The launch of the Asean Economic Community has opened up a new wave of opportunities. However, with Western banks pulling back from Asia and domestic banks all-powerful in the region's more developed markets, it may only be the Greater Mekong region that sees any discernible change to its financial landscape in the near future.

What difference does the AEC make

Commercial banks in communist Laos may start talking to each other soon, thanks to the advent of the Asean Economic Community (AEC). “If you open up a national payments system, banks can talk to each other,” says Tammy Medard, chief executive of ANZ Bank (Lao).

As part of its commitment to the AEC, which officially came into being on January 1, 2016, Laos has started to set up a national payments system that will facilitate not just domestic intra-banking activities but also cross-border banking and foreign investment in the emerging market.

“The AEC integration has certain requirements and one of them is a specific national payment system platform. We’re trying to help the Bank of Laos start getting a road map ready for implementing this because it would open the door for what we banks can do, and also for international investors,” says Ms Medard. ANZ is the only international bank operating in landlocked Laos and it hopes that helping the country meet its AEC obligations will be part of its legacy.

Laos, with a gross domestic product (GDP) of some $12bn and population of about 6.7 million, is a hard sell for foreign direct investment. It would be even harder if the country were not a member of the Association of South-East Asian Nations (Asean), a 10-member regional bloc that also includes Brunei, Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Together, their aggregate population is about 625 million with a collective GDP of some $2600bn (as of 2014), making the region the world’s seventh largest economy worldwide, according to Asian Development Bank estimates.

Asean's blossoming

Asean, set up in 1967 as an anti-communist bloc between the founding members – Indonesia, Malaysia, the Philippines, Singapore and Thailand – has evolved into a dynamic economic hub, gaining traction after the launch of the Asean Free Trade Area in 1993. Between 1993 to 2014, intra-Asean trade grew from $82bn to $609.2bn, accounting for 24% of the region’s total trade in 2014, according to Asean Secretariat statistics. In 2007, the leaders of the Asean countries – by then the expanded 10-country pact it is today – decided to broaden their economic co-operation to include services and labour flows under the AEC. The liberalisation scheme, however, will be done in the ‘Asean Way’, i.e. piecemeal and as painlessly as possible for the participants. This is not the EU.

Banking liberalisation will take place under the Asean Banking Integrated Framework (ABIF), initiated by the region’s central bankers in 2011, with a tentative deadline of 2020. Under the framework, the five most developed Asean economies – Indonesia, Malaysia, the Philippines, Singapore and Thailand – should open their markets up to at least one qualified Asean bank (QAB) by 2018, on a reciprocal basis to be decided by the members themselves.

The Bank of Thailand, for starters, kicked off negotiations with Bank Negara Malaysia on March 14 to allow indigenous banks with QAB status to operate in one another’s markets. There are already two licensed Malaysian banks operating in Thailand – CIMB and RHB Bank – while Bangkok Bank – Thailand’s largest by assets – has had a branch in Kuala Lumpur for decades. Under the QAB arrangement, these banks would be treated as local banks, without the restrictions usually placed on foreign banks such as being limited to one branch. The ABIF also includes efforts to standardise banking regulations, such as establishing a common payments system and capital market integration.

The ABIF scheme remains very much of a work in progress, subject to changing circumstances, such as the regional economic slowdown over the past two years triggered by the drop-off in imports from China, Asean's main trading partner. “The important thing is a consensus that they want to go down this path,” said Thiam Hee Ng, principal economist at the Asian Development Bank in Manila.

The relative 'softness' of the region’s economies, which should still average 4% to 5% economic growth this year, has its plus side for the AEC and Asean banks. “What we are seeing now that I think is more relevant to the situation is a sort of pull back by the major Western banks,” says Mr Ng. “So that will open up more opportunities for the regional banks to take a larger share. In that sense this could help improve the pace and progress on this AEC issue.”

