Asian Banking Becomes More Asian

Tags: banks

In the document Asia/Pacific Banking 2012 Top 10 Predictions: Shattering the Myths of 2012 (Doc # FIN231444, December 2011), we discussed how growth in the number of banking institutions that now compete in Asia/Pacific confirms the region's growing importance to the financial services industry worldwide. From mid-2010 to the last quarter of 2011, the number of banks operating in theregion grew 5.8%, from 907 to 960. We expect this level of growth to be sustained in 2012 and into the medium term. 

In this regard, India's increasingly open environment and China's loosening controls on foreign participation make India and China the most likely markets to witness even more growth in new competitors.Meanwhile, altogether new banking institutions may also debut in countries like Malaysia and Australia where regulators have recently allowed new bank licenses. The former directs its initiative to the Middle East to boost its stature as an Islamic banking hub, while the latter hopes to elevate local credit unions and regional lenders. 

We also would like to note the commitments being made by the ASEAN countries to lower barriers in their financial services industry. Table 1 provides a list of the subsectors that will be liberalized in several ASEAN markets by 2015, alongside the supposed creation of the ASEAN Economic Community (AEC). The table gives us a a road map of how an intra-ASEAN market for banking and related services is being developed, as well as an indication of where new players will emerge in more significant numbers.

New players, of course, will provide additional frenzy to the competition becoming ever so vibrant in key business areas such as lending and deposits. Whether these players are on a greenfield strategy as they enter new territories or are part of a superregional strategy of a parent institution (also read our discussion on superregional strategies in Business Strategy: Mergers, Acquisitions, and Consolidations in Asia/Pacific Banking — Where Are the Hot Spots?, Document # FIN231313, November 2011), we assume that these new market entrants will be punching above their weight to acquire marketshare as quickly as possible, becoming threats to complacent incumbents. In the aspect of IT-related investments, these new players too will provide additional uplift to the size of spending as they will be investing in foundational systems — and usually in high-spend growth areas such as core banking systems and channel systems. 

Amidst all these, we believe that the winners will be Asia/Pacific-based institutions that go beyond their borders and address the opportunities in the broader region. They have the inherent advantages of local knowledge and local roots of course, but they also have the advantage of the 2012 circumstance. European or U.S. institutions are distracted by concerns in their own home markets, and now is the chance for Asia/Pacific financial institutions to build their might at home.

Big Data: A Banking Perspective

Tags: , asia/pacific, banks

Cloud Computing in Financial Services: Sentiments from the Ground

Tags: asia/pacific, banks, cloud computing, it priorities

From our conversations with banking executives in the past month, we note their observation that the industry has over time repositioned outsourcing as cloud computing, even though technology has advanced well enough to differentiate both. The rebranding of the politically contentious outsourcing to cloud computing continues, not only in financial services but in other sectors as well. Relative to outsourcing, cloud computing is a new term, and is less defined, confusing critics in the meantime. The initial feedback on cloud computing, however, shows less openness by the industry toward cloud computing in general but more toward private cloud — so there is a mad scramble to talk about private cloud too, never mind the notions of application service provisioning, or virtualization, or hosted services that may be accurate descriptions of what is actually being undertaken.

All these attempts to come up with something new to talk about belie a profound transformation in how banks prefer to consume and pay for technology. As purse strings tightened amid the down cycle, IT executives found that a modular approach to the consumption of IT was more easily justifiable to the board. However, even as economic pressures have eased, we still see continued interest in utility-based consumption of technology — the model has proven to be not just a stopgap measure, it is increasingly becoming the norm.

From a business case standpoint, the on-demand model (i.e., elimination of significant upfront costs, and expenditures more closely aligned with operational usage) has created strong interests in shared, utility-style service provisioning options, especially among the smaller players. Interestingly, small-tier institutions in Australia, Indonesia, and the Philippines have pressed for cloud computing–style solutions, even for their core systems and processes. The attraction stems from a desire to avail of broader and deeper technology capabilities in line with the needs of the organization, without having to incur the hefty price points of proprietary solution offerings.

In essence, financial institutions are taking to results-based principles in IT spending: "I pay for what I need and require." We see this not only in time- and materials-based pricing, SLA-based and performance-based contracts, but also in other pricing permutations to account for risks taken (by either the bank or the third party, or both) or business objectives met. So, whatever the term that is being pushed — whether it be cloud computing, or utility processing, or "new outsourcing" — it should align with the pay-as-you-go, use-as-you-please, and results-based principles that have gained ground.

Still, the debate over the relevance of cloud computing in financial services is yet to be resolved. Just when there were signs the industry was starting to buy into the business case for cloud adoption, high-profile incidences of service failures and operational outages that involved third parties have proved damaging to confidence in innovative delivery of IT. In characteristically reactive and high-handed fashion, the regulatory response has served to diminish appetite for risks associated with third-party management of sensitive data, operating infrastructure, and technology assets, regardless of underlying benefits. The recent notice from the Australian Prudential Regulation Authority (APRA) hit the nail on the head — cloud computing has to be managed similar to outsourcing and offshoring. From the notice, the industry benefitted from a clearer definition of the regulatory framework vis-à-vis cloud computing, including considerations and contingency plans required when banks take on innovative IT delivery.

