24 October 2016
In Singapore, foreign investors can own only 5 percent of a local bank. Photo: Bloomberg
In Singapore, foreign investors can own only 5 percent of a local bank. Photo: Bloomberg

Foreign banks see pros and cons in ASEAN countries

Banks from the United States, Europe, Japan and China are all grappling with limited space in their local markets given the slow recovery in developed economies and the slowdown in China’s economic growth.

These banks are keen to explore new markets to drive business growth.

The Association of Southeast Asian Nations (ASEAN) region has lured many of these banks thanks to Beijing’s ambitious “one belt, one road” strategy.

Among ASEAN’s members, the ASEAN-5, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand, are expected to generate growth in gross domestic product in the range of 5.2-5.5 percent between 2015 and 2020, International Monetary Fund figures show.

That growth rate is far above the 1.9-2.4 percent projected for developed markets.

Continued urbanization has stimulated consumption and demand for infrastructure investment in the region, which would benefit project financing and individual consumption financing for banks.

Also, further integration among ASEAN countries and more free trade agreements (FTA) agreed with countries outside the region will drive banks’ trade finance, cash management and foreign exchange businesses.

In addition, rapidly increasing personal incomes will underpin the wealth management business for banks.

The ASEAN markets have yet to be saturated, which leaves vast potential for foreign banks.

For example, the ratios of banking accounts held by adults in Singapore, Thailand and Malaysia are above the world average level, and only Singapore has a ratio equivalent to that of affluent countries.

Despite the rosy macro outlook, foreign banks still face various forms of restrictive oversight in ASEAN countries.

These countries are quite cautious toward foreign investment in local banks.

The Philippines has removed its cap for foreign investment in local banks.

By contrast, Thailand has a cap of 49 percent; Indonesia, 40 percent; Malaysia, 20 percent; and Singapore, 5 percent.

The stakes allowed to be controlled by foreign investors are below 50 percent.

Foreign banks may encounter considerable barriers if they want to ramp up their presence quickly through mergers and acquisitions.

Also, the ASEAN countries have implemented various limitations on the development of local business by foreign banks.

For example, Singapore has pegged the minimum asset maintenance ratio (AMR) at 0.35 percent for foreign banks with a full license.

The Philippines also requires foreign banks to hold no more than 30 percent of the country’s total banking assets.

Such regulations have tipped the playing field in favor of local banks in these countries.

Many of the ASEAN countries rely on exports to outside markets.

Only one quarter of ASEAN’s trade value is generated from countries in the region.

By contrast, trade with the European Union accounts for about half.

ASEAN countries depend heavily on external markets in terms of their economies and capital flows.

As a result, foreign banks could face high risks in operations, credit and liquidity when venturing into ASEAN markets.

Improper risk management could pose a threat for the whole banking system.

Foreign banks should pay attention to risk management after entering these markets.

This article appeared in the Hong Kong Economic Journal on Sept. 30.

Translation by Julie Zhu

[Chinese version中文版]

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Economist at Bank of China (Hong Kong)

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