Contrary to many global banks retreating from various businesses in Asia-Pacific, Société Générale is not only staying, but also growing in the region. How is it staying profitable? Stefania Palma asks the lender's Asia-Pacific CEO, Hikaru Ogata.
As local banks across Asia-Pacific grow in size and scope, they have started to challenge global banks with operations in the region. Rather than being everything to everyone everywhere, focusing on selective competitive advantages is the new winning strategy. Société Générale’s focus on securities, cross-border flows, infrastructure financing and now also debt capital markets, is allowing it not only to survive in Asia-Pacific, but to expand its reach. Throughout 2013, it hired 200 individuals in the region.
Spearheading this development is Hikaru Ogata, Asia-Pacific CEO of Société Générale, who took on the role five years ago. “When I joined in 2010, it was a period when we were trying to figure out what it was we were going to do in Asia-Pacific,” says Mr Ogata.
Société Générale Asia-Pacific’s strategy seems to be working. Its cost-to-income ratio is lower and its return-on-equity ratio higher than the bank’s global average. The Asia-Pacific business achieved €1.2bn in revenues in 2013, while 2014 was a record year (results still are not public) and, according to Mr Ogata: “This year is off to a very good start. We are well on track to achieve profitable growth." His business has a target of 10% compound annual growth through to 2016.
Adjusting to Japan
Japan remains the key Asian market for Société Générale’s capital markets business. The lender has become a key dealer of structured products, which as high-yielding bonds are very popular in a market where bank deposits yield close to nothing and where the local bond market does not offer a wide range of paper.
But even these products have started to yield less than they used to, due to moves in foreign exchange and the stock market indices linked to them. “The dollar/yen and Nikkei levels have rallied so much that these structured products have been knocked out or have matured. Investors are now rolling their money back in. However, there is nothing to buy in the bonds space, bank deposits still don’t yield you anything, and people are looking for a better way to play equity markets aside from buying stocks,” says Mr Ogata.
Therefore, the new key trend in Japan is institutional investors’ unprecedented big move into international markets.
“You’ve got the big government pension fund decreasing its allocation to the domestic bond markets. Big insurance companies and [delivery service] Japan Post are saying: ‘I have nothing to buy onshore, so I’m going abroad.’ Japanese banks – that used to gobble up Japanese government bonds [JGBs] – are not doing this anymore. They are putting their money in international assets,” says Mr Ogata. “Bank of Japan is now the single main JGB investor in the market. Everyone else is looking at higher yielding diversified products abroad.”
Mr Ogata views this decrease in risk aversion optimistically, and as a sign that more retail investors could join the market. “Local capital markets can still grow to create a more risk-taking culture. The amount of money that is still in deposits is just amazing," he says.
Courting South Korea
Japan is only one example of Asia-Pacific’s evolving investor base. “The sophistication of Asian investors even in retail is increasing quickly. The Japanese would focus on Nikkei. South Koreans would focus on Kospi and dollar/won. What you see now is people saying: ‘I think European stocks look really attractive. They just started quantitative easing, let’s go into European stocks.' Hybrids are also becoming popular, for instance,” says Mr Ogata.
While the French bank is consolidating its historical presence in Japan, it is also breaking through tougher north Asian markets, such as South Korea.
International banks, such as Standard Chartered, Citigroup and HSBC, that have tried focusing on retail in South Korea have faced problems and left the market. Although South Korean banks have consolidated, the number of lenders is still high for a population of 50 million, say market participants, and the largest banks dominate the market, especially in the retail space. Margins are too thin, they add.
“Retail banking seems to be a difficult business due to over banking and we have no intentions of entering the retail banking business in South Korea. In wholesale there have not been people leaving the market,” says Mr Ogata.
Société Générale has indeed focused on becoming what Mr Ogata calls a capital markets “product factory”. “We are basically product providers to local banks, securities, insurance companies. We are a product factory. There are some institutional clients we go to directly, but we have no direct access to retail clients,” he says.
