Even as the current economic climate creates uncertainties, there are increasing opportunities for Asian banks. Along with highlighting how bankers’ perceptions of risk have shifted over the past two years, the Pwc 2012 Banking Banana Skins Survey also showed just where banks in Asia may have greater potential to grow.
Whereas survey participants in 2008 said the top risk was liquidity and the top risk in 2010 was political interference, as regulators continued to deal with the aftermath of the financial crisis, the top risk in 2012 is macro-economic risk. Emphasising the scope of the concerns, Pwc partner Chris Matten said “this is far and away the most worrying time we’ve seen”, as risk has continued to rise and there are clear signs of unprecedented anxiety in the market.
Rounding out the top three in 2012 are credit risk and liquidity risk, according to the 710 banking, regulatory and analyst professionals from 58 countries who participated in the survey.
Pwc said the main cause of anxiety – not unexpectedly – is the eurozone crisis. The eurozone problem affects Asia too, Matten said, because credit risk in Asia-Pacific is tied to macro-economic risk and if there’s a downturn, companies will suffer and credit risk will increase.
The impact of these risks varies significantly depending on the region. In Europe, Matten said, banks may have difficulties meeting Basel III ratios issues due to an insufficiency of retail deposits. A significant issue is that regulations in Europe require self-funding onshore and the pipeline is blocked. Even though there’s a flood of deposits in Asia, including deposits at offices of some of the European banks in the region, the European banks can’t use them to meet liquidity requirements and the result is that there’s a drought at the other end in Europe.
In Asia, Matten said, banks face far different problems. First, even though banks have plenty of retail deposits, there still may not be enough liquid assets to meet the technical requirements of Basel III because there is not a big enough government bond market. A second issue is US dollar liquidity. While the large volumes of retail deposits are most often in local currencies, non-domestic lending in Asia is most often denominated in US dollars and banks around the world are hoarding dollars. As a result, there may not be enough US dollar sellers to get the funding banks need for trade financing. There are country-specific risks too, and Matten said China is one example because even though banks there are okay now, they’re growing their balance sheets 20-30% per annum and will run out of capital eventually.
While much of the focus is on macro-economic, liquidity and credit risk, Matten said banks are still worried about political interference. Compared to 2010, however, their concern has shifted. While banks “accept the need for regulation”, the problem now is the quantity and conflicting nature of the regulations. Along with local regulations, banks in various locations may have to comply with EU directives, the Vickers Commission, Dodd-Frank, Foreign Account Tax Compliance Act (FATCA) or other requirements. As one example, whereas international regulations say that loans must be booked in the country where the transaction is completed, China and Korea insist that loans must be booked onshore. Banks then need to manage both the huge quantity of regulations, as well as the lack of consistency.
While there are many risks, the current environment also creates opportunities specifically for Asian banks. One advantage for Asian wholesale banks in particular, Matten said, is that they can compete better for corporate relationships and for deals against European banks since European banks can’t fight as strongly as before.
Another opportunity is for Asian banks to expand. European banks need more capital, and it can be difficult for them to increase capital from rights issues or retained earnings. It’s then more likely that European banks will turn to the alternative of selling assets, as RBS has been doing, to raise capital and meet regulatory requirements. Asian banks may then have attractive opportunities to grow by purchasing these assets.
While risk may be at high levels, Asian banks with a clear strategy have perhaps stronger prospects than before to grow their business in the region.
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