Despite ongoing uncertainty and volatility in the region’s financial sector, transaction bankers are optimistic about trade in the region in the face of a US recovery and anticipated volume growth.
The positive long-term growth trajectory of Asia is keeping transaction bankers bullish about prospects in the region. This is not to say that all is well—bankers have still to navigate substantial headwinds. The recent turmoil in the emerging markets over concerns of the imminent easing of monetary stimulus in the US brings into focus the dislocation that excessive global liquidity can wreak on the small and underdeveloped economies in the region.
Increased volatility in capital flows around the region can be expected in the coming months, which will further depress domestic demands and growth, especially in economies with current account deficits and which are dependent on foreign capital inflows, such as India and Indonesia. However, the prognosis for the more developed economies in the region, such as Singapore, Hong Kong and Korea is more positive. These countries are more likely to benefit from recovery in the US and Japan, which will boost external demand. Globally, the developed economies seem to be on a stronger footing and that bodes well for Asia’s open economies.
After years of stagnation, Japan’s economy seems to have been revitalised from the stimulus programme promulgated by prime minister Shinzo Abe’s new expansionist policies. Even Korea is showing signs of growth.
However, the longer term moderation of growth in China, as it focuses on strengthening its underdeveloped financial system and infrastructure, will perhaps have a greater dampening effect on the region, especially for countries such as Australia and Indonesia which are major exporters of raw material to China. However, a slower pace of growth in China may not be altogether bad—transaction bankers are generally positive about prospects, especially in trade.
“Although China’s accelerated growth in the last three years may normalise, we are still bullish about trade. There has been significant margin compression, but it has been compensated to some extent by an increase in volume. Trade is an integral part of the economy in Asia and it will continue to be a key focus for banks. Our focus and capabilities in trade have enabled us to outperform the market in terms of volume growth,” said Sameer Sawhney, managing director and head of global transaction banking at ANZ.
The prospect of tightening liquidity in the region also means that pricing will have a chance to go back to more normal levels as players start the long-anticipated process of re-pricing the risks that they are willing to take in building their asset books.
“Excess US dollar liquidity from quantitative easing has made pricing very competitive, but we have managed to stay with our clients by offering them better and more efficient products and solutions. As quantitative easing tapers off and pricing normalises, we will be able to continue on our trajectory of expansion, which could be challenging for banks that relied on the short-term excess liquidity to gain market share,” Sawhney elaborated.
As pricing normalises, banks are shifting their focus to not just gaining a bigger share of the market but optimising profitability of each customer relationship. To this end, they are looking to synergise their transaction banking offerings and are focusing on engaging customers in a deeper and more holistic manner as well as beefing up their technology base to provide optimal solutions. Banks are taking on a more relationship and customer-centric approach.
“Currently, transactional banking is focused on creating value-added customer service, and innovation in products and delivery channels. Specifically, there has been an increase in the development of more intuitive and interactive products and service platforms to serve clients on an online and mobile level. While this is common for personal banking services, the introduction of new technology and platforms to cater to corporate clients’ needs allows them to manage letters of credit and various trade documents with an unprecedented level of ease,” said Gina Lim, head, FI sales, global transaction services, DBS.
She observed that there has also been a larger focus on the fee-based businesses for banks, which resulted in the integration of cash management and trade finance services. Doing so enables the evolution of new products and services for banks to further differentiate themselves in the market.
Targeting specific customer segments
According to Marie-Caroline Domingo, Asia Pacific head of global transaction banking client access at Deutsche Bank, corporate clients are increasingly interested in bank-agnostic solutions, such as joining SWIFT through Standardised Corporate Environment (SCORE). As they move towards a single banking connectivity and delivery channel, there is also a continued interest in harmonised global formats across banks. “As a result, it is important for banks to invest in these capabilities,” she said.
This is a common view across banks. Corporate customers are increasingly looking for integrated solutions across the different locations that they operate in.
“There has been a general increase in the number of corporates keen to pursue a supply chain programme. Corporates that have successfully implemented a supply chain financing programme in one region or country are keen to replicate their success in other markets. Increasingly we are seeing complex, multi-country and multi-currency opportunities, where clients are keen to work with banks that can offer a common look and feel solution,” commented Pravin Advani, global trade executive, Asia Pacific at J.P. Morgan.
