Southeast Asia’s banks are growing - but there’s danger ahead

Amid the cut-and-thrust of international banking, it’s hard to set a truly global benchmark for the world’s biggest banks. With the sheer diversity of local markets, it’s not always possible to compare apples with apples.

By one’s region’s standards - say, the well-established Western European banking industry - the movements in a developing territory like Southeast Asia might seem small by comparison. But an educated observer would recognize the dynamism and potential present within Southeast Asia’s banking scene at the moment.

The publication that probably comes closest to a truly global barometer of banking success is The Banker, the Financial Times’ market-leading publication focusing on, as the name suggests, the financial services industry. One-fifth of the magazine’s registered subscribers are CEOs, CFOs, and CIOs at top banks and businesses.

The Banker’s unique access to the top echelons of the banking world grants it a unique vantage point with which to offer a structural assessment of the industry. Each year, The Banker’s coverage culminates in its list of the world’s top 1000 banks.

The Banker’s analysis includes a variety of criteria in its assessment. It’s not focused solely on assets under management, but also other measures like capital growth, return on equity, asset growth, and cost-to-income ratio (to name a few). Thereby, it creates a comprehensive portrait of global banking’s top performers.

Alongside the overarching top 1000, there are also region-specific rankings. Of particular interest is the top 100 from Southeast Asia’s burgeoning banking sector. The Banker’s assessment of the region throws up a few interesting findings, so let’s take a closer look.

The Philippines on the rise

The Philippines doesn’t have the biggest presence in The Banker’s top 100 ASEAN bank ranking (offering only 12 entries), but there are plenty of reasons to be enthused about the country’s performance.

According to the report, Filipino banks put together a combined increase of 19.5% in Tier 1 capital to $22.8bn in 2017. These numbers are modest, compared to Europe, China, and the US, but it’s the biggest increase of any of the countries in the ranking.

BDO Unibank is the Philippines’ top-ranking bank, climbing one place to 17th, with a Tier 1 capital increase of 37.3% to $5.3bn. Again, these amounts are modest - but there’s enough dynamism to indicate that the country’s banks are on the march.

Vietnam punching above its weight

In every single category thrown up by The Banker’s analysis of ASEAN banks, at least one Vietnamese bank sits in the top ten. In terms of pre-tax profit growth, Vietnamese banks dominate the top ten with five entries.

It wasn’t always this rosy for the country’s banks. In 2012, the country experienced a banking crisis after years of mismanagement and corruption. The crisis was swiftly dealt with, however, and a mix of good governance by the State, a lowering of NPLs, and a robust, growing economy have coalesced to resuscitate Vietnam’s once-ailing financial industry.

As we pointed out in our own analysis of Vietnam, the Vietnamese Central Bank has wholly restructured the sector. Banks have been set stringent targets and are expected to keep their bad debt ratios below 3%. There’s also a looming rollout of Basel II capital adequacy requirements.

Things are on the up - but with one caveat. According to statistics, Vietnam’s NPL ratio is down from a high of 4.67% in 2012 to 2.5% at present, but there is a lingering worry over the accuracy of this figure. Vietnam hasn’t fully implemented IFRS 9 - the international accounting standard that determines how impaired loans are recognized - and once that happens, NPLs could quickly climb.

Bigger but not necessarily better in Indonesia

At a glance, Indonesia’s banks are in rude health serving up 26 banks in the ASEAN top 100 - the most of any country. In other words, there are a lot of big banks in Indonesia, and they’re doing well.

But there is such a thing as doing too well when it comes to banking. As Bloomberg’s Andy Mukherjee observed, “There’s too little debt in the banking system and too much equity”. According to the Asian Development Bank, Indonesia has a US$57 billion credit gap.

But change is afoot: Indonesia is a young country with a median age of 28 years and smartphone use has climbed 15% since 2014, to 47.6% in 2019. A slew of fintech is targeting this young, tech-savvy demographic, bypassing Indonesia’s big incumbents.

Peer-to-peer lending is a particular growth area. Indonesia has 73 registered P2P lenders, with another 100 in the pipeline. At present, the trend is constrained by an identification bottleneck. Indonesia has an official digital ID database and there is a plan to offer access to businesses for KYC purposes.

Once P2P lenders can gain access, digital identification will become easy and safe, and Indonesia’s big banks might find themselves dealing with a new breed of competitor.

Success in Singapore

The city-state of Singapore is a rare example of a flawless transition from colonial rule to independence. The ex-British colony has blossomed into a prosperous, stable economy and this success has trickled down to the country’s banks.

Despite the country’s small size, it places five institutions in the ASEAN top 100 and leads the way, by some margin, in terms of total assets. But underneath this apparent calm, there are rumblings.

Customer service has been a struggle. Two-fifths of Singaporean customers say they’ve terminated their relationship with their bank as a result of poor customer experience. At the same time, Singaporean consumers have demonstrated a substantial thirst for fintech innovation: 64% of bank customers use at least one mobile wallet or payment app.

Singapore’s bustling ecosystem of fintech startups is already snapping up market share - and they have official support. In Singapore’s carefully controlled economy - run like “a corporation”, as Fortune once described it - state backing is critical.

MAS, the monetary authority of Singapore, is “encouraging financial institutions to adopt open APIs,” according to EY’s ASEAN Fintech Census. Open APIs will allow startups to plug into a bank’s systems, fostering innovation and interoperability.

The race is on in Singapore, and the question is whether Singapore’s startups will win clients before the incumbent banks have time to innovate on a massive scale.

Doldrums in Brunei and Cambodia

Two nations that saw a dip in their position in the ASEAN top 100 were Brunei and Cambodia. Bank Islam Brunei Darussalam (BIBD), Brunei’s only representative on the list, saw its Tier 1 capital fall 8.2% to $783m in 2017, and its overall placing in The Banker’s Top 100 ranking drop from 61st to 73rd.

Cambodia’s two entrants in the top 100 saw their combined profits slump by 14.5% to $206m in 2017. Acleda Bank and Canadia Bank did, however, see their combined Tier 1 capital rise by 4.7% to $1.1bn.

BIBD is making all the right noises, however. For instance, the bank is implementing an aggressive “branchless banking initiative”, offering innovations like point-of-sale system integration, making cashless payments easier for customers.

There are winds of change in Cambodia, too. The National Bank of Cambodia has signed a cross-border fintech cooperation pact with Singapore’s Monetary Authority. Cambodia’s nascent fintech scene will “reap the benefits of the new innovation in financial technology” according to the National Bank of Singapore’s deputy governor, Neav Chanthana.

For Cambodia’s incumbent banks, the pact is a warning shot. The World Economic Forum has previously criticized the country’s sluggish domestic payment and settlement processes. As fintech competition ramps up, this situation will have to change.

A lot of promise - but a long way to go

The Banker’s ASEAN top 100 illustrates how far Southeast Asia’s banks have come, but there’s much work to do. The figures are impressive and growth has been tremendous.

But with development come changing expectations and increasing competition. Younger, more affluent consumers want convenience, and a new array of fintech is ready to pounce if banks don’t step up to the plate.

An investment in digital innovation is a must. Payments, lending, and debt collections - these are all examples of labor-intensive processes ripe for automation. The opportunity is there for Southeast Asian banks to keep growing - but only if they keep innovating.