Asian Banking: China and Asian Banks Fill Void Left by European banks

Nature abhors a vacuum.

In Asia, the Bank of International Settlements recently remarked that China and Asian banks filled the void left by retrenching European banks

The Central Banks News notes…

A pullback by Swiss and euro area banks from Asia-Pacific has been countered by an expansion of local banks, including Chinese and offshore centers, resulting in a continuous rise in international credit to the booming region, the Bank of International Settlements (BIS) said.

Fears of a lack of funding in Asia-Pacific due to the retrenchment of European banks after the global financial crises and the euro area’s debt crises thus never materialized….

The statistics…

Foreign lending to Asia Pacific rocketed by 41 percent, or $613 billion to total outstanding claims of $2.1 trillion by mid-June 2012 from mid-2008, just before the collapse of Lehman Brothers, BIS said in its December quarterly review.

This expansion is in stark contrast to a drop in international lending to emerging Europe of 14 percent, or $230 billion, and a more modest increase in lending to Latin America of 24 percent, or $254 billion, in the same period.

In Asia Pacific, the total claims of euro area banks shrank by an estimated 30 percent, or around $120 billion, between mid-2008 and mid-2012 and their share of foreign lending fell from 27 percent  to 13 percent by mid-2012, BIS said.

More stats…

Drawing on other sources, such as Bankscope, BIS found that the unconsolidated total assets of Chinese banks’ foreign offices in Asia (excluding Singapore) grew by $135 billion, or 74 percent, from 2007 to 2011.

And based on data from Dealogic, BIS learned that Asian banks, including those from Hong Kong and Singapore, increased their syndicated loans to emerging Asia Pacific by 80 percent, or $223 billion, from 2007 to 2001. Asian banks' share of total signings rose to 64 percent from 53 percent.

Insights to draw from the above.

Unlike mainstream thinking, Chinese and Asian banks’ picking up of where European banks vacated signifies as spontaneous market action at work. This has essentially dissipated “fears” over the lack of funding. Again, nature abhors a vacuum.

The withdrawal of European banks in Asia may perhaps be read as “home bias”. Due to the ongoing crisis, European banks may have taken a defensive posture or may have reconfigured their corporate strategies to optimize on their competitive advantages on the domestic arena or has been made to raise capital by reducing expenses and by taking lesser external risks.

Yet such void presented an economic opportunity for Chinese and Asian banks. The report does not indicate that the actions of Asian banks have been under the directives of respective governments.

Also, the increasing role of China’s banks in providing financial intermediation to Asia has been consistent with her government’s push to promote the yuan as an international reserve currency. Deepening trade and financial relations and exposures will help promote regional currency based transactions.

On the other hand, this again reveals of the paradox between China’s militant regional (territorial claims) policy and economic and financial relations with the region—another instance of Dr Jekyll and Mr. Hyde relationship.

Importantly, this report shows of the deepening trend of financial integration in the region. The implication is that regional markets will be more correlated and more intertwined which should optimize the region’s economies of scales and hasten the financial and economic development

Alternatively, greater interconnectivity and interdependence infers to greater contagion risks.

Heyday for Asian Bankers as the Region’s Millionaires Swell

Asian bankers are having a field day as the number of millionaires in the region swell

From Bloomberg (bold emphasis mine)

Asia-Pacific millionaires outnumbered those in Europe for the first time in 2010, according to a survey by Capgemini SA and Bank of America Corp. More millionaires means more spending and more demand for private wealth managers from banks such as BSI SA, JPMorgan Chase & Co. (JPM), UBS AG (UBSN) and HSBC Holdings Plc. (HSBA)Recruiters say too many banks are hunting too few experienced staff in the region, pushing up salaries and crimping profits.

“Good bankers have at least one offer on the table, if not two,” said Collardi, 37. “Today, if you want to be successful in hiring, you need to be forceful.”