Supply chain finance is a key focus for banks and they are constantly working on identifying the right value proposition for customers. As trade transactions migrate to open account settlement, banks want to find a way to intermediate themselves into the transaction cycle with an appropriate service offering to clients. And increasingly banks are exploring electronic means to facilitate transactions in a way which is secure and yet efficient and cost effective. Business Process Outsourcing (BPO) could be one option but banks remain cautious about over investing and question whether this is actually going to amount to anything.
“If you look at that the genesis of BPO, it has its origins in SWIFT’s introduction of the Trade Service Utility (TSU). TSU is SWIFT providing a way to get into the supply chain open account space. But very few banks have signed up to use TSU because banks are struggling to identify a value proposition to their clients,” remarked Fred DiCocco, head of sales and relationship management, treasury services for Asia Pacific at BNY Mellon.
Banks are adjusting to operating in a more risk-centric regulatory environment, where it has become more important to manage and balance capital requirements and sustain business growth at the same time. Moreover, the cost of meeting new regulatory rules such as enhanced AML and KYC requirements, the extra-territorial impact of US regulations in the form of FATCA and Dodd-Frank have created significant challenges for banks.
“There is a fixed amount of money invested in our transaction banking system. The growing percentage of funds that is invested to meet increased regulations is leaving fewer dollars for new product development. I think the challenge for the industry and for banks is how to effectively balance between the two while also balancing risk requirements and improving customer experience,” shared Richard Yorke, head of the Wells Fargo International Group.
With the added cost of maintaining a higher level of regulatory capital and capital buffer to operate, banks find themselves more than ever having to prioritise the business that they want to be in and customer segments that they want to serve. Strategic investments needed to build necessary capabilities have to be prioritised.
For BNY Mellon, however, it is very clear that their focus is on financial institutions in the region.
“In APAC, the bank segment will continue to be a very important component of our business. But we will also start to diversify our customer base by targeting non-bank financials such as insurance companies and brokers/dealers, and fund managers. However, we do not anticipate expanding into the corporate segment. Internationally, it’s really not part of our DNA. We are not here to be a local banker or even compete with our local bank clients. We want to be a service provider to the financial services industry. Hence, we will probably limit what we do in the corporate space,” commented DiCocco.
On ANZ’s strategy with customers, particularly in Agriculture and Natural Resources, Sawhney says, “Our unique footprint across Australia and Asia Pacific matches the flow of commodities across producing and consuming countries, giving us a distinct advantage in this global client segment. We have the capability to be at both ends of the transaction, covering both the seller and the buyer and thereby improving the efficiency and quality of the experience. Furthermore, the resources sector is a core strength for ANZ and we can offer a full suite of solutions from transaction services to short term trade and long term debt solutions using capital markets. This has enabled us to establish core banking relationships with many global clients.”
A growing focus on payments
Corporate and wholesale payments have become the new investment focus for banks. Corporate and FI customers are placing emphasis on working capital and liquidity management. The increased visibility and control of cash flow that corporates need and which banks can provide help to identify and mitigate liquidity risks. With the increase in straight-through processing, costs reduction can also be achieved at the same time. Banks are preparing for these requirements by making the necessary investments in infrastructure and business processes.
“The most important thing for us is to provide our customers with a set of solutions which enables them to complement the domestic capabilities they offer in a particular market. So you can literally take any market in Asia where you have a strong domestic bank which has a set of really compelling domestic solutions and they can look to an international bank to help them make those payments on their behalf. I still see customer service, speed and effectiveness of payments delivery as three of the most important things to our customers in this region,” said Dianne Challenor, head of Transaction Services, Asia Pacific, J.P. Morgan.
Similarly, other international and domestic banks are looking to enhance and revamp their payments capabilities.
“We are in the midst of a multi-year project installing a new state-of-the-art payments platform. This is an enterprise-wide investment that will significantly increase our ability to transact in currencies beyond the US dollar. In addition to expanding and enhancing our service offering to our bank clients, it will also better position us to service the non-bank sector with the delivery of enhanced local currency capability. We are just starting the implementation of the first phase of the project this year and will eventually migrate the platform globally to the majority of our branches.” said DiCocco.
The new payments platform is currently BNY’s biggest ongoing project. The bank currently operates on separate platforms, one for US dollar and another for multi-currency. The end goal of this project is to consolidate all of that onto a single payments platform, standardising the client experience regardless of currency or branch location.