As regulatory positions gain more clarity, internal guidelines on cloud computing are expected from super-regionals and international players that aim to build cross-country technology platforms. These too will give further momentum to the take-up innovative IT delivery models. They will present best practices and critical decision factors to the industry at large. Banks, especially those from less developed markets, will also look to greater availability of bandwidth and improvement of network infrastructure to push discussions on cloud computing along.

Welcome the Super-Regional Banks

Tags: banks, financial services

A bright light in the Asia/Pacific region's financial services industry is the emergence of super-regional institutions, which we define as Asia/Pacific-based organizations that have made aggressive moves to acquire operations across the region. Their regionalization objectives are intentionally more paced, however, and they have chosen to manage regional units that are close in proximity, and limited to one part of the region. We have tracked ten super-regionals closely this year, namely: ANZ Bank (Australia), Commonwealth Bank of Australia, DBS Bank (Singapore), OCBC Bank (Singapore), UOB Bank (Singapore), Maybank (Malaysia), CIMB Bank (Malaysia), Mitsui Sumitomo Insurance (Japan), Sumitumo Mitsui Banking Corporation (Japan) and Tokio Marine (Japan).

In the recent ASEAN Bankers Association forum which I spoke at, this super-regional theme captured a lot of attention, primarily because the bank presidents wanted to find out what their peers were up to in the Asian-wide M&A space. I also spoke of the lack of a credible super-regional story out of banks in Thailand and Indonesia – from where super-regionals should have emerged by now.

From the global realignment forced by the recent crisis, it also appears that there have also been super-regional strategies being launched out of banks in Latin America. Also, the super-regional story is apparently not just in financial services, because Asian-based companies from other industries have also made moves to go beyond their home markets, especially as the recent downturn resulted in global incumbents focusing more on their home markets in the US and Europe. It can be said that although super-regionals are filling in some of the vacuum left by retreating global players, we believe that super-regionals themselves are creating their own unique propositions as truly Asia-centric powerhouses.

What implications does the emergence of super-regionals have on technology decision-making?

The super-regionals' technology strategies are understandably distinct from domestic-focused institutions. These will be brought to life in region-wide platforms that are more than likely standardized applications and assets that will be used across the organization's various operations in the region. There will be country- or market-specific overlays, but the real and ultimate drive would be toward a common platform.

In the core banking space, a few super-regionals have just recently made decisions on their core banking vendors, and a few more decisions are tipped to be made within a year. Super-regional core banking will be a key theme in this area in the years to come. These deals will be handed to a wider number of vendors than expected, preventing an oligopoly of super-regional references for just a few core banking vendors.

Asia Banking Executives Gather in Phuket to Discuss Risk Management

Tags: banks, insurance, risk management

Last month, 34 banking executives from 11 countries across the region attended the IDC Financial Insights-FICO Asia/Pacific Risk Officer Retreat. We conducted an informal survey, which was spearheaded by two participants, and found some interesting facts and expectations about the tenure of Chief Risk Officers (CROs) in banks.

Let me give a quick run-down:

• On average, CROs have been in their current roles for less than four years.
• The past crisis scaled up everyone's experience tremendously. What they could have gained in five years, they gained in one.
• The demand for risk executives has created a notable dearth of good risk officers in banks.
• A trend of CROs becoming CEOs of financial institutions is expected to emerge in the medium term.

There were snide (but well-meant) commentary about stress tests, Basel 3, modeling, and even the discipline of risk management itself. The discussions also reinforced some notions about the role of risk managers in banks: mainly, that it is a job that requires smarts, business acumen, fortitude, and a grasp of internal and external realities that confront their institutions.

The candid discussions in and outside of the Roundtable also validated our opinions about technology decision-making with regard to risk management. While IT spending in this area will remain high, admittedly, there will be some projects that will be categorized under "risk management," most probably to get immediate management buy-in.

Furthermore, justifications for risk management projects are getting more tactical, just as ROI calculations increasingly get treated differently. Also, technology has matured significantly over the past few quarters and risk officers have a better set of vendors to work with in the year to come. However, finding the right vendor for their organization's needs will continue to be a key challenge. These will find a way into our research agenda in the coming year.

The IDC Financial Insights-FICO Risk Officers' Retreat is designed to be an annual gathering of risk officers to share latest insights about the discipline of risk management, as well as operational benchmarks and best practices discovered in their respective banks. This year's event was held at Cape Sienna in Phuket, Thailand from July 29 to 31 this year. We look forward to continuing these discussions with those who attended and with other FSI executives who couldn't make it but are keen to join in the next gathering.

The retreat also shattered the myth that CROs are too straight-laced and don't have a capacity for humor, as the photos we took during the event show. Check out the photo gallery on the IDC Financial Insights-FICO Asia/Pacific Risk Officers' Retreat Facebook page.

Below: Proof that I was there and doing my job!