Global demand for client relationship managers is expected to rise 13 percent over 2011 and 2012, while growth in the Asia- Pacific region will be double that, PricewaterhouseCoopers LLP said in an e-mail. That’s pushed top salaries in Singapore to almost twice the level in Switzerland, the world’s biggest offshore wealth manager, according to London-based recruitment firm EMA Partners International.

Senior private bankers in Singapore earn between $160,000 and $410,000 a year, while the comparative range in Switzerland is $152,000 to $210,000, EMA estimates.

“People are simply paying too much and that cannot be justified from an economic point of view,” said Thomas R. Meier, Zurich-based Julius Baer’s CEO in Asia. If a bank pays 30 percent more than a person’s salary at his previous employer, and the new recruit ends up adding just 5 percent more to revenue, the bank will feel the pinch, the 48-year-old said.

The premium to attract somebody new in Asia is 20 percent to 30 percent of their base compensation, said Matthew Streeton, partner at The Consulting Partnership, a Singapore-based recruitment firm. Usually, private bankers get a guaranteed bonus in their first year on top of the base salary and thereafter earn an annual bonus based on performance, he said…

Asia’s 3.3 million high-net-worth individuals had $10.8 trillion in assets, compared with the $10.2 trillion accumulated by their 3.1 million counterparts in Europe, according to the report published in June by Capgemini and Bank of America’s Merrill Lynch Global Wealth Management.

Recruiters say private bankers need an apprenticeship because wealthy clients expect to be advised by someone with experience who can understand their goals.

Remarkably Asian bankers are even paid more than their bosses or multinational employers.

Yet all these signify as mounting evidence of an ongoing paradigm shift from a myriad of agglomerated forces, such as globalization, wealth convergence, the internet, technology driven innovation and differences in the degree of the welfare state, economic freedom and applied administrative, fiscal and monetary policies.

How the Information Age Affects Asian Banking

The McKinsey Quarterly writes, (bold emphasis mine)

Banks doing business in Asia face rapidly changing consumer behavior, with big consequences for both local and multinational institutions. Consumers increasingly prefer local banks over multinationals, are less loyal to existing banking relationships, are much more cautious about borrowing, and are more open to Internet and mobile banking. These shifts in the nature of banking relationships, product and service needs, and channels are reflected in a 2011 McKinsey survey of 20,000 consumers in 13 Asian markets...

Asian consumers are being weaned from brick-and-mortar branches: for the first time since McKinsey began conducting the survey, 13 years ago, bank branch usage has dropped, plunging by 27 percent on average across Asia between 2007 and 2011.

This drop has been matched by an uptick in Internet and mobile banking, a trend particularly pronounced in developed Asian markets, such as Hong Kong, South Korea, and Taiwan. There, consumers now use new channels, such as the Internet and mobile devices, for their banking more often than traditional ones, such as telephones and branches: the use of new channels rose to 3.2 times a month in 2011, from 2.35 in 2007, while that of traditional channels dropped to 2.57 times a month, from 3.5. In China, about 18 percent of all people who patronize banks now use Internet banking, compared with only 3 percent in 2007.

That shift arises largely from the increased penetration of remote channels. A growing number of customers across income segments are getting accustomed to and comfortable with them for both sales and service. The multichannel environment has thus become a reality: our research highlights the fact that, on average, Asian consumers are using as many as 5 channels for research and 1.8 channels for maintenance.

Some comments

The rapid shift in the preferences of Asian consumers reveals of the increasing personalization or specialization of markets. This extrapolates to an intensifying trend of de-massification of financial services towards niche markets or a transition from products and services designed for the masses towards decentralization or localization. Providers who cannot cope will this seismic development will perish. This is the forces of creative destruction at work.

And this paradigm shift is being enabled and facilitated by the internet which again exhibits how the web revolution has immensely been affecting people’s lifestyle.

In addition, this is another proof that people are getting to be more sophisticated with an extended reach or access to information.

This also means more value added services for the increasingly discriminate consumers.

The forces of centralization seems to be paving way for reign of the forces of decentralization.

The great F. A. Hayek’s knowledge revolution is underway.

