Published: August 01, 2010
Asian companies are emerging from the global economic recession with a diminished reliance on Western sources of capital and a new focus on local Asian markets for growth.
New research from Greenwich Associates reveals that the largest companies (annual turnover $500m and over) across Asia (excluding Japan), are reporting improved access to credit and growing demand for funding for growth oriented capital expenditures. These findings demonstrate a positive change in the business environment much more dramatic than that experienced to date in Europe and the United States. The strength of Asian markets relative to those in the West during the crisis and the speed with which Asian economies are recovering as the recession subsides has prompted companies in the region to look closer to home for credit and growth:
“Over the past decade, there has been a lot of talk about the extent to which Asian economies have ‘decoupled’ from those of the West,” says Greenwich Associates consultant Markus Ohlig. “Our data suggests that the global crisis itself might have been the biggest driver of decoupling by forcing Asian companies to turn to local sources of funding and providing opportunities for Asian companies to generate growth at home in the face of depressed demand from export markets.”
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Approximately 30% of Asian companies say their access to funding for their ongoing operations improved in 2009, up from the 22% of companies reporting improving access to these critical funds in 2008. Meanwhile, the share of companies reporting diminished access to funding for ongoing operations dropped to roughly one in ten in 2009 from 18% in 2008. “These findings point to a steady recovery in Asian credit markets that began in 2008 and continues to the present day,” says Markus Ohlig. “By contrast, the same data from Europe shows that funding conditions for companies there were still deteriorating through the end of 2008 and began to stabilize only in 2009.”
In another positive sign for Asian economies, companies are reporting both a growing need for and better access to funding for capital expenditures. Thirty percent of Asian companies say their demand for cap-ex funding increased in 2009, and an equal share report this funding became easier to secure last year. Only one in ten companies said it became more difficult to obtain funding for cap-ex in 2009, and only 8% said their need for cap-ex funding contracted last year. Again, these results suggest that Asian economies are recovering faster than those in Europe, where only 18% of FT500 companies report increasing demand for cap-ex funding.
Asian companies are also reporting a pick-up in both the demand for and availability of acquisition funding — a sure sign that at least some of them have shifted their outlook from defense to growth. In 2008, 38% of Asian companies reported diminished access to acquisition financing; in 2009, that share fell to just 14%. Over the same period, the share of Asian companies reporting that their access to acquisition funding was improving increased to 29% from 22%. As funding becomes available once again for M&A, the results also reveal continued signs of a coming pick-up in deal activity among Asian companies. Twenty-eight percent of Asian companies in 2009 said their demand for acquisition finance was on the rise, compared with 15% reporting a decline. “Again these results stand in stark contrast to those in the West,” says Markus Ohlig. “In Europe, companies were about evenly split as to whether access to acquisition finance was recovering or still deteriorating, and by a ratio of more than two to one, European companies said their demand for acquisition financing was still on the decline.” [[[PAGE]]]
The research results point to a particularly strong recovery in India, where the economy has traditionally been driven more by domestic demand than by exports. Half of Indian companies last year reported increased demand for cap-ex funding and approximately 40% reported increased need for acquisition financing. The fact that comparable shares of Indian companies said it was getting easier to secure both types of funding suggests that the Indian economy is already providing companies with attractive opportunities for both internal and external growth.
Although Asian companies are increasingly turning to Asian banks for credit and other essential services, companies are not yet entirely convinced of the staying power of local providers. In 2008, 44% of Asian companies that used local banks as credit providers said they were confident that these banks would persist as reliable lenders in the future. In 2009, that share fell to 37%. Driving this shift was the relatively rapid expansion of local banks’ client bases. This expansion was enabled in large part by the retrenchment of Western banks, which pared relationships with many Asian companies seen as falling outside their core group of most profitable corporate clients. Because these Western banks generally tried to retain their most valuable clients, companies still using these banks as lenders in 2009 are increasingly confident in the durability of these relationships, having survived the cut-backs. In fact, the share of clients of Western banks expressing confidence that these banks will remain reliable lenders in the future actually increased to 33% in 2009 from 30% in 2008.
“Local banks took advantage of the opportunity provided by the crisis in the banking industry in the United States and Europe by stepping in and offering credit to Asian companies at competitive rates,” says Markus Ohlig. “Approximately one third of Asian companies rated their local banks as among the market’s most competitive in 2009, up from one quarter in 2008. Having gained market share by providing affordable credit during the crisis, local banks now have the opportunity to convince Asian companies about the sustainability of these relationships and to solidify these gains.” [[[PAGE]]]
Asian banks are also gaining ground in cash management, in which a growing number of companies are turning to local providers to meet their domestic business needs. In the past, Asian companies often used Western banks for both international and domestic cash management due to the large differential in capabilities between these global providers and local banks. While companies continue to rely on Western players for international cash management needs, many have begun to shift domestic cash management business to local banks. Asian banks have upgraded the quality of their cash management platforms to an extent that, in most countries, there are at least one or two banks now viewed as credible options by local companies. The cash management capabilities of HDFC in India, Korea Exchange Bank of Korea, and China Trust Bank of Taiwan are now all seen as being on par with foreign banks within their domestic market.