The bank’s strategy responded to South Korea’s recent macroeconomic trends. “It started looking like a mini Japan: falling interest rates, ageing population, significant creation of wealth and a stagnant stock market,” says Mr Ogata.
“Interest rates were at 7% to 8% in South Korea eight years ago. Now they’re less than 2%. People who traditionally had notions of interest rates at 7% to 8% are yield hungry. This is the real opportunity we have been exploiting for both retail and institutional clients,” he adds.
Cracking new markets
Société Générale’s growth in Asia-Pacific is also expanding in the Assocation of South-east Asian Nations (Asean) region, where it has a presence in Malaysia, Singapore, Vietnam and Indonesia. In the latter two, Société Générale looks to facilitate foreign capital inflows destined to much-needed infrastructure projects that local banks cannot finance alone.
“[Vietnam] is a story of 90 million people modernising, of a country becoming a manufacturing hub, with rapidly growing needs such as electricity,” says Mr Ogata. “We have to understand the government’s priorities to map out how we want to work with our international clients."
Indonesia is a newer market for Société Générale, but one that is very attractive given the country's dire need for infrastructure. “We are building up our relationships there. We have local representation and a partnership with [securities company and investment bank] PT Danareksa Sekuritas, which helps us understand the local landscape,” says Mr Ogata
One of the French lender’s achievements in Indonesia was its involvement in the Sarulla $1.61bn 20-year geothermal power plant project. “This is one of the world’s biggest geothermal projects in the world. Showcasing our expertise we served as the technical bank for this 330-megawatt renewable power project,” says Mr Ogata.
After having established a presence in 11 Asian countries, one of Mr Ogata’s goals is to expand Société Générale’s activities in India. The bank already has 4000 staff in operations and IT in Bangalore and three branches in Delhi, Mumbai and Sanand. “We are also looking into opening new branches in some key cities in the near future,” says Mr Ogata.
Capital markets could be key in the bank’s future development. “If you look where offshore Asia bond markets will go in the next five years, 50% of the issuance will come from China and another 20% will come from India,” says Mr Ogata.
Foreign exchange and interest rate liberalisation, however, could be relatively slow. “In trying to tame inflation, India will likely be very cautious in allowing large capital flows in and out of the country by foreign investors. So, when we talk about tapering and eventual US rate increase, the bigger impact will likely be on India, compared with China,” says Mr Ogata.
The bank will also focus on cross-border flows and infrastructure financing, but bureaucracy and tricky processes could be a challenge. “Infrastructure needs are very apparent but there is still a lack of harmonisation of international and Indian standards, for example in project finance,” says Mr Ogata.
A DCM push
Building a debt capital markets (DCM) business is Société Générale’s next priority. Historically, the bank specialised in private placements and international medium-term notes out of Hong Kong. Now, it wants to build an Asia-wide DCM franchise and arrange deals for local issuers. It has already arranged local deals, such as the debut high-yield transaction in Asia-Pacific – Haikou airport’s offshore renminbi bond – and dairy company Fonterra’s offshore renminbi transaction, both Chinese deals.
“The credit business overall is a focus area for development. We believe DCM in Asia will show strong growth over the next decade, as we will see growing disintermediation, such as we are seeing in Europe,” says Mr Ogata
A trickier market to crack as a DCM house might be China, since domestic banks and securities firms have enormous presence in the market with access to pockets of investors across the country. Société Générale’s China strategy focuses on cross-border flows and on renminbi products to international investors, says Mr Ogata.
Focusing on fee-based DCM business will also help the bank keep its balance sheet in check, especially now that it has started lending significantly more in Asia-Pacific. Fixed-income business is also particularly attractive now that other international names have left the scene and Société Générale can capture more market share. Royal Bank of Scotland, for instance, has closed down its fixed-income business in Asia completely, save for a hub in Singapore.
