A window of opportunity for banks
Banks have the ability to reset their innovation agendas as the health pandemic spurs key competitors to put their growth plans on hold.
A new report by EY assessed the outlook and key trends of the Asia-Pacific credit landscape in the wake of COVID-19.
The pandemic has put a pause on the emergence of neobanks and the shift by tech giants into lending particularly off the back of a flight to safety.
But once the challenges alleviate, EY Asia Pacific capital markets leader Andrew Gilder believes the big tech ecommerce giants will continue to build on their existing payments capabilities, rolling out lending to retail customers and SMEs.
“We are already seeing it happen with Amazon, who has been lending to their sellers as well a the border supply chains.”
Similarly, the plans for neobanks to expand their products have been put on hold.
“Large-cap banks are enjoying a ‘flight to quality’ by consumers, leveraging their scale, brands, capital strength and through-the-cycle experience,” Gilder said.
In contrast, their digital-only rivals face increasing headwinds, illustrated by the May 2020 cancellation of one Australian IPO.
“Obviously the neobanks don't have the scale, brand recognition and capital that the big techs have.
“It is also challenging raising capital but I do believe that it is only a matter of time before the neobanks are back in market aggressively acquiring customers.”
For Gilder this ‘pause’ in the growth plans by these competitors should provide a window of opportunity the incumbent banks to reset their innovation and technology agenda.
“The delay in the rollout of products [by the neobanks and big tech firms] should give the banks the opportunity to lift their game on the customer experience.”
“This window of opportunity should provide them get their data and analytics in order. They need to make sure they refine their customer proposition. Because if they don't, I am absolutely certain that those fintechs [and big techs] will come in with a very good customer value proposition.”
Scope for consolidation
The report also sees scope for consolidation among the local and regional banks in the region that have a high level of non-conforming loans.
This could be a trigger for consolidation in order to strengthen the capital ratios and boos their cost efficiency, according to Gilder.
He believes that the sector in China is ripe for consolidation given that Chinese financial services firms were already overweight in non-performing going into the pandemic.
However, closer to home, Gilder sees scope for consolidation among credit unions, a trend that was already playing out pre-pandemic.
“I believe there is still a level of consolidation that can happen in that segment,” Gilder said.
He acknowledges that it could be more challenging to push forward on the strategy given the nature of the mutual sector.
“It’s not as simple as buying equity and taking control with the member organisation. It's a little bit more complicated to drive merge [among credit unions].”
Gilder also predicts securitisation – backed by yield-chasing investors - in Australia to pick up following the pandemic.
He sees it is an option for most of the banks as the sector remains currently focused on the three Cs –that is, credit, costs and capital.
According to Gilder, banks will start to make smarter use of balance sheets, reviewing risk weightings and capital allocation more dynamically than in the past.
“By reducing their risk weighted assets, capital is freed up for those banks allowing them to originate new loans and retain their customer relationship.”
As the pandemic highlights lending is key for the banks, but securitisation will free them from the capital constraints allowing them to stay in the market and acquire new customers by supplying credit.
“It also allows them to retain that relationship with the customer and cross-sell other products.”
He acknowledges that Australian banks have been doing securitisation for many years with its role now amplified as banks seek to recycle their capital while still being able to lend.