As the world’s banking behemoths battle it out to grab market share from the growing band of corporate giants in Asia, they could be overlooking the real opportunity on the continent. Writer Charlie Corbett.
The Asian growth story has become a well-worn tale. As the economies of the developed world sit on the precipice of recession, so all eyes have turned to Asia, which has so far survived the credit crisis relatively unscathed. Decoupling – previously a word used by those involved in the train business – has become the mot juste among banking professionals.
Whether or not Asia’s robust economies are truly decoupled from the rest of the world is open to debate, but what cannot be denied is the massive growth in Asian trade flows, both within and outside the continent. It is a subject of particular interest to those international banks looking to maximise the potential of their transaction banking businesses.
At a time where revenues from formerly lucrative parts of banks, such as investment banking and corporate lending, have dried up so the spotlight has turned on the less high profile but reliable cash management divisions. And Asia is where transactions banking professionals see the biggest potential.
The huge expansion of the Chinese and Indian economies over the past decade has fed strong growth throughout the region and led to the emergence of a new breed of Asian company. Bigger, stronger and more demanding, domestic banks in Asia can no longer cater to the needs of companies that have outgrown their domestic markets and are expanding aggressively overseas. This has opened up a huge opportunity for international banks that have cash management expertise.
Asia now accounts for 25% of global trade flows, and consultancy McKinsey and Company estimates that the overall trade finance and cash management revenue pool for the region will exceed $100bn by 2012. This is not just true of China and India. Countries such as Thailand, South Korea and Singapore are also experiencing consistently high rates of growth.
Asian prominence
“Asian multinationals are emerging on the global stage,” says Richard Jaggard, head of global payments and cash management in Asia-Pacific at HSBC. “If you look at the Fortune 500 today, more than a quarter are Asian-headquartered names. This is very different from 1990, when there were about 10%, most of which were Japanese.”
Asian cross-border trade payment has soared over the past five years. Whereas in 2003, according to data from Global Insights, cross-border merchandise trade volume in Asia stood at just over $2000bn, analysts predict that figure will rise to almost $10,000bn by 2012 (see below). As a result of this growth, corporations across Asia are demanding new transaction banking services that stretch far beyond the traditional trade finance needs of yesteryear.
“There has been a drift away from the dominance of the US as being the single biggest buyer from Asia, which has resulted in Japanese and Korean corporates opening up manufacturing capabilities in China and India,” says Subin Subaiah, Asia head of Bank of America’s treasury services division. “It means local bankers have been challenged to provide cash management and trade services offshore, which requires a huge amount of investment.”
The increased sophistication of corporate Asia means companies increasingly demand not only traditional trade finance from their banks, but also cutting-edge cash management services. They will require account services in foreign currencies, phone and electronic banking and more efficient payment and collection products to maximise liquidity in a credit-starved world. The smaller, domestic focused banks in the region cannot provide these kinds of services, so it is up to international banks to plug the gap.
Karen Fawcett, senior managing director and group head of transaction banking at Standard Chartered, says Asian companies are coming under increasing cost pressures, both as a result of their growth, and because of the dearth of liquidity in the market. “They will be looking to their banks to provide a cost-effective and operationally efficient way of doing things. We expect more of them to be demanding consistent products and services across multiple countries,” she says.
SME key
It is not, however, the bigger Asian conglomerates that represent the best opportunity for Western banks looking to expand their Asian operations. Small and medium-sized enterprises (SMEs) offer the key to success. By capturing this small but expanding market, banks can piggyback on the growth of SME business in Asia and beyond.
“It’s obvious that there is a huge wallet in Asia, which in the past we weren’t tapping, in the local corporates and SMEs. So for the past few years we have had a concerted strategy to build up a local corporate and SME business,” says Ms Fawcett. “In the wholesale bank, we look after clients with $25m and over. Even that is a vast number of clients in our core markets. They have naturally been served very well by the local banks – but their attractiveness for us is that they are beginning to go cross-border.”
According to a report from McKinsey and Company, international banks have largely ignored this section of Asian companies, despite them offering enormous potential for growth. “Larger companies will continue to be a source of strong revenues, requiring increasingly sophisticated solutions, but the SME sector represents a relatively untapped opportunity,” the report says. Such companies are becoming a major force in Asian economies – in China alone, SMEs make up 60% of overall corporate revenue.