Rise of the Rmb
China is the main engine of growth driving the region, and its role will only increase as its economic and financial system and infrastructure continue to develop and mature. The central government has been deliberate in moderating growth in order to rein in inflation and the build-up of asset bubbles in the real estate sector. It is determined to reform its financial and banking system and state-owned enterprises and continues to liberalise its interest rate regime, capital accounts and markets. And inevitably, one of its key reforms will be the liberalisation and internalisation of the use of the renminbi (Rmb).
Carl Wegner, head of global transaction banking for Greater China, Deutsche Bank feels that the ongoing liberalisation of China’s financial system and its currency is essential to the growth of cross-border investments and trade settlement in the Rmb. The recent move by the People’s Bank of China (PBoC) to widen the Rmb FX trading band and to initiate pilot schemes to liberalise capital accounts clearly reaffirm the country’s commitment to enhance the convertibility of the Rmb.
“This could act as a catalyst for the internationalisation of the currency, which can in turn enable corporate treasurers to better manage their liquidity and drive the use of the Rmb as part of their international treasury management and investment strategies,” he said.
“China is seeking to promote wider usage of the Rmb in trade settlement outside China, and in that regard, it has been successful in increasing the currency’s market share. This is providing investment opportunities back into China so that the Rmb liquidity created outside China can be recycled back to the mainland,” added Masayuki (Mike) Tagai, global market infrastructures executive, Asia Pacific, J.P. Morgan.
“In the long run, if China were to liberalise its capital markets further, that would mean that the offshore markets developing in Hong Kong, Singapore, Taiwan and Malaysia will start to perhaps compete with the mainland market within a 10 year time span,” he cautioned.
The pace at which it moves on liberalisation could also be tied to specific targets that it has announced.
“Shanghai has set a target to become an International Financial Centre by 2020 the Rmb’s free convertibility will be a cornerstone of this development. This is because by definition, you can’t be an international financial centre without a convertible currency. The fact that the state government has reaffirmed the date of 2020 for Shanghai to be an international financial centre is very important. Rmb internationalisation is occurring most rapidly in East Asia and Southeast Asia. The intra-Asian trade, especially where China is the buyer, is very important in terms of accelerating liberalisation. It is usually the buyer who decides the currency of a transaction,” highlighted Yorke.
While the Rmb continues to rise in terms of world ranking among all international currencies, offshore and cross-border usage remains relatively low. Looking at recent industry surveys in terms of Rmb usage, it substantiates those opinions that corporate demand for cross-border Rmb remains low despite the high level of dialogue around the Rmb. The general consensus is that China is committed to internationalising the Rmb. The gap between dialogue and usage can be narrowed by better market advocacy. PBoC has implemented many pilot programmes to test the market before the launch of any scheme to the public. Many corporates understand the “why” but not the “how” in using Rmb, as there are many internal and external practical challenges such as accounting standards to overcome.
“The government continues to make statements and take actions that indicate their commitment, but it is still very closely tied to the impact to the economy of China. They are very intent in managing appropriate levels of inflation and GDP growth and are conscious of capital inflows and outflows that will dictate how liberal they make Rmb in the near term,” added DiCocco.
According to Lim, the Rmb is emerging to be a significant contender in the world of trade settlement currencies that is now dominated by the US dollar and the euro. Looking at China over the last 20 years, the expansion in China’s exports has allowed the Rmb to be more internationally utilised as a means of trade settlement. Additionally, the recent shift in financial focus through China’s political reform will signify a more deregulated Rmb that allows foreign investors and corporations to increase their trades in the Rmb market.
“From a transactional banking point of view, it is imperative that we implement systems and products that suit the requirements and demands of the Rmb revolution, especially with the increase in popularity of Rmb outside China,” she surmised.
Emerging trade corridors
China’s influence on trade extends beyond the immediate region; it is also driving the emergence of new inter-regional trade corridors.
“Geographically, trade corridors between Asia, Middle East and Africa are growing primarily on the back of foreign direct investment that countries such as China are providing to African nations, and to a certain extent, Middle Eastern countries,” said Yorke.
And that is creating business flow for banks in Asia. DBS, for example has seen a lot of trade activities between Asia-Africa and Asia-Latin America, more so than the Middle East.
“While our strategic focus and expertise is within Asia, we recognise the potential in this space, and hence, work closely with our clients to complement the services provided by their banks in these markets to meet their transactional banking needs,” said Lim.