A second constraint is that most domestic markets are dominated by a handful of companies, often state-owned or state controlled. In India, for example, 7 out of the top 10 largest banks are state-owned, in China the ‘big 4’ banks too are controlled by the state. The problem is magnified in some Asian countries by geography. Indonesia, for example is a vast country of over 240 million people, spread across an archipelago of over 18,000 islands. Factors such as this impose significant logistical barriers to entry to any Western bank hoping to develop a significant retail branch infrastructure, for example.
A third complex of issues reflects negative sentiment driven from the global financial crisis. Foreign banks reputations and brands have been tarnished by virtue of their historical practices and need for financial support. Of the top 100 banks in Asia, 85 are still local Asian banks and only 15 are Western banks. These banks all have operations in at least ten Asian countries, supported by a high asset and capital base. It is not uncommon to hear local management of Western banks, articulating that the Western head office does not understand local market dynamics or have a compelling, achievable strategy.
There are obvious counter-examples of successful Western banks: HSBC, Citibank and Standard Chartered Bank, for instance. However, their success and size principally reflects the fact that they have all been active in the region for a very long time. There is a key lesson to draw from this: developing a significant presence in Asian retail and corporate banking markets is a very long-term process, depending on steady organic growth rather than rapid acquisition of market share and supported by cornerstone acquisitions of key capabilities or platforms as a basis for scaling up.
One final point is that some sub-sectors are becoming overcrowded with so many Western banks wanting to obtain a foothold. However, there is still an expectation gap between buyers and sellers, with Western buyers in particular still finding it difficult to justify paying the large multiples that sellers expect (three times book value and upwards in some cases). There is intense competition for these targets, and Western banks perhaps don’t have the flexibility to compete with some other banks.
But… major opportunities
The Asian region contains the most dynamic and fastest-growing economies in the world. The Asian banking sector was more profitable than its western counterpart before the economic crisis, and has recovered more rapidly since. In terms of profitability, the average ROE of the Asian region for the period 2007–2012 is 14.6 percent, placing it second globally after Latin America (ROE of 20.0 percent), and far ahead of the US and European banking sectors (ROE of 5.5 percent and 6.8 percent respectively.)
Looking at the individual markets, Indonesia promises to be the most attractive in the region, with an average ROE of 24.4 percent for the period 2007–2012, growing young population and increasingly wealthy middle class with a strong appetite for financial products (however tightening regulations over foreign ownership are creating uncertainty as highlighted above). The other most successful economies are Hong Kong, China and Malaysia, offering returns on equity of 18.0 percent, 17.3 percent and 16.9 percent, respectively.
The other side of the logistical challenges is that the size of Asian populations represents a massive potential market. Two factors magnify the attraction. Many markets are under-banked: in many cases, only a minority have bank accounts at all. Second, those who do have bank accounts are largely only using plain-vanilla products and services (i.e. a deposit account and a mortgage or auto loan). However, the Asian middle classes are growing very rapidly. The potential to provide higher added-value products and services, to a higher proportion of growing populations, is an extremely attractive prospect. One example of this is mobile payment services, where Asian banks have been quick to seize the potential and penetration rates are often ahead of their European and US counterparts.
Wealth management, private banking and bancassurance are among the major growth prospects. The number of high–net-worth individuals in Asia has increased by 27 percent in the last five years, and looks set to increase at least as fast in future. It is also a business segment with low capital requirements and high margin potential. In particular, the Swiss banks have built up a strong presence in Asia in the past decades – UBS Wealth Management was named Overall Best Private Bank in Asia in 2010.1
1Asiamoney’s private banking poll, 2010