GAINING LEVERAGE
A new study reflects the growth of banking options for CFOs throughout Asia.
By Tom Leander

Deborah Schuler sometimes tires of poring over bank balance sheets in an effort to spot a pending real estate bubble. When she does, she catches a cab in Bangkok or Jakarta or Manila, keeping her eyes peeled for boarded up construction sites. “If the bank that financed a site is based elsewhere in Asia,” says Schuler, a regional credit officer at Moody’s, “it probably means that no one locally wanted to fund the project.” In other words, the cross-border bank is about to lose its shirt. “That doesn’t mean local banks are any wiser,” says Schuler. “They’re just as likely to make the same mistake in another country.”

This is one way of saying that many of Asia’s banks, now amid a robust recovery following years of hard work, are stretching their confines, claiming new territory and testing new markets. Evidence from a recent Greenwich Associates study shows a marked, if incremental, seizure of market share from global financial institutions in several areas in which the global majors are most vulnerable (see table, next page). And, all told, the health of the region’s banks improved last year, helped along by better credit risk management, structural improvements, and better asset quality.

The question in Schuler’s mind is this whether this flowering is driving them toward greater risk, and a repeat of past sins. “That, of course, is the million dollar question,” says Marcus Ohlig, a research associate at Greenwich Associates based in London, and author of the Greenwich study.

Exploiting the advantage

No one’s denying that greater competition is a welcome sign. “The foreign banks have an enormous advantage in international banking,” says Wei Yen, managing director for Moody’s financial institutions group in Asia, something that is true for “any business that has to do with being an intermediary in the global capital markets. Local banks can’t compete in this type of business.” The same could be said about transaction services targeted at companies with major cross-border operations. But in other corporate banking disciplines – from syndicated lending to raising funds in local currency bonds and even trade finance – all bets are off. “In many markets,” says Wei, “local players are equally as savvy in terms of products and marketing, and focus.”

This strengthening of local banking institutions has emerged from a complex mix of events. A lively M&A environment has changed the minority ownership profile of banks throughout the region as major investors, from Singapore’s government investment vehicle Temasek to US and Japanese banks, are buying stakes, with a particular emphasis on snatching up shares in China. Japan’s banks, now showing loan growth, are feeling their way back into the region. Both trends have fed into the rise of cross-border regional banking, with opportunities and risks in equal measure as banks venture out of their familiar markets. In India, private banks such as HDFC and ICICI have gained a corporate following in services once thought to be the sole province of the State Bank of India.

All this has led to better choices for the region’s CFOs. The Greenwich Associates survey polled 635 buyers of corporate finance services throughout Asia, showing that a trend, established last year (see CFO Asia, April 2005, page 13, “A Little More Heft”), continued. Local banks are slowly claiming new territory against the global financial institutions based in Europe and the US. It covered ten markets, including China, Taiwan, Hong Kong, and Singapore.

In all markets, the trend was similar. Banks with a global presence such as Citibank, HSBC, Standard Chartered, and Deutsche Bank dominated international lending and corporate banking services as well as transaction-based services, such as cash management. These services have become commoditized to the degree that only the global majors can really benefit from the economies of scale needed to earn profits when serving major corporates.

But local banks, including Asian institutions like Singapore’s DBS that have bought stakes in foreign markets, gained market share in bilateral and syndicated lending. They continued to increase their share of domestic banking relationships to 41% in 2005, from 38% in 2004 and 30% in 2003. They also made inroads in areas such as debt capital markets and mergers and acquisition advisory.

Diversification is the rule everywhere. Throughout Asia, companies’ overall number of banking relationships increased to 8.5 in 2005 from 7.4 in 2004 and 7.1 in 2003. In one sign of this trend, the share of companies using syndicated credit increased to 37% in 2005 from 33% in 2004. This was seen as an effort by local companies to break away from a traditional reliance on bilateral lending – or depending on a single bank for funding in a transaction. In a syndicate, since banks spread the risk, obtaining credit and better pricing is likely to be easier – a necessity for companies seeking loans to match robust growth plans.

The share of companies using an advisor for debt issuances grew to 32% from 28%, and the number of advisors companies turned to grew to 2.9 from 2.2. Companies also expanded the number of providers of traditional bilateral credit to an average of 4.1 in 2005 from 3.5 in 2004.

Access to credit has become easier, as banks, facing competition, priced their loans more aggressively. Amid this environment, local banks are increasingly considered reliable alternatives to foreign banks for credit provision. “It’s a sign of the credit cycle,” says Greenwich Associates’ Ohlig. He adds: “There’s more risk appetite than there was three or four years ago.” The question is whether this trend will lead to some of the bad debt woes that led to the Asian currency crisis in the late 1990s, or whether the banks’ ability to assess and price risk has improved. But Ohlig says it will be tough to discern whether this is the case until this business cycle hits a trough and companies begin struggling to meet loan payments.

Perhaps the most interesting aspect of the Greenwich Associates study can be found in the question: “Do you feel that banks are being fairly compensated for their credit provision?” The answer defines CFO attitudes toward bankers who argue that, since margins on lending are so thin, corporates must sign on for other banking services such as cash management, foreign exchange, interest rate derivatives, commodity derivatives, and structured finance to make extending credit worthwhile.

CFOs in the study believed that banks were already adequately compensated. They have thus diversified away from their traditional lenders when choosing non-credit products. This cannot be good news for global banks that have built business models on the ability to make profits by cross-selling. The trend now among Asia’s CFOs is to cherry-pick services based on the best pricing and best service level. “Companies feel that credit is fairly compensated,” says Ohlig, “leading to a lower sense of being beholden to credit providers when awarding non-credit product business.”

All this has contributed to the sense of confidence on the part of local players. “On the corporate side – the local banks are getting more sophisticated in cash management,” notes Schuler. “They are not equal to some of the global players, no. But they are merging with each other. They’re exploiting the home ground advantage.”

But they’re also more exposed than in the past, which is why Schuler keeps a watch when she’s on the road.