According to McKinsey, more than 40 of the world’s largest banks by assets are Asian, and account for approximately 50% of the market capitalisation of the top 100 banks globally. Additionally, the continent has been the world’s largest regional banking market for a decade.
In the banking space, the past few years have seen newly licensed digital banks, global digital-only banks and digitalised traditional banks competing across the region. S&P noted in July 2019 that these developments have not caused “any noteworthy changes” to its outlooks for banking sector country risks across the region, and estimated that virtual banking may not lead to rating or outlook changes for APAC banks over the following two years. Over a longer period, however, it noted that “as virtual banking strategies take hold and further disrupt the traditional bank sector, the potential for ratings differentiation is greater.”
Moving away from globalisation
Based in Singapore, Siang-Chee Chew, Head of Treasury at JERA Global Markets, has found that the pandemic has forced many of the usual business activities to a complete stop. “This includes face-to-face meetings, which are essential for banks to understand clients’ activities better and vice versa,” he says. Banks need to embrace the digital revolution and engage clients in the virtual space in order to keep up-to-date with their needs in this challenging environment.
Additionally, the pandemic has had monumental effects on the global economy, with major industries affected. The World Bank’s Global Economic Prospects report, ‘Pandemic, Recession: The Global Economy in Crisis’ from June 2020, describes the baseline forecast envisioning a 5.2% contraction in global GDP in 2020 – “the deepest global recession in decades, despite the extraordinary efforts of governments to counter the downturn with fiscal and monetary policy support”.
Indeed, the UK is in its first recession in 11 years, whilst Australia recently entered its first recession in nearly 30 years, and Singapore’s only deepens. Like many, Chew envisions a knock-on effect on banks with global loan portfolios, and notes that there are already signs of decreased risk appetite in global banks, with many of them either scaling down in, or exiting completely, non-core markets. “This means that local and regional banks, with a better understanding of their key market business environment, will need to step in to fill these gaps,” he says, and there will be a significant impact on local economies if they are unable to.
In his base of Singapore, Chew has noticed local banks moving towards digitalisation for years already. He believes that together with their knowledge of regional businesses as well as their footprint in Asia, they are in a good position to step up into the potential void that could be created by the downsizing and departure of global banks in certain industries or countries in Asia. He also believes that this development will mean regional and local banks will be able to improve services to clients whilst not being “undercut” in terms of pricing by global banks. “This is a positive in the medium term, as the banks have largely competed purely based on pricing for quite some time now,” he says. He envisions there being a refocus on core banking relationships, both by clients and banks.
This focus on local and regional banks may come with a downside though, as Chew explains that the globalisation model that many treasurers are used to may come under pressure. “Capital will not be as freely available to both existing businesses and start-ups, as many of these businesses’ viability comes under threat in the medium term.”
Focus on connections
As a result of the pandemic experience, it’s possible that banks will be aiming to steer corporate client relationships in new directions – and corporate clients are likely to do the same. For many, the pandemic could give drive to re-evaluate banking relations, especially where corporate treasurers have felt they have had either very or little support. Meanwhile, Chew believes that most banks will look to focus on key relationships, as opposed to trying to “gain new ground”. With some banks stepping back to their key markets, some clients may be affected. He explains that companies with a diverse banking panel may be less impacted, but it will “take some time for clients to re-adjust their banking panel such that their business is supported adequately”.
This may, he says, accelerate the entrance of new banks to fill gaps that the existing ones leave. Additionally, he notes that there will be some banks which are not “key players” in certain sectors, that will see the pandemic as a chance to move into areas where others are retreating. “Some of the second-tier Chinese banks may see this as a chance to expand more aggressively while facing less resistance from the incumbent,” he says.
As the inevitable flight to quality happens, it’s going to be important for treasurers to work closely with their banking partners to understand the banks’ limitations in the current environment. Chew explains that these limitations could be in terms of credit appetite, pricing or structure, to name a few. “It may be a situation where treasurers need to expand their banking panel and be realistic about the market conditions,” he concludes.