Western pullback

Indeed, some of the big Western banks are scaling down or leaving Asia altogether. In 2015, CitiGroup pulled out of retail banking in Japan, while in February this year Royal Bank of Scotland confirmed plans to wind down its Asian corporate banking activities. Of course not all the big Western banks are pulling back. HSBC, despite its recent decision to keep its headquarters in London instead of shifting it to Hong Kong, is looking more towards Asia while pulling out from other regions. It sold its Brazilian operations last year, and in June chief executive Stuart Gulliver said the bank would pivot towards the China Pearl Delta and Asean areas in the near future.

“Asia-Pacific is too important a region for us not to concentrate on,” says Kelvin Tan, CEO of HSBC Thailand, where the bank has had a presence since 1888 when it became the first commercial bank to set up shop in what was then known as Siam. HSBC discontinued its retail operations in Thailand in 2011, selling them to the Krungsri Bank Group, but it has maintained its corporate banking and trade finance activities in both the country and the region.

HSBC’s core strengths in Asean include its extensive connections in the Chinese market, a major trade partner for the region, and its broad penetration of the Asean market itself, where it has branches in seven of the 10 member states, excluding only Cambodia, Laos and Myanmar. “Our Asean strategy now is looking at our customers and seeing how we can service them across the Asean region,” says Mr Tan.

One of the trends that all the banks are hoping to catch a chunk of is the outward bound investments of top Asean companies into the region itself, to diversify their growth potential and catch the growth opportunities of emerging markets such as the so-called CLMV (Cambodia, Laos, Myanmar and Vietnam) region, the former communist/socialist bloc that now includes some of Asia’s fastest growing economies.

“When [Asean clients] want to have a one-stop bank as an expert in the Asean region, that they can deal with from a treasury perspective, a cash management perspective, even from a risk perspective… that’s what we are targeting,” says Mr Tan. The bigger Asean banks can also offer their Asean clients in the region those products when they move abroad, but HSBC is banking on having a slightly broader footprint than its local rivals. “We feel we have the advantage because we are in 19 countries in Asia-Pacific, even in Bangladesh and India,” says Mr Tan. HSBC is listed among the world’s top 10 banks by Tier 1 capital according to The Banker's annual Top 1000 World Banks ranking.

A new ANZ direction

ANZ is another non-Asian bank with a significant presence in the Asean region, although the bank’s new management, under CEO Shayne Elliott, has seemingly questioned that presence, which was largely the handiwork of Mr Elliott's predecessor, Mike Smith. Mr Smith had set a goal of the bank deriving 25% to 30% of its earnings from its operations in the Asia-Pacific region by 2017. With China and Asean in slowdown mode, that goal has started to look unrealistic. Mr Elliott, while not exactly pivoting away from Asia, has placed his emphasis on maximising profits from the bank's existing network.

“ANZ’s strategic focus on Asia has not changed, however, we have entered a new phase in our development that will see our emphasis shift to cementing higher returns from the investments made in our expanded footprint since 2007,” says Farhan Faruqui, ANZ's CEO of international banking. Part of that expanded footprint is Asean, where ANZ has a presence in nine out of the 10 member states, excluding only Brunei. ANZ most recently set up licensed branches in Myanmar and Thailand.

“We are the only international bank with a presence in all five [Mekong sub-region] countries – Cambodia, Laos, Myanmar, Thailand and Vietnam – and we continue to look for opportunities to connect multinational clients that are looking to do business in this region,” says Mr Faruqui.

Mekong moves

The Mekong sub-region, specifically the emerging CLMV economies, form a sub-text in the AEC story, which many feel is more exciting than the bigger picture. “Initiatives such as the AEC and the QAB are over-rated for Thai banks,” says Parson Singha, senior director covering financial institutions at Fitch Ratings, Thailand. “Practically speaking, the Thai economy has been very weak for many years and the sub-regional economies – such as Cambodia, Laos, Myanmar and Vietnam – are booming, so there has been a lot of trade and investments into these neighbouring countries and a lot of the Thai banks are increasing their activities there following their customers.” 

