality that Asian banks can be early adopters of technology.”

And in this, Whitcroft says the banks are very much aided by “a regulatory approach that is supportive of fintech start-ups—particularly in Hong Kong and Singapore—as they can see the transformational possibilities and competitive advantages for the global financial system.” Nevertheless, there are fears that in the mad rush of competition, systemic risk in Asia will rise rapidly. An example is the speed with which Chinese banks have entered the syndicated loans space in Asean, particularly in the project finance arena.

An ongoing criticism among rival bankers is that alongside this capture of market share has come a reduction in prudent lending practices, with looser covenants and lower interest-rate margins than have typically been the norm. The naysayers in the industry are pointing to the potential of China’s vast One Belt, One Road initiative and its creation of massive project finance demand in the countries on the One Belt route—which aims to link China with trading partners in Asia, the Middle East, Europe and Africa—as resulting in a relaxation of standards.

The rise of fintech has brought with it a series of concerns ranging from fraud to cybersecurity. Last year a peer-to-peer lending company marketed in China based on its fintech prowess collapsed, costing Chinese investors $7 billion in the process. Meanwhile, the full-scale efforts of companies to store data in the Cloud invites profound issues of data management and leakage. All of this points to the likelihood of tighter regulation; Asean’s fintech honeymoon may be shorter-lived than is generally recognized.

“The themes for banking globally are industry deleveraging, multijurisdictional regulation and zero-tolerance compliance, and Asia exemplifies these, although to a lesser extent than in western banking as far as deleveraging is concerned, given the relatively conservative approach that Asian banks took prior to the global financial crisis,” says Whitcroft.

In their rush to reinvent business models and enhance returns on equity, banks in the region are looking not only at fintech startup investment, but expansion into the reaches of the developing and frontier markets. Accessing the region’s rural poor through such investment allows them exposure to activities outside their normal comfort zone, such as microfinance and branchless banking. Since 2015, some 13 foreign banks were granted licenses to operate in Myanmar, Asean’s ultimate frontier market, in the hope of gaining access to these activities.

When it comes to banking in the region, it is no longer possible to have one arrow in your quiver and hope to survive in this fast-changing landscape.


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