 Below: Ample opportunities to network and let our hair down.

Hong Kong Bankers Prepare for Growth as Economy Starts to Recover

Tags: asia/pacific, banks, economic crisis, hong kong, risk management

IDC Financial Insights Asia/Pacific hosted 12 CIOs and IT heads from top Hong Kong banks at our recent Hong Kong Banking Roundtable. This was a closed-door session providing a platform for bankers to deliberate on the critical business, operational, and technology-related issues impacting their businesses, and forms part of a series of roundtables that IDC Financial Insights organizes across the Asian region.

Here, the consensus view was that the economic storm clouds seem to have cleared, with a glimmer of sunshine streaming through.

Latest Hong Kong Monetary Authority (HKMA) data indicates that Hong Kong has pulled out of its deepest recession since the 1998 crisis, and is currently joining Singapore on the road to recovery. The territory's seasonally adjusted GDP expanded 3.3% quarter on quarter in 2Q09, three times as fast as analysts had forecast, and finally ended four straight quarters of contraction.

Nonetheless, still wary of the fragility of the economic situation, Hong Kong bankers are placing concerted efforts to look for sustainable business growth - whether to consciously control expenses to fatten margins, to continually broaden customer engagements, or to undertake initiatives to strengthen payments and transaction services business.

With that in mind, topics that currently preoccupy business and IT divisional heads at the Hong Kong banks center around IT optimization, distribution channels, customer centricity and analytics, and compliance and risk management, most of which are tied to the omnipresent need to manage cost and unlock more value from customer engagements.

Technology optimization sees a focus on application portfolio management to reduce the cost of maintaining business suites, interest in Web-delivered IT services, and always with an eye on a quick turnaround on investments.

Meanwhile, a saturated, competitive market like Hong Kong where almost 200 banks and deposit-taking institutions jostle for wallet share means that creating an integrated and consistent customer experience across all delivery channels is key. Here, banks have entrenched internet banking presence but a weaker toehold for retail mobile banking, and point to the need to prepare themselves for the inevitable wave of mobile adoption.

The call for wider and deeper customer engagements sees increased investments in analytics to slice and dice customer data and accordingly redefine product design and marketing. Elsewhere, shareholders' push for more prudent risk management, reinforced by regulatory pressures, compels Hong Kong banks to review their internal risk control systems and reexamine technology investment in risk detection, avoidance, and management solutions.

The roundtable further sought feedback from participants on their growth strategy and technology initiatives for the short term. Here, the graph below outlines the strategic imperatives at Hong Kong banks over the next 12 months. There appears to be no letup in the focus on risk management and compliance, cost management and operational efficiencies. Banks are working on reining in cost and making the most out of limited resources via undertakings such as improving  processing turnaround times and throughput, reducing process redundancies, and perhaps integrating solutions onto fewer platforms in their drive to weed out inefficiencies.

The Hong Kong banks are also unique compared to peers around the region in that a core imperative includes market expansion - presumably with an eye into China, given plentiful opportunities in the mainland as it avoided the worst effects of the global downturn and still grew a robust 7.1% in 1H2009.

Note: Full insights are captured in the report entitled "Market Analysis: Hong Kong Banking Update 2009" (Doc #FIN219780). This covers discussions from the roundtable as well as the future strategy and technology undertakings of the participating banks for the upcoming months ahead.

Banks Turn the Spotlight on Vendor Risk

Tags: , asia/pacific, banks, economic crisis, financial services

In recent months, we received several inquiries from banks about how they are best to ascertain the business and financial viability of their vendors. The intent of the inquiries could partly be attributed to how banks are working to avoid another spectacular issue as that seen out of the former Satyam. Banks have more clearly  understood how technology failures, including the failure of technology vendors to deliver, can have dire implications for business continuity, bank reputation, and business strategy.

Indeed, the economic crisis has put in question the viability and sustainability of vendors' businesses. While several financial technology vendors have reported strong results despite a tumultuous economic environment, most players have shown their weakest performance in years. The pace of vendor consolidation has gained more speed. Early this year, we stated that 2009 will see 12 of the top 100 financial technology firms acquired or declaring bankruptcy, higher than the industry average over the past five years.
Vendors have been more mindful of fee structures and engagement margins. Banks justifiably have to be on guard for vendors drastically cutting staff levels (especially in banks' outsourcing partners), as well as those showing declines in SLA compliance and performance.

Although the fall of Satyam is not necessarily attributed to weak financial performance, the Satyam saga easily proved that lapses in reporting are possible. Financial institutions have thus intensified their scrutiny of the financial reports and balance sheets of their vendors. The lack of transparency is correctly considered a significant risk in itself. Vendors though have themselves responded with improved transparency. Disclosures made by vendors to current and potential clients have become more detailed to include other client references, new wins, and other metrics for performance and delivery.
Regulatory mandates have also scaled up to reflect the new regime of vendor transparency. There will be a greater push to report vendors' banking relationships (are vendors themselves clients of the banks they serve?) — something that we note especially in India. Although the most recent regulatory guidelines coming out of