Thailand’s economic growth has spluttered in the past three years, in tandem with the decline of its exports, which fell 0.3% in 2013, 0.4% in 2014 and 5.8% in 2015. The only bright spot in Thailand’s trade picture has been the CLMV region, where exports have grown a respective 11.8%, 8.9% and 7.7% during that period. Corporate Thailand has been following its exports abroad for years. Bangkok Bank, the largest Thai bank in terms of assets, and operational in nine out of the 10 Asean countries (excluding only Brunei), now advertises itself under the slogan 'AEC + Bangkok Bank = Opportunity'.

Unlike other Thai banks that expanded hastily overseas in the heady 1990s, Bangkok Bank did not shut down its foreign branches in the wake of the 1997 Asian crisis. “It has the edge in the overseas business,” says Prasarn Trairatvorakul, who was the governor of the Bank of Thailand between 2011 and 2015. “In terms of real transactions and real business volume, Bangkok Bank is ahead,” he adds.

Bangkok Bank was the only Thai bank to win one of nine foreign banking licences offered by the Myanmar government in 2015. Last year it also opened a branch in Phnom Penh, the capital city of Cambodia. And Bangkok Bank is not the only Thai lender pushing aggressively in the CLMV region in pursuit of its customers. Krungsri Bank, which had its majority shares bought out by Japan’s Bank of Tokyo-Mitsubishi UFJ (BTMU) in late 2013, is pursuing both its Thai and Japanese corporate customers in the Mekong sub-region through its network of joint Thai-Japanese outlets. Although Krungsri did not bid for one of the Myanmar bank licences, BTMU did, and won. The BTMU Yangon branch has helped Krungsri to assist both Japanese and Thai companies seeking to set up operations in Myanmar.

“What we did is send a Krungsri employee to work in the BTMU branch office in Yangon,” says Noriaki Goto, president and CEO of Krungsri Bank. “He is supporting Thai customers trying to come to Myanmar.” 

Krungsri has also opened a representative office in Yangon, as a first step towards what it hopes will be permission to operate in consumer finance in Myanmar in the future. “You can really enjoy the growth of the country in retail and consumer finance,” says Mr Goto. Earlier this year, Krungsri Bank purchased 100% of Hattha Kakesekar, the fourth largest microfinance institution in Cambodia. “This is a very long-term play,” says Mr Singha at Fitch. “It is going to take a long time before this materially contributes to the bottom line.” With few growth prospects in its home market of Japan, BTMU is prepared to wait.

Small returns

But the prospect of small returns may be one reason that the other south-east Asian banks are not as keen on the CLMV region as the Thai banks. “For the other banks, they may do something in these countries but it doesn’t move the needle,” says Ambreesh Srivastava, Fitch’s head of financial institutions in south and south-east Asia. For the big Singaporean banks, such as DBS, OCBC and UOB, and Malaysia’s big three – Maybank, CIMB and Public Bank Berhad – there may be greater interest in expanding in Indonesia and the Philippines.

“Within the Asean world they are looking for meatier markets, so Indonesia is one although it has become more restrictive in the past few years. Similarly, the Philippines, which used to be the sick man of Asia, has now become more attractive, but because of the conglomerate ownership of banks there the local banks have a very entrenched position,” says Mr Srivastava.

In fact, all the Asean banks have fairly entrenched positions in their own local markets. The top three Singaporean banks control an estimated 80% of the assets in the domestic banking system, while Malaysia’s and Thailand’s top four banks control more than 60% of their domestic markets, according to ADB and industry estimates. It therefore remains to be seen what impact any newcomer Asean bank would have on another Asean market, even if it was allowed to compete on a level playing field under the QAB platform.

“They may come in and open one or two branches, but they aren’t going to blanket the whole country,” says Mr Ng. “That wouldn’t make any sense from a business perspective.”


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