It is not hard to see why banks around the world are looking to Asia for growth. Those working in Hong Kong and Singapore sometimes worry about things slowing down. But to bankers in Europe and the US, the region looks enticing.
High-growth economies, plenty of breathing space for lending, and a geo-political rise that is starting to look pre-destined — what is there not to like about Asia?
Well, there is one thing: too much competition. Every senior banker you meet from Europe or the US is full of praise and predictions about this apparent haven. They are increasingly joined by those working at banks headquartered in Asia, often banks that have become part of an oligopoly in their domestic markets, and now want to turn offshore for their own growth.
The need to turn offshore is, for some Asian lenders, almost desperate. Japanese banks cannot hope to do anything but shrink unless they move out of their domestic market, although that requires a difficult balancing act (see EuroWeek Asia’s previous View for more).
For other Asian banks, the move is more opportunistic. Singaporean banks, for instance, can still enjoy good growth at home— but they can earn a lot more by turning to faster-growing countries only a short flight away.
But this ubiquitous push for Asian business has a downside so obvious that even a high-school economics student could graph it confidently: more firms pushing for business means lower returns.
This is exacerbated by the fact that domestic markets have more back-slaps and cheap money than they have realistically priced credit. Asia’s banks are used to playing hardball to win business, and there’s little doubt they will do that to get a foothold in neighbouring countries.
Rising loans, falling margins
Asian banks — at least those outside Japan — can still enjoy big lending growth at home. Loans to Singaporean companies grew by 33% over the course of 2011, while those in Hong Kong and Malaysia grew by 20% and 14%, respectively, according to a report by Standard & Poor’s entitled "Regional Expansion By Singapore, Hong Kong And Malaysia Banks Is A Double-Edged Sword".
But the rating agency thinks that banks from Asia’s most stable economies could suffer deteriorating loan quality when they push into China, India, Indonesia, Vietnam and other fast-growing Asian countries.
That is almost a given: emerging market countries come with higher risks that developed nations. (This was axiomatic until a few years, when the European belly-dive drained the pool of liquidity. Now bond investors aren’t so sure — the Philippines trades inside Italy, for example — but it is still a good assumption for those us paying attention to bank strategy.)
The problem of credit control is real, but manageable. The bigger problem is that these banks will often take on higher risks without pushing hard enough for realistic pricing. The name of the game over the next few years will be winning business. Justifying it to shareholders comes later.
Singapore and Malaysian banks, in particular, are suffering from falling interest margins at home, S&P notes. That reduces the return they need to earn to justify turning offshore, makes overseas expansion even more important, and exacerbates a coming cycle of boozy lending to emerging Asia.
It is natural that mature Asian banks want to move offshore to increase their returns, and even more natural than they should stick to a region they know well, rather than move into other emerging markets, or into a Western world that is proving increasingly uninspiring.
But the aim of the game is not simply to win. It is to accumulate points.