The CEO of Singapore's DBS, Piyush Gupta, talks to Stefania Palma about the potential and pitfalls of building a franchise in Asia and how global banking regulation has become a challenge in itself.

As Asia’s liquidity and wealth continue to grow, Piyush Gupta, the CEO of Singaporean lender DBS, makes a point of underscoring the enormous development possibilities within the region, especially for banks such as DBS, which has a strong name recognition locally and internationally and is one of the strongest franchises in Asia.

According to The Banker Database, DBS ranks 26th for assets in Asia-Pacific and is the top bank for assets and Tier 1 capital in Singapore.

“For us to run a bank in Germany, Switzerland or the US, given the regulatory environment, [would not be] easy,” says Mr Gupta. “If you think about where people will allocate capital in the next decade, the answer is Asia. This is our backyard so it makes sense for us to allocate capital here.” 

Breaking China

DBS is taking a holistic approach to its Asia strategy. It sees the strongest opportunities in north, south and south-east Asia – especially China, Indonesia and India – and aims to connect these three regions.

“Trade flows and growing capital flows support this notion. It’s a large part of the world population. Between them, these countries have 40% to 45% of the world’s people. Even when they slow down, they are still growing at 5% to 6%. There is a lot more growth than some of the developed markets such as Europe,” says Mr Gupta.

In China’s case, DBS rethought its strategy in 2010, and started servicing local companies rather than focusing on global multinational corporations (MNCs) wanting to enter the Chinese market.

“In the second largest economy in the world, with a $9000bn economy building up to be a $15,000bn one in the next 10 years, you cannot build a strategy by just following MNCs into China. You have to have a strategy that is anchored in local champions,” says Mr Gupta.

With the help of McKinsey, DBS identified about 1000 local companies of various sizes that it wanted to work with. So far, the bank has built relationships with about half of these, starting with cash management and treasury services. DBS then moved on to executing some 15 capital markets transactions for these companies by the second quarter of 2014.

The Shanghai-Hong Kong Stock Connect is also boosting DBS’s profile in China, especially via the wealth management business. As wealth in Asia-Pacific continues growing at the highest rate worldwide, customers in the region want to diversify their portfolios globally. Meanwhile, global banks have witnessed a growing number of investors wanting to be a part of China’s growth story.

Tackling India’s bureaucracy

If DBS’s biggest challenge in China is building customer relationships, in India it is bureaucratic inefficiency. “We believe that half the challenges in India are purely ones of execution: getting the bureaucracy to work, getting processes in place. If [the government] can get the execution component going, that in itself has the capacity to lift India’s per capita gross domestic product [GDP] by a couple of percentage points,” says Mr Gupta.

Though many market participants remain underwhelmed by prime minister Narendra Modi’s pace of reform, Mr Gupta believes that expecting so many big changes so early in Mr Modi’s mandate is overly optimistic, largely because some of India’s problems are intractable.

India’s other challenges include legislation and policy. “That includes land reform, tax code reform and labour reform. These are not easy things for a government to do,” says Mr Gupta.

India also presents difficulties in terms of infrastructure financing, an obstacle present in another key DBS market: Indonesia.

Excluding China, there is an enormous amount of infrastructure needed in Asia, which is creating substantial financing opportunities for banks in the region. “We are positive about the infrastructure story in general,” says Mr Gupta. However, in markets such as India and Indonesia, private financing can be tricky as it typically requires significant tail risk. “Tail risk in turn brings up the question of successive governments’ willingness to stick to policy regimes. Both India and Indonesia have been a bit challenging in that regard,” he adds. 

Indonesian opportunity

For banks such as DBS that are building a franchise in Indonesia, the local currency’s tendency towards volatility calls for particular care in managing cross-border exposures. A comparatively shallow savings pool can also hinder progress. But the country's enormous potential makes it very attractive to foreign banks, arguably the most attractive in the Association of South-east Asian Nations.

“Indonesia is an under-penetrated market,” says Mr Gupta. “Its loan-to-GDP ratio is only 30%. That number should be 75%, given its per capita income.”

Despite the challenges this market presents, Indonesia shows great promise, if new president Joko Widodo is able to convince a fractured parliament to implement policy reforms.

“Indonesia has a presidential form of government, [similar to] the US, and therefore the president needs to bring the legislature along in policy-making,” says Mr Gupta. “It’s a fragmented parliament as there are many parties and commissions. If Mr Widodo can demonstrate that he can carry the parliament in the next few quarters, the prospects for Indonesia are very bright.”

Making regulation relevant

Implementing Basel III has not proved a challenge for most Asian banks as they are very well capitalised in relation to their Western peers. “Leverage ratios are very comfortable and we have enormous amounts of liquidity,” says Mr Gupta. 

However, he adds that banking regulation at present, which operates on a one-size-fits-all model, remains out of touch with Asia’s banks’ needs and circumstances, and is actually hindering development in some cases.

“The big challenge is to make sure that regulation in Asia is not stifling growth. Our imperative for Asia is to encourage the growth of small and medium-sized enterprises, trade, infrastructure financing, deeper capital markets and securitisation,” says Mr Gupta.

“I can understand the need for a single global artifice of regulation because we have an integrated financial system. On the other hand, it is not a flat world. The regulation that makes sense when the taxpayer and the shareholder are two separate entities does not make sense when the taxpayer and the shareholder are the same entity. So how do you nuance regulation for relevance and appropriateness? We still don’t have the answer to that.” 

Asia’s banks play a key role in helping local economies and financial sectors develop; from supporting infrastructure financing and foreign direct investment to helping local companies expand abroad.

But as it stands, global banking regulation will not help Asia’s economies and financial sectors generate the enormous amount of capital and liquidity needed in the next five to 10 years to meet spending needs such as infrastructure. Excluding China, most Asian governments lack the capacity to capitalise their local banks.

“Many banks in Asia are state owned and there is not enough capital in the banking systems. A capital shortfall will be felt in the next five to 10 years,” says Mr Gupta.

“Asia’s needs and circumstances are very different from countries in the West. We need a lot of capital. Our financial markets are not well developed. We do not have adequately deep bond markets. We don’t have securitised markets. We do not have enough derivatives and swap markets. Frankly we need to encourage the development of all the things that current regulation is trying to restrain.”

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