As Cambodia opens up to the ASEAN community, so too does its financial sector, putting the big banks on a bigger stage and leaving the smaller ones in a battle to survive.
Asia’s market integration with the ASEAN Economic Community has paved the way for greater access to domestic markets with higher competition across the region. With that higher competition, we can expect the strongest banks to dominate the markets and force smaller banks to consolidate in order to compete and survive. In recent decades, Asia’s banking sector has been on the rise, with powerhouses like Singapore, Japan and China playing a key role. In 2015, the value of the global banking industry stood at $1.1 trillion, with Asia accounting for nearly 46% of that number, according to consulting firm McKinsey & Company.
It is easy to fathom the vast economic opportunities that a rising banking sector could achieve in an integrated market, however some countries may feel a slight disadvantage. For example, the Philippines’ four largest domestic banks combined pale in comparison to any of Singapore’s leading domestic banks, so the push for “national champions” could be on the rise to help each country play a role in the region’s banking industry. According to a 2015 banking report by Ernst & Young, regulators are doing what they can to convince local banks to expand abroad in order to compete with the banks of other countries–Taiwanese regulators have eased offshore investment limits to help banks go overseas, while the Philippines has encouraged investment in its banking sector by increasing foreign ownership limits in domestic banks from 60% to 100%. Asian countries are also looking at increasing minimum capital requirements so as to pressure small banks in their respective markets to consolidate, as has been done in Vietnam and the Philippines.
Regional dynamic economies like Japan, Australia, China, Malaysia and Singapore, among others, have already ventured into foreign markets in the region and undertaken the task of establishing their regional presence either via local branches or subsidiaries. Banks like ANZ, Maybank and CIMB are expanding their regional presence to other Asian countries to secure expansive growth, beyond their own matured markets. Chinese banks are also seeing the need to follow their customers and the Chinese diaspora across the Asia Pacific region.
While Asia’s most dynamic economies have stimulated rapid growth in the banking sector, a 2016 report from McKinsey & Company has confirmed that the Asia Pacific region could be facing tough times ahead and that the golden age of the region’s banking industry could be coming to a halt. An increasing volume of nonperforming loans, slow global growth and a growing number of new competitors from the fintech sector are three of the main factors that are resulting in what McKinsey is calling a “powerful storm.” The fintech sector has also played a role in disrupting the traditional banking sector, by targeting multiple links of the banking value chain.
While some banks have already adapted themselves to the fintech movement, collaboration between the fintech sector and the banking sector could be challenging according to Ernst and Young. Nonperforming loans are hitting major economies like China and India quite hard. Indian banks, for example, are facing an unprecedented jump in non-performing loans of about 30%. The McKinsey reports estimate that banks in Asia will need to raise between $400 billion and $600 billion in additional capital by 2020 to cover losses from nonperforming loans. The slowdown in growth can also be demonstrated by a dip in economic profits by banks. Of the 328 banks surveyed by McKinsey, 28% posted a profit from 2011 to 2014, as opposed to 39% between 2003 and 2006.
Overall, while Asia should brace itself for some changes, the banks that can become “national champions” and the larger banks that are already expanding overseas could survive and see market opportunities grow in the coming years, while smaller banks may be forced out of the game or forced to merge in order to weather the storm and grow.
Words by Vivaddhana Khaou