In fact, some local Asian banks now boast treasury management platforms comparable in technology to the best systems offered in the West. The reason: These banks have no legacy systems with which to contend. As a result, whether they build their platforms in-house or purchase off-the-shelf systems, the implementation of the latest and best technology can often be achieved much faster and with far fewer headaches than would be possible for most established cash management banks.
“With the capability gap between global providers and Asian banks narrowing, local banks become attractive options for companies’ domestic cash management needs because they usually have extensive branch networks in their home countries and they are considerably cheaper than global cash management providers,” says Markus Ohlig. “Until recently Asian companies asked to name the most expensive cash management providers cited local and foreign banks to a roughly comparable degree. This year, 26% named a foreign bank as the most expensive provider while only 15% named a local bank.”
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Most Asian companies — about 60% — pay for cash management services primarily with direct fees to providers, with 16% of companies reporting that they pay providers mainly through compensating balances, and 23% reporting a mix of the two. In Europe, direct fees have become the standard method for compensating cash management providers, with approximately 90% of companies paying their providers in this manner. “Asian companies can expect more banks to begin trying to move in the direction of direct fees, which provide a stable and more reliable revenue stream in the face of low interest rates,” says Markus Ohlig.
About a quarter of Asian companies discussed changes in fee structures with their providers last year, whether initiated by themselves or by their banks. Seventeen percent of companies overall actually experienced a change in fee structures, while 8% report that a change in fee structure was requested by one party or the other, but not implemented. Among companies that experienced a change in absolute fee levels in 2009, larger companies generally managed to negotiate fee decreases while mid-size companies were more often subject to fee increases.
Robust returns on cash investmentsAsian companies report that their cash investments generated a return of 5.2% in 2009, a performance that stands in stark contrast to the 1.6% returns that European companies in the FT500 generated from their own cash investments. In 2010, Asian companies expect to earn 6.1% on their cash investments, compared to the 1.5% expectations reported by European companies. “Even if the return numbers in Asia prove overly optimistic, it is apparent that low returns on cash holdings do not act as nearly as big a drag for Asian companies as they do for European companies, which are coming under increasing pressure to put their cash holdings to more productive uses,” says Markus Ohlig. “This is mainly due to the fact that interest rates in most Asian currencies have not reached the lows seen in the West, and many central banks in Asia have already started raising interest rates again in the face of robust economic growth.”
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The forced retrenchment of global banks in Asia as a result of their struggles during the global crisis enabled Standard Chartered Bank to establish itself as one of the leading corporate banks in the Asian region.
Most large Western banks reduced the size — or at least the breadth — of their Asian corporate banking franchises from 2008 to 2009. In general, the number of Asian companies naming each of the global banks as one of their corporate banking relationships declined from year to year. What is important to note, however, is the difference in results between overall banking relationships and lead relationships. Western banks saw their overall number of banking relationships decline from 2008 to 2009 — in some cases by significant amounts. But most of these banks kept their lists of lead banking relationships intact. “These results reveal that global banks were not arbitrarily downsizing their Asian franchises last year, they were carefully pruning them by cutting off relationships they viewed as the least important while working hard to preserve relationships they viewed as critical.”
Standard Chartered seized on these dislocations by stepping in to provide funding and services to affected Asian companies. “Without a doubt, Standard Chartered is the big winner to emerge from the turmoil of the past two years,” says Markus Ohlig. “In 2008, Standard Chartered was named as a lead bank relationship by 19% of Asian companies; in 2009, that share jumped to 27% — an increase of 50% in just 12 months.”
Standard Chartered’s success in forging new relationships in corporate banking and lending has also facilitated a climb up the ranking tables in cash management. Standard Chartered gained the most new relationships of any cash management provider in Asia last year, despite trailing the region’s leading providers in terms of overall quality ratings from clients.
From September to November of 2009, Greenwich Associates conducted interviews with 1,519 financial officers (e.g., CFOs, finance directors and treasurers) at companies in China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea,Taiwan, and Thailand. Subjects covered included product demand, quality of coverage, and capabilities in specific product areas such as cash management and debt capital markets.
The findings reported in this article reflect solely the views reported to Greenwich Associates by the research participants. They do not represent opinions or endorsements by Greenwich Associates or its staff. Interviewees may be asked about their use of and demand for financial products and services and about investment practices in relevant financial markets. Greenwich Associates compiles the data received, conducts statistical analysis and review for presentation purposes in order to produce the final results.
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