Tapping into such unrealised potential, however, is easier said than done. Small companies tend to be geographically dispersed, which makes servicing them expensive. They also tend to be loyal to their traditional banks, making it harder to lure them away. Any bank looking to capitalise on the market will need a strong balance sheet and the necessary experience on the ground to succeed.
“It’s an enticing proposition, but if you haven’t got the balance sheet as a bank it is one market you will not be able to access,” says HSBC’s Mr Jaggard.
“If you are there already the big question is: ‘can you continue to fund the investment that is necessary?’ That is the biggest challenge facing cash management banks. You need to have the balance sheet capacity to fund the technology.”
Banks need branch infrastructure and local expertise before they can capitalise on the SME market. Mr Jaggard adds: “You need to be able to look at your principal client as well as his customers and suppliers. That takes a broad franchise both in terms of your marketing and your presence on the ground and infrastructure.”
One local bank that has recently ramped up its operations to target SMEs is India’s ICICI Bank. It announced that it had increased its customer base by 50% in 2007 on the back of a series of new cash management products. The bank introduced factoring, foreign exchange hedging, small business credit cards and collateral free business loans, as well as developing an internet resource centre. According to McKinsey and Company’s report, the key to success is offering such a package at a low price and delivering it in a cost efficient manner.
Bricks and mortar
For foreign banks, however, success lies in having infrastructure on the ground. Ms Fawcett says that banks from outside Asia have traditionally been burnt by not being close enough to what is happening locally. “We don’t want lots of markets with a small amount of middle-market business, we want to have enough critical mass so you get experience in risk management and you have relationship managers on the ground and close to the clients,” she says.
“We have a minimum of five to six staff on the ground [in each branch] so we build up credit expertise and get to know the local community.”
This deep on-the-ground strategy does not appeal to all international banks. Citi, for example, takes an indirect approach to its Asian business by creating cash management products and selling them on to local banks. This approach, known in the industry as ‘white labelling’, means Citi deals directly with banks, rather than their corporate clients. Francesco Vanni d’Archirafi, global head of treasury and trade solutions at Citi, believes the key to success in Asia and elsewhere is through technology. “We are a technology company with a banking licence,” he says. “China is a huge opportunity, India is a huge opportunity. They are both $1bn countries for us so we’re investing a lot.”
Opportunity lies not only in servicing the multinationals, but also in grabbing valuable SME business, he says. “The way to capture the SME market is really through the bank distribution structure. So the idea would be to partner with a big Chinese or Indian bank and they use our platforms to serve their clients.”
White labelling
The white labelling approach is not universally popular, however. Bank of America’s strategy in Asia involves servicing Western corporates that have a presence in the region. “We are a universal banker to multinational corporations as they do business with Asia in Asia,” says Bank of America’s Mr Subaiah. “Asia has become critically important for our clients. The trade flows between the US and Asia now exceed $3000bn per annum.” He says white label solutions are not easy to acquire and present significant barriers. “Any conversations around that topic [white labelling] seem to involve an 18-month time to market and a huge amount of resources. Everyone has got to be customised.”
Uncertain times
Looking ahead, times are going to get tougher for banks looking to capitalise on the growth of corporate Asia. Not only are economies across the region stuttering, due to inflationary pressures and the knock-on effect of the credit crunch. Clients are also demanding more services for less money. Banks that want to succeed in Asia will need to spend heavily on technology infrastructure in order to satisfy an increasingly demanding client base that is looking to maximise liquidity in straitened times. “Working capital efficiency due to the credit cycle is taking on a new importance,” says Mr d’Archirafi. “If you squeeze efficiency from working capital you release cash, and cash is king. Liquidity is of paramount importance to corporate boardrooms.”
HSBC’s Mr Jaggard says corporates’ attitudes towards banks are shifting. “With concerns about the cost of bank credit and the availability of bank credit, clients are asking: ‘Are my banking partners going to be able to support my needs?’ The counterparty risk agenda has changed a lot. Rather than banks thinking ‘am I comfortable with my corporate clients?’, corporates are asking whether they are comfortable with their banking partners.”
