Taking the Reins: Alternative Sources of Corporate Funding in Asia

Asia is facing a conundrum: its appetite for funding is increasing just as bank lending from historically liquid continents is shrinking. Strong domestic demand is augmenting company expansion, helping to prop up and stimulate the region’s continued industrial growth and economic development, which, although slowing, remains enviable. Indeed, analysis shows that the east Asia and Pacific region’s share of the global economy has tripled in the past two decades.

Meanwhile, the continued fallout from the global financial crisis and the ensuing eurozone debt problems are having knock-on effects on the availability of funding in the region. Many European and US banks are leading an industry-wide retreat to their home markets, scaling-back billions of dollars of funding to companies in Asia. Indeed, according to data from the Bank for International Settlements (BIS), lending by continental European banks to Asia-Pacific had dropped from around US$455bn in June 2008 to US$356bn by the end of 2011 – a fall of 22%, despite on-going demand.

However, the withdrawal of global banks from the emerging markets is not all bad news for corporates in Asia, as both regional banks and alternative providers have established a position to fill this space.

A Western Retreat

Even without the advent of tighter bank regulation, bank constraints caused by the euro sovereign debt crisis are being felt in Asia. Yet the imminent implementation of Basel III, which demands better-capitalised banks globally and is prompting them to slim their balance sheets, has accentuated the squeeze. Indeed, given the stringent treatment of letters of credit (L/Cs) and other trade instruments under Basel III, the availability of trade finance globally is becoming diluted.

This trend is being further driven by political pressure. The global financial crisis highlighted the link between banks and the state, particularly given the use of taxpayers’ money to bail out many of the world’s largest banks. This has led to governments pressurising their banks to prioritise domestic companies when it comes to lending decisions, further reinforcing the retreat from emerging-market lending. 

Regional banks are taking advantage of this shift. They have a historical domestic presence and an unrivalled grasp of local clients’ needs. Certainly, the withdrawal of European and US banks from Asia is prompting the region’s corporates to look towards local banks for US dollar funding. Banks in countries such as Singapore, Hong Kong and Japan are benefiting from this retreat. Recently, for instance, Singapore-based DBS Bank posted a record Q1 profit as loans to Chinese borrowers soared by 81% and lending to Indian borrowers increased by 42%. 

In addition, several local banks that come from smaller markets – such as Malaysia’s CIMB Group and Maybank and Singapore’s DBS, OCBC and United Overseas Bank (UOB) – have started expanding across the continent. They are also benefiting from some international banks selling their regional loan books to both mitigate risk and improve liquidity. CIMB Group, for instance, is buying some of the Asian units of the Royal Bank of Scotland (RBS), and DBS is in the process of purchasing Bank Danoman in Indonesia to strengthen its already substantial presence in that country.     

Alternative Sophistication

However, while it is reassuring to see regional banks stepping into this funding gap, they can only do so much. Also, their focus is often on providing off-the-shelf, generic solutions to their existing client base. Many of the smaller regional banks may lack adequate IT infrastructure and resources that would allow them to create sophisticated solutions with a fast approval turnaround.

Certainly, no two clients are the same, and they all have different requirements, meaning that generic solutions typically provided by banks are sometimes incapable of meeting the precise needs of a company.

However, there are sophisticated solutions available. Many corporates have started to look beyond traditional sources of funding and have found that alternative solutions providers have both the resources and expertise to structure sophisticated corporate and trade based solutions. Additionally, some alternative providers operate on a global scale and are capable of providing the global reach now sought by Asia’s increasingly ambitious corporates.

Alternative providers often do not have the balance sheet size of the global banks although this need not be a constraint, particularly in the current environment. Their smaller size makes them nimble, allowing them to operate with various parties along the supply chain and form deeper relationships with their clients. This, in turn, enables them to offer tailored solutions that fit the company’s exact requirements.

A Positive Shift

Certainly, the retrenchment of European and US banks to their home markets may require many Asian corporates to reassess their business practices and sources of funding. But this need not be for the worse. Much pre-crisis cross-border lending could now be judged by some as being too risky for the current book, and a number of financial institutions are finding it hard to be enthusiastic about some of the new decisions, strategies and approvals found in the present market.

At the same time, the steady rise of regional banks and alternative providers indicates that corporates are no longer solely reliant on global banks. Instead, Asian corporates are presented with a wider variety of funding options, and a new approach to corporate finance. In addition, the collaboration between financial institutions suggests that the emphasis in the corporate finance space has shifted to placing importance on the quality of solution, rather than on the financial institution that provides it.

As a result, Asian corporates now operate in an environment that holds their needs at its core. Therefore, despite European and US banks reducing funding to corporates in Asia, this may actually prove to be good news in terms of the speed and flexibility of the financing on offer.  

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