FINANCIAL INTEGRATION in Southeast Asia will make the region less vulnerable to external shocks, according to a report Standard & Poor’s (S&P) released yesterday, but the process will be a rough ride for banks like those in the Philippines which, despite current strengths, could “find it difficult to compete if larger banks join the fray.”
In its report, titled “ASEAN Financial Integration: The Long Road to Bank Consolidation,” the credit rater said completion of the process by 2020 could result in “emergence of major banks that can compete with large banks outside the region.”
“Better economies of scale would also make financial systems within the region more efficient... [and] make banking sectors more resilient to external shocks,” S&P said.
Financial integration in the Association of Southeast Asian Nations (ASEAN) is part of the planned ASEAN Economic Community (AEC) that is scheduled to formally take effect next year.
AEC will transform the region into a single market and production hub where goods, services, capital, and labor move freely across borders.
The report said AEC will make ASEAN the fifth-biggest trading bloc in the world with combined gross domestic product (GDP) of about $2.4 trillion “and a young, growing and consumption-driven population of 625 million.”
S&P said it projects regional GDP growth to pick up to 5.8% in 2016 from 4.9% this year, “second only to China.”
More intensive intra-ASEAN trade, S&P said, “could encourage banks to expand regionally to better serve their clients.”
‘LONG WAY TO GO’
At the same time, however, the credit rater noted the process of creating a regional financial system will not be “entirely smooth.”
“ASEAN’s financial system still has a way to go to meet its goal of integration by 2020,” S&P said.
“The uneven pace of financial liberalization in different countries -- along with significant divergence in regulatory frameworks -- could complicate cross-border mergers,” it added.
“We believe national regulators will proceed with gradual financial liberalization and ensure that domestic banks are strong enough to compete before they allow full liberalization -- allowing the entry of qualified ASEAN banks.”
CONDITIONS ‘GOOD’
In the case of the Philippines, the recent easing of a law that had restricted the entry of foreign banks into the country for two decades “could gradually boost foreign investor participation” in the local banking industry and “trigger some industry consolidation, particularly for small- to mid-sized banks.”
Last July 21, President Benigno S.C. Aquino III signed into law Republic Act (RA) No. 10641 -- An Act Allowing the Full Entry of Foreign Banks in the Philippines -- amending RA 7721 which had sanctioned entry of a limited number of foreign banks since 1994.
The new law stated that more foreign banks -- which should be publicly listed in their home countries -- could operate in the Philippines through any one of three modes of entry, namely by:
• acquiring, purchasing or owning up to 100% of the voting stock of an existing local bank;
• investing in up to 100% in the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or
• establishing branches with full banking authority.
At the same time, RA 10641 mandated the Monetary Board to ensure that at least 60% of the resources or assets of the entire Philippine banking system is held by domestic lenders majority-owned by Filipinos.
Section 6 of RA 7721 had allowed up to 10 foreign banks to enter the Philippines within five years from effectivity of the law.
Currently, all those slots have been filled by: CTBC Bank (Philippines) Corp.; Maybank Philippines, Inc.; Bangkok Bank Public Co. Ltd.; Bank of America, N.A.; Bank of China Limited-Manila Branch; Citibank, N.A.; JP Morgan Chase Bank, N.A.; Korea Exchange Bank; Mega International Commercial Bank Co., Ltd.; and the Bank of Tokyo-Mitsubishi UFJ, Ltd.
Only should one of the 10 banks pull out could another foreign lender enter the Philippine market under the previous law.
On the whole, the credit rater noted that “good economic conditions and ample liquidity continue to bolster loan growth and mildly improve” bad-loan ratios of Philippine banks.
Moreover, S&P said it expected local banks’ net interest margins “to gradually improve” as they reprice loans to keep in tune with increases in key policy rates earlier this year.
At the same time, however, increasing competition will likely temper such improvement in their interest margins.
OUTLIER
The perception of relatively well-cushioned Philippine banks was shared by Moody’s Investors Service in a separate report it released also yesterday.
In its report, titled “ASEAN Banks’ Bond Issuance Set to Increase As Loan Growth Continues to Outpace Deposit Inflows”, Moody’s said it expected Southeast Asian banks to increasingly turn to capital markets -- particularly by issuing bonds -- to help fund lending operations.
“Loan growth in most parts of the ASEAN region has steadily outpaced deposit inflows over the past several years, leading banks to use most of their stock of deposits for the purpose of funding loans,” the credit rating agency said.
“There is evidence that some banks have turned to their excess liquid assets as an alternative source of funds, and we believe this source is also diminishing,” it added.
Moody’s, however, cited Philippine banks as outliers, noting they “continue to have very strong funding cushions” -- with deposits “still well in excess of loans” -- hence, “liquidity is unlikely to become a constraining factor for their credit profiles in the next few years”.
COMPETITION INCREASING
Region-wide, S&P said in its report, characteristics specific to certain Southeast Asian countries -- such as entrenched family ownership of the banking sector in the Philippines and strong labor unions in Malaysia -- will make industry consolidation “more difficult”.
High acquisition costs have also been cited as a “significant obstacle” in many deals, the debt watcher added.
And as the region’s banking sectors become more integrated, S&P said asset quality will remain a major risk factor in ASEAN banks’ credit profiles.
Integration, S&P added, will also increase the risk of contagion and spillover effects within the region.
‘PLAYING DEFENSE’
Currently, major Singaporean and Malaysian banks were noted as being the most active in regional expansion.
Thai banks have also been expanding, though to adjacent Vietnam, Laos, Cambodia, Myanmar and parts of China.
“Indonesian and Philippine banks, on the other hand, are playing defense and strengthening their domestic networks,” S&P said.
Banks in Southeast Asia were noted in the report to be largely “small by global standards and don’t have the scale and footprint to compete effectively with global behemoths.”
“In particular, the fragmented banking systems in some countries -- such as the Philippines, Indonesia and Vietnam -- have a large number of small financial institutions with weaker financial profiles than their global peers,” S&P noted.
“These systems will find it difficult to compete if larger banks join the fray.”
source: Businessworld
