Asia is one of the most competitive regions when it comes to its retail banking industry, with many banks in the region facing declining earnings and net interest margins (NIMs). Though NIMs are traditionally higher than more developed parts of the world, margins are expected to continue to fall due to tight competition, low global rates, asset quality cycles, and other variables across the region. However, it is one of the key pockets of high growth in the world, and banks will need to do what it can to stay in the game.
The high barriers to entry to Asia’s banking industry make it tough for new players to gain any traction as operating in Asia comes with registration, incorporation and compliance costs as well as regulatory burdens. When looking at the market share of main bank relationships held by the top banks in each country, it is quite oligopolistic in nature. On average, the top 4 banks account for around 7 in 10 main bank relationships, with Singapore’s banks leading the way with a dominating 94%.
Source: RFi Group 16H2 Asia Retail Banking Council
Like many of the banking markets in Asia, state ownership of banks helped propel incumbents like DBS, formerly known as The Developmental Bank of Singapore, race ahead to build a market dominant position in the market. Its advantageous position was on full display when it acquired Société Générale’s private banking arm in Singapore back in 2014, and more recently, as it bought Australia and New Zealand Banking Group (ANZ’s) businesses in Singapore, Hong Kong, China, Taiwan and Indonesia. Not to be outdone, OCBC has also acquired National Australia Bank’s (NAB) retail and wealth businesses in Singapore and Hong Kong.
On average, the top 4 banks account for around 7 in 10 main bank relationships, with Singapore’s banks leading the way with a dominating 94%.
ANZ wasn’t the only bank to struggle in Indonesia, where the top 4 banks take up 85% of the main bank relationships. Back in 2013 DBS failed to acquire a majority stake in Bank Danamon as the deal fell into a regulatory black hole with Indonesian officials reluctant to open up to foreign banks, especially as Singapore was not willing to reciprocate. Traditionally foreign banks are not allowed a controlling stake which has seen the likes of Standard Chartered hold onto a 45% stake in Bank Permata. There are a few mergers in the pipeline as China Construction Bank (CCB) has been approved to buy a majority stake in Bank Windu which looks to merge with Bank Anda. We also expect to see the full effects of HSBC’s merger with Bank Ekonomi in 2017.
Hong Kong has also been a hotbed of corporation action as banks hustle to dent the 84% share of main bank relationships held by its Big 4 banks. OCBC got its foot in Hong Kong acquiring Wing Hang Bank in 2014. More recently, Bank of China Hong Kong (BOCHK) completed the sale of its stake in Nanyang Commercial Bank in 2016, and is also looking to dispose of its stake in Chiyu Bank.
In the Philippines, East West Banking Corp took over some of Standard Chartered’s local operations in 2016 and is rumoured to be looking to sell a 20% stake to a strategic investor this year. This is off the back of rival group, Security Bank Corp which sold a stake in 2016 to Mitsubishi UFJ Financial Group, Japan’s biggest bank and now allows their respective customers to conduct certain cross-banking transactions without worrying about the remittance costs and tedious transfer process.
Malaysia almost saw a blockbuster merger back in 2015 where a deal which proposed that CIMB, RHB Capital and Malaysia Building Society (MBSB) get together to overtake Maybank as the largest bank by assets got scrapped due to unfavourable market conditions.
In Korea, HSBC had washed its hands from the retail and wealth management operations a few years ago, as its attempt at organic growth wasn’t as sustainable as Standard Chartered’s acquisition of Cheil Bank, or Citibank’s takeover of KorAm Bank. In 2015, Hana Bank merged with Korea Exchange Bank to become KEB Hana which made it Korea’s largest lender by assets.
Thailand has proved to be a difficult retail banking market to conquer for Standard Chartered, which plans to transfer its retail banking business to Thailand’s Tisco Financial Group this year while continuing its wholesale businesses. The competitiveness of the market and lack of scale made it difficult for Standard Chartered to achieve the returns it wanted.
Even as Asia proves to be a difficult environment to survive, competition will only heighten given the positive growth forecast compared to other parts of the world.
Even as Asia proves to be a difficult environment to survive, competition will only heighten given the positive growth forecast compared to other parts of the world. Untapped spaces in digital commerce and finance have paved the way for new banking licenses to internet only banks in Korea and microfinance companies in India. China’s consumer finance and payments has been dominated by Alibaba and Tencent as mobile payments and wallets looks to displace cash in the region.
Though the banks still dominate, it looks like the scene is set for more mergers and acquisitions in the region as banks look for synergy and operational efficiencies. Not only will banks look at financial companies but they will be forced to look at technology companies for innovation as they keep their focus on brand and reputation.