P.S. My computer hasn't normalized yet so my post will remain limited

McKinsey's Outlook On Global Banks: Asian And Emerging Markets To Outperform

Here is an interesting outlook on global banks from the McKinsey Quarterly team.

From McKinsey (all bold highlights mine)

One key finding is that the capital shortage triggered by the crisis and recently addressed through several rounds of massive capital raising will endure and get worse. Our scenarios model both the demand for capital (the amount needed to finance projected asset growth and meet regulatory requirements) and the supply (earnings, less the amount likely to be paid out as dividends). In every case, demand exceeds supply. Capital needs will range from small (investment banks, which have already raised significant amounts and are holding substantial buffers, anticipating regulatory change) to vast (emerging-market giants, which will need to finance their growth). In between are the universal banks, which will have modestly challenging capital needs in the midpoint scenario and a very challenging problem in the extreme one.

A second factor weighing on returns will be the high and rising cost of long-term funding.

Several factors are at work here, beginning with a shift in demand. As part of balance sheet restructuring, many banks are cutting back on short-term, unsecured funding (such as commercial paper) and seeking instead to issue longer-dated debt. Demand will also rise as the longer-dated funding currently on banks’ books expires and is renewed. On the supply side, government asset-purchase programs—quantitative easing—are already being retired. Finally, the market will see greater competition for funds, not least from governments that must finance their deficits. All this implies that prices for long-term funding will inexorably rise, shaving as much as several percentage points off ROE, depending on the scenario.

Given these drags on performance, returns will be weak by the standards of the past decade. Worse, they will be highly uncertain—our third finding. In the midpoint case, industry revenues would grow by 5 percent annually through 2014; in the extreme case, the industry would eke out much less attractive annual growth of 1 percent. Under either scenario, the emerging-markets giants come out on top. The story for the other groups of banks is mixed. In the midpoint case, the European and US universals and the investment banks would generate middling ROEs well below their pre-crisis levels. The Japaneseuniversals’ returns would suffer from a poor macroeconomic environment. In the extreme scenario, all but the emerging-market giants will find it extraordinarily difficult to return even their cost of equity. In other words, these banks will face a challenging period reminiscent of the early 1980s.

Our estimates may be cautious. We did not include, for example, the effects of a liability levy such as the one the Obama administration recently proposed. Instead we modeled this proposal separately and found that if such a tax were adopted globally and imposed on the banks in our model, the effect would be to reduce their ROEs by 0.7 to 1.2 percentage points.

A fourth finding confirms the economic evidence of the past several months: the crisis affected emerging markets, especially Asia, less severely than Western ones. Parts of Asia were the last areas to enter into recession and the first to emerge from it—indeed, China’s economy never stopped growing. Asian banks had less trouble with toxic assets and excess leverage than their counterparts elsewhere did. The crisis served to demonstrate that the balance of power shifts abruptly and powerfully rather than gradually; many Asian banks have vaulted to the top of league tables in one go.

Our research confirms that for the next several years, Asia’s economic might will continue to grow, as will the influence and power of its banks. Indeed, in these markets, banking is likely to grow much faster even than the broader economy, because so much of the population is “unbanked.” In both scenarios, all the emerging markets will grow substantially faster than the more mature markets of Europe and North America.

Our last finding stands apart from the rest—and offers a ray of light to many banks. The archetypes constitute a form of destiny: emerging-market giants, riding the back of faster GDP growth, will outperform developed-market universals. In many ways, banking is a leveraged bet on the underlying economy. Yet despite that destiny, banks can do a lot about their performance. The model suggests that within archetypes, differences in performance will be even greater in the future than they are today. The crisis has considerably ratcheted up economic volatility, putting an end to the period some have dubbed “The Great Moderation.” This volatility will amplify the existing differences in performance. Even banks that have been dealt a challenging hand can do much to outperform their peers and reward stakeholders.

Bottom line: global banking is likely to be faced with higher interest rates and an outperformance of Asia and Emerging Markets relative to their OECD peers.