Economic Affairs

Banking on Asean banks to step up with AEC

Local banks looking to grow over the long term are prone to look to the regional South-east Asian or Asean market. While it has not always been easy for banks to expand in the region, the launch of the Asean Economic Community (AEC) by the year end will change things for the better.

The launch of the AEC promises to open up Asean markets to Asean banks. This is a highly attractive prospect as the region is home to a young population of over 600 million severely "underbanked" people with rapidly growing incomes. The middle class is expected to swell by as much as three times over the next two decades, and these consumers will need bank accounts, insurance policies and investment portfolios.

Even now, there is scope for banks to grow within Asean. In Indonesia alone, the banking penetration rate stands at just 30 per cent - there are about 170 million Indonesians today without a bank account.

Singapore banks, with their deep pockets and cross-border expertise, are poised to benefit from an opening up of Asean markets.


As the experience of banking integration after the formation of the European Union suggests, customers also stand to gain. With EU-based banks free to open branches across the EU, "bank customers were able to raise funds more efficiently - they could access loans in the location with the lowest interest rate and deploy them in other locations which required more financing but which had higher interest rates", said Mr Eugene Lim, head of Asia-Pacific trade and commerce practice at law firm Baker & McKenzie. He added that retail clients of a bank could use their automated teller machines outside the bank's home country wherever the bank had a branch in another EU country.

To be sure, the banking integration envisaged under the AEC is more modest, but would still be a boon for those living in less-developed financial markets, as banks target underserved customers. For example, competition will spur banks to offer more innovative solutions to Asean customers living in rural areas, where many more people own mobile phones but do not have bank accounts. Experts also predict

that interest rates on loans across Asean could fall as a result of increased competition.

For corporate customers, the opening up of Asean's financial services market means that when they expand their businesses across the region, their banks can "follow" them, by providing seamless cross-border service.

These are achievable goals, but it will not all be smooth-sailing, as Asean member states will have to overcome several obstacles first, before banks can start tapping the opportunities that the AEC promises.

Indeed, Asean central bankers will likely need all the time they have to implement the Asean Banking Integration Framework (ABIF). While the AEC kicks in on Dec 31 this year, the aim is to achieve Asean-wide banking sector liberalisation as envisaged by the ABIF by 2020.


Ultimately, the ABIF aims to remove restrictions on Asean financial institutions that want to provide financial services across the region. So, Asean banks should be free to offer their products and services in any Asean member state.

Under the ABIF, member countries have adopted a Qualified Asean Bank (QAB) scheme: A bank qualified in one jurisdiction will receive equal treatment in the others.

The ABIF process has two layers, a multilateral one and a bilateral one. This is to provide for countries with different levels of development to come up with their own rules.

For a start, the multilateral layer means all member states will establish Asean-wide guidelines for financial services integration.

In addition, the ABIF allows any two countries among five Asean economies - Indonesia, Malaysia, the Philippines, Singapore and Thailand - to conduct bilateral talks on greater access for QABs in each other's markets.

So, for example, Singapore and Indonesia can agree on specific areas they want to open up to each other, based on the commercial interests of their banks.


This may sound relatively straightforward but in fact it can be a gnarly issue, notes Norton Rose Fulbright partner Craig Loveless.

For starters, the banking sectors in these five countries are vastly different from one another.

Singapore has just three very big banks, while some of the other Asean markets have fragmented banking sectors with hundreds of small banks.

"Core to the bilateral negotiations is the idea of reciprocity - that an Indonesian bank should have as much freedom to expand here as a Singapore bank would have to expand in Indonesia," Mr Loveless said.

"But to have reciprocity such that any of the Philippines' 600 banks or Indonesia's 120 banks can expand here in the same way that a bank as financially strong as DBS Bank or OCBC Bank can expand in another market - I just don't think that's going to happen."

And so Asean member states will have to set out clearly what reciprocity means and which banks should be given QAB status.

Mr Lim said that harmonising banking regulatory standards, market conduct practices, disclosure requirements and conditions of licensing will further add to the complexity.

And if political interests come into play, these issues will be all the more tricky to iron out.

"There are large potential benefits to be achieved from greater integration (that is, better and cheaper services for customers)," noted Mr Toby Pittaway, a partner at consultancy Oliver Wyman. "But the bigger question is how the economic value created from this can be shared on a win-win basis between the different countries in order to overcome protectionist interests."

Not surprisingly, things have been slow-going so far.

Monetary Authority of Singapore managing director Ravi Menon noted in a speech in June that the pace of financial integration across Asean had lagged behind that of trade integration.

"In part, this is deliberate. In part, this is disappointing," he said.

Financial integration is more complex than trade integration and requires more time, he explained. Liberalising access to financial services is not as straightforward as reducing numerical tariff rates on particular categories of merchandise.

Unlike the goods market and most services, financial liberalisation and integration must pay close heed to issues of systemic stability, Mr Menon added.

"A key lesson from past financial crises is that premature opening up of financial markets without strengthening domestic financial systems and establishing credible safety nets can have painful consequences."

Still, while there are good reasons for financial integration having been slower than trade integration, "one cannot help but think that progress could have been faster than what we have seen to date", Mr Menon lamented.


Asean banks expanding within the region have mostly done so through mergers and acquisitions (M&A) but, from 2020, they should hopefully not have to enter into such deals in order to grow in a new Asean market.

After all, it has not been easy to complete M&A deals. In 2013, a bid by DBS Group to acquire a majority stake in Indonesia's Bank Danamon fell through after it failed to gain regulatory approval.

In the same year, Malaysia's CIMB Bank also had to scrap plans to buy a controlling stake in the Philippines' Bank of Commerce as it failed to reach a deal with the target's various minority shareholders.

And as Mr Pittaway noted, the list of attractive and available acquisition targets in Asean is shrinking, while the success record of Asean banks realising positive shareholder value from acquisitions has been mixed.

With the ABIF, Asean's strongest banks will hopefully be able to more easily expand across the region organically.

One of the aims of the ABIF, as Mr Menon noted in his speech, is to help grow a group of strong pan-Asean regional banks with the scale and capability to compete alongside global banks.

The timing could not be better.

As Western banks are struggling with their own finances, many have decided to shrink their presence in Asia or exit altogether.

The stage is set for Asean banks to take centre stage in their own home base and become powerhouses in their own right.

Now it is time for the AEC to show it has the political will to pave the way ahead for financial sector liberalisation in the next five years.

A version of this article appeared in the print edition of The Straits Times on December 09, 2015, with the headline 'Banking on Asean banks to step up with AEC'. Print Edition | Subscribe