With western markets all catered to, now the global banks have set their eyes onto Asia.
Asian markets have started to open their economies to the world but the global players are very selective as to which country to pick from this Asian bouquet. According to McKinsey, a global consulting firm, the profit margins at private banks in Asia rose six percentage points to 17 per cent in 2012. As of the major countries on which the global players have either entered or are eyeing includes India, Thailand, Indonesia and China. The Pioneer has tried to do an in-depth swot analysis of the current situation of banking in Asia in order to find which of the Asian markets is best placed of the global giants to enter.
One thing that all the global banks do keep in mind before entering new markets is the gross non performing asset (GNPA) situation of the local banks. World Bank in December 2012 released country wise GNPA data as per, which Singapore had the lowest GNPA of just 1per cent followed buy Korea with 1.5 per cent. India stood at the bottom with 3 per cent of GNPAs in its domestic banking sector. In terms of the smaller economies Indonesia’s GNPAs stood at 2.1 per cent and Thailand’s at 2.7 per cent.
Now as per this, Indonesia seems to be a better bet but since December everything has gone upside down there. Bank of Indonesia in its annual statement as of December 2012 said, foreign-owned banks accounted for 37 per cent of the country’s total banking assets but with many players now pulling out of the country, this figure is sure to fall. Since then the foreign banks operating in the country have reduced their investment due to the new banking law which might come into effect soon. As per the new law, these banks will have to get their operating subsidiaries legalized in Indonesia. Once a legal entity, the parent banks will allocate money to them on basis of the global rating Indonesia has. Hence, the banks have delayed new investments and hampered their main business of supplying foreign exchange loans into the country.
Some of the major names which are currently operating there include ANZ, Citibank, Commonwealth Bank, HSBC, JP Morgan Chase, Rabobank, Royal Bank of Scotland (RBS), Standard Chartered, Bangkok Bank, UOB and Bank of Tokyo-Mitsubishi UFJ. Ever since this new law has been drafted, Rabobank has announced that they plan to sell Bank Rabobank International Indonesia as it will not be profitable for them to operate in the country any more.
Apart from the law another concern which the global players have with Indonesia is the high inflation rate and their growing current account deficit. Cause of all these reasons, the international banks have started to limit their investment in the country and some are planning to leave it completely. On the front where Indonesia is losing global players from its banking, Thailand has stepped up and tried to attract foreign banks. Bank of Thailand on June 28 issued the announcement, inviting interested foreign banks to establish subsidiaries in the country. Bank of Thailand has decided to award 5 licenses in order to enhance competition and financial access of the Thai financial system.
Also, Thailand has registered itself as an avenue for investment in the eyes of Japan. Japanese SME investors have show keen interest in the country and in order to aid more exchange between the two countries, Tokyo Chamber of Commerce and Industry has signed a memorandum of understanding with Kasikornbank (KBank). KBank is Thailand’s fourth-biggest lender by assets. This move would help Thai companies to take foreign loans.
China, one of the most prominent economies of Asia, is another candidate in this race to attract foreign banks. Very recently, the Chinese Government promised major changes in its State-run banking industry, including allowing the creation of private lenders. And all this is being done to expand its banking domestically as well as globally. In the recent times, Chinese banking has come under a lot of pressure which exposed the biggest weakness in their banking system. Till now the State run banks had never to work under tight liquidity and now when the Government is taking steps to curd the excessive lending. All this is being done to improve the domestic banking because the super rich Chinese investors are now looking for options outside China to park their money.
According to the Asia- Pacific Wealth report, which was jointly released by Merril lynch Wealth Management and Capgemini, HNIs wealth from India & China is expected to grow by 8.8 per cent till 2018, while the global average stands at only 7.1 per cent. China may have one of the largest markets in the world but in realty foreign banks in China has constantly complained about the Government’s regulatory environment and want the authorities to further liberalize the financial markets in order to attract more investments.
China’s next door neighbour India till now has been a place where global banks have invested till now. But now these global brands are facing tough competitions. The biggest problem right now in the Indian banking system is the problem of growing NPAs with the State run banks. 10 per cent of total loan book of public sector (PSU) banks are gross NPAs and restructured loans. The figure is quite alarming and is growing day by day. With the issues pertaining to delay in power and infrastructure projects, this figure is rising. With the result season again starting, as per experts, PSU banks like Punjab National Bank, Bank of Baroda, Bank of India and Canara Bank’s earnings are expected to come down by 10 to 20 per cent (YoY). The only performing banks in the current envoirnment in India are the private sector banks like ICICI Bank, HDFC Bank, Axis Bank and Yes Bank.
India already has had quite a few foreign banks operating in the country, which included HSBC, Citi, Standard Chartered, RBS, UBS and Barclays. But now these banks are closing one after another. Goldman Sachs, Morgan Stanley has already shut their operations and now UBS has also decided to close its operations.
Private Banks in India have given the foreign giants a run of their money. The biggest issue the global banks are facing in the country is that the global banks have failed to capture the loyalty of the Indian customers. Another reason for their worry is the new banking structure which the RBI proposed in its annual monetary policy on May 3. As per the proposed structure, differentiated licensing regime for domestic and foreign banks is proposed instead of granting a universal license. Once a separate license is given, foreign banks believe the RBI will try to restrict their functioning.
Keeping all this in perspective, as a global bank, Asia indeed has many opportunities to offer. Some markets may have an edge over the other but they all have their weaknesses. Nomura has come out with its strategy on Asia. It is overweight on Thai banks and believes that their focus on strong macro fundamentals and earning momentum will be the key factor to invest in the country. While, Nomura is underweight on Indonesian banks and feels the recent steps taken by the Government will have an adverse impact on the banking sector and its global pursuits.
As far as India and China goes, all the global player are still waiting for the political uncertainty to clear of and the economies to stabilize before they make a strategy towards the Asian giants.