Published: April 01, 2010
Operating in Asia for over 150 years, Standard Chartered Bank has witnessed first-hand many economic cycles in the region. As Asia emerges from the latest financial downturn, Karen Fawcett, Group Head of Transaction Banking at Standard Chartered, highlights the rewards the region’s banks are reaping from lessons learned during previous financial crises and suggests how international banks can compete in this new environment.
At the Nikkin conference in Tokyo late last year, I gave a speech to an audience of Japanese bankers on the state of Asian banking, focusing on the remarkable turnaround experienced by the sector across the region. Considering their geographical proximity, Japanese banks have a relatively small presence in Asia – something the bankers stressed that they were trying to rectify. Yet, when answering their questions afterwards, it was reinforced that while entering the Asian market offers huge opportunities, it also poses great challenges – especially given the resilience shown by the region’s local banks during the economic downturn. Indeed, we can go as far as to say that the Asian banking sector has had a very successful crisis.
We can go as far as to say that the Asian banking sector has had a very successful crisis.
First of all, let us take a look at what did not happen. There were no major international payments problems in any Asian country. FX markets were volatile but remained open, with no worries about government-imposed constraints or the threat of collapse. And credit, while restricted, did not disappear from the supply chain.
Many predicted that Asia would topple as the contagion spread from the West. However, far from true, rather than behaving like dominoes, this crisis has shown Asia’s emerging market economies to more closely resemble dynamos – able to generate self-sustained, domestically-driven demand. Given this, Asia is now seen as the growth centre of the world.
When asked why Asia has fared so well, we feel compelled to provide a lesson in history. A financial crisis of this magnitude is not completely new to this region, of course, and the Asian crisis of 1997–98 stands out as a watershed event. At that time, Asia had experienced two decades of very strong economic growth which had fuelled lax lending and careless investment practices. When foreign investments (which until then were huge) slowed and governments became unable to support their currencies, the region began to witness a major meltdown.
Asia’s success in riding out the storm this time is no accident. It is clear that Asia learned a number of crucial lessons from the depth and severity of the 1990s crisis – and they determined never to go that way again. Since then, Asia has been preparing itself to withstand future crises. So while other regions were caught woefully unprepared, Asia was leaner, meaner, and more ready for the shocks.
Foreign exchange reserves, for instance, have surged across the region since 1997 and there is a far greater emphasis on fiscal discipline, as well as on the credibility of monetary policy. Most importantly, the previous crisis reduced the level of indebtedness built up within Asian economies. This proved key to ensuring that the debt-induced crisis in the west did not spread eastwards. [[[PAGE]]]
Foreign exchange reserves have surged across the region since 1997 and there is a far greater emphasis on fiscal discipline, as well as on the credibility of monetary policy.
Another lesson from the 1997-98 crisis was that countries need to deregulate their financial sector at speeds best suited to domestic needs. Prior to 1997, some Asian economies had deregulated too quickly, allowing bubbles to build up. Without the appropriate institutional infrastructure, this was disastrous. But the onset of the more recent crisis demonstrated that Asian economies had emerged from the 1997-98 crisis with more robust regulatory environments.
We know that many also laud the role of government intervention in saving Asia from a more severe downturn. Indeed governments across the region acted decisively to support their local economies, unveiling multi-billion dollar fiscal stimulus packages varying in scope and scale, including pump-priming projects, lower interest rates, currency stabilisation programmes and the ending of loan quotas. Yet such action was only possible due to the solid fiscal position in which they found themselves, with relatively low levels of public debt, high levels of foreign currency reserves and healthy external payments balances.
Perhaps the most overlooked, but no less important, feature of the strong Asian response to the crisis, however, was the position of local banks compared to their counterparts in the west. In Asia, we have simply not witnessed the expected deterioration in banking profitability.
In 2008, for example, total Asian banking profit was 27% higher than the total of global banking profit (many banks worldwide made losses, which lowered this total). That is despite representing only 14% of global assets and 17% of Tier One capital. By contrast, Europe – which boasts the majority of banking assets – experienced losses that were the equivalent of 14% of global banking profits. In the US, the banking sector has been the worst hit, with losses equivalent to 80% of global profits, despite having 20% of equity in the global market.
These figures, while representing a mere snapshot of what occurred in the recent crisis, are a key piece of the puzzle when you consider what happened in the 1990s versus what has happened in the developed world this time around. It is clear Asian banks are performing impressively. During the 1997-98 crisis, we saw many foreign banks pull out, leaving local companies short of credit as local banks (which were also suffering) failed to step up and meet local demand. This time round, an entirely different picture has emerged in Asia. Local banks have had much stronger balance sheets and have shown far stronger support for local companies.
As such, they now dominate their domestic markets – in all but the city states of Singapore and Hong Kong, foreign banks have no more than a 10% market share. China’s banking sector has been particularly successful in moving onwards and upwards – stock market listings, strategic stakes taken by international banks and stellar growth. Indeed, Chinese banks have emerged as among the most profitable in the world.
One reason that the Japanese banking audience I addressed recently was so interested in these developments was the increase in Japanese corporate investment in Asia. Of course this is by no means a new development in itself – Japan has been gradually expanding into Asia for over 30 years. What is interesting is the changing perception of the Asian market in the eyes of Japanese corporates. Now, we are seeing more and more corporates shift their focus from low-cost manufacturing to higher-value research and development and, crucially, local sales.
But this is true of all global corporates, not just those from Japan. Standard Chartered Bank has been suggesting for some time that emerging Asia – as a highly dynamic and fast-growing region – is, within the next decade or so, likely to catch up with the West as a core consumer region of the world. And the recent global financial crisis has definitely seen an acceleration of this redistribution of relative economic power from the developed economies to the Asian emerging markets. This has been driven by corporates shifting operations towards producing for the end Asian consumer rather than for re-export to western markets. This trend is very exciting – as the Asian market continues to become wealthier and more knowledgeable, the opportunities are enormous.
While opportunities abound, there are also huge implications for banks. As soon as companies start producing for the local market, their banking needs change dramatically. Initially, when corporates’ operations are limited to factories producing for export, they are often satisfied with basic lending and, in general, cross-border transactional services with a focus on basic cash, trade finance and foreign exchange. But as we have seen at Standard Chartered, across our 17,000 branches in not just Asia but in Africa and the Middle East, as corporate operations become more local, domestic transactional services are required with full local currency capabilities – plus more value added services as the corporate begins to hedge, fund and structure their business at a local rather than international level. [[[PAGE]]]
The advice we gave to the Japanese bankers was that unless they can find a way to service the changing needs of their corporate clients expanding in Asia, little by little, thriving local banks will eat away at their profits. Beyond Japan, other international banks in similar predicaments with their corporate clients expanding their Asian activities should also consider the importance of this.
‘Acting local’ is easier said than done and while some may argue regional banks are in a more difficult position than the ‘mega banks’ because of fewer resources, just as important as size I would argue would be the number of branches and level of local integration. This is especially true given the challenges which include dynamic regulatory changes and their implications, disparate systems, language and local operating requirements.
More important, is whether you have the capabilities and willingness to build a domestic business on the ground that will rival the skills of the local Asian banks. From Standard Chartered’s experience from having operated in Asia for over 150 years, we believe that to be successful, banks must tailor their approach to these local needs while simultaneously providing consistency across multiple small markets. This has had big implications for the way we run our business with global product teams on the ground in Asia, managing standardised platforms with multi-language systems across all markets.
And given what has happened in the context of the global financial crisis, there has become a heightened awareness that now, more than ever, other banks must also shift their emphasis towards becoming more local in key countries – or alternatively find a partner that can do exactly that on their behalf.
No signs of slowing down The local banking sector is now strongly placed to play an integral part in Asia’s future growth. As the global economy looks towards recovery and new engines of growth, we are at an important juncture in the development of the Asian economy and the Asian banking sector in particular. If banks can get their act together and step up to meet increasing market demands and be flexible to adapt to changing corporate needs, the future will be a very profitable one indeed.
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