The Banking Industry in ASEAN on the Verge of Higher Growth
ASEAN’s combined GDP is USD$ 2 trillion, which is larger than India’s and Russia’s. At 600 million people, the total population of ASEAN is second only to China and India in terms of size and breadth. Which industry can gain the most out of it? All signs point to the banking industry.
McKinsey Institute estimates that nearly 59% of the population in East and Southern Asia do not use formal or semi-formal financial services.
These large under-served populations represent vast opportunities for financial institutions and investors that are able to offer high-quality, affordable financial products and services. In other words; the banking industry in ASEAN can take off.
In countries such as India and China, many families set aside as much as a third of their disposable income for retirement, health expenses and other obligations. This contrasts with the paltry 5% savings rate in the United States.
Tapping into these immense reserves in ASEAN has only begun. And, there are other factors that can also strengthen single-window ASEAN banking.
Telephony penetration (i.e. use of cell-phones in ASEAN) is increasingly going up due to its young demography; with Indonesia reaching 90%, a figure higher than its internet penetration. Nearly 85% of the population in ASEAN are under the age of 35. Extensive phone banking is possible, cutting down the need for repeated travels to the banks due to the absence of physical connectivity in ASEAN.
Debt to GDP ratios are still low throughout ASEAN, with Indonesia having a maximum of 20%. Although the tax base is narrow, with only 1.5 million people paying taxes to the Indonesian government in a country of more than 240 million people, the debt to GDP ratio is not worrisome; especially when Indonesia is the world’s largest archipelagic state. It has the biggest maritime borders, which allows Indonesia to tap into maritime and gas resources in the exclusive economic zone.
The ASEAN economy has not yet been severely exposed to the credit default crisis in the US, the fiscal crisis in the European Union or severe inflation caused by the housing bubble. To a large degree, ASEAN is partly decoupled from these global economic problems because ASEAN is able to lean on the economic growth of China and India.
China’s and India’s economies are fuelled by a private consumption of 34% to 57% respectively, according to the International Monetary Fund (IMF). Thus, although more than 50% of ASEAN’s trade is with the world, it is still unaffected by the global economic problems.
ASEAN has the figures to prove its insulation from the crisis. In 2010, ASEAN attracted foreign direct investment totalling US$ 75.8 billion, which was double the 2009 level. The figure also surpassed the pre global crisis peak in 2007 of US$ 75.7 billion.
Indeed, FDI flows in ASEAN grew at an annual average rate of 19 per cent over the last ten years, especially after ASEAN took the initiative to set its house in order after the Asian financial crisis of 1997-1998.
Surely, ASEAN economies are expected to grow faster than the rest of Asia over the next 5 years i.e. Malaysia 5%; Vietnam 6%; Indonesia 7%. In comparison, Australia is expected to grow by only 3% and Japan by only 2%. Only India and China can challenge the growth rate of the ASEAN economies.
However, unlike China, ASEAN economies are not experiencing an asset-, housing-, or a stock-bubble, which make them relatively safer to invest, especially when international investors are looking for more financial insulation, not just value appreciation.
ASEAN already accounted for 9% of Asian wholesale banking revenues, and 13% of capital market and investment banking (CMIB) revenues, according to studies done at the McKinsey Institute.
To the degree global investment banks are weakened by their problems in European Union (EU) and the US, they will look to ASEAN as an attractive location to strengthen their financial positions. Once again, the savings behaviour of the ASEAN consumers would be brought into play, as these companies make a beeline to strengthen their operations here. More companies imply more banking services for upstream and downstream commercial activities.
In 2009, ASEAN banks made a profit of US$ 7.5 billion, of which 29% came from CMIB alone; thus suggesting the room and space for more growth.
According to Dr John Mobius of the Templeton Fund, the emerging economies – including ASEAN – will remain a key driver in global economic growth. The equity market in ASEAN is growing at 21.9 % over the next 5 years. This is consistent with the assessment of Templeton Fund on the increased number of initial public offerings (IPOs)
Debt capital market is expected to grow at 18% over the next 5 years; while M & A in ASEAN is expected to grow at 17.9 %, according to Dealogic. Asia is also experiencing a surge in investment banking. Over the next 5 years, the ASEAN region is expected to spend more than US$ 350 billion on infrastructure, spurring new forms of syndicated loans and other structured fixed-income products.
The research at The McKinsey Institute notes that it is Asian investors that would be participating in these products, not those from the West. Vietnam would need to spend US$ 80 billion in the next 10 years, with most financing coming from private companies.
In addition, government support for the capital markets is changing the wholesale and retail banking sector in emerging Asia. Many are trying to create financial new centres. Malaysia is trying to position itself as the global hub for Islamic finance in Kuala Lumpur. Singapore is attracting hedge funds and private banking players to the city state too.
Sales and Trading in ASEAN banking will grow at 7.9% according to Global Insight and Market Monitor. Indeed, all capital markets and investment in ASEAN will grow at 11%. Indonesia and Vietnam would deregulate tens or hundreds of state owned enterprises (SOEs) over the next 10 years. To the extent savvy investors can mop them up, assets worth USD$ 7.5 trillion will come from ASEAN’s high net worth individuals.
Global banks are increasingly investing in equity capital and debt capital market. Their presence in ASEAN will require them to find suitable partners to achieve the ultimate synergy between politics and economics. To be sure, Singapore’s share of banking revenues and profits in ASEAN constitutes 68%, but it is projected to drop down to 51% over the next five years, creating more opening for other banks to participate;
Global banks still dominate equity capital, and debt capital market in ASEAN for now. But with the increased sophistication of the respective member states of ASEAN, they cannot be dominant without first bringing on board a panel of local bankers or investors. All in all, the banking industry is converging to allow global and local banks to gain from this sector in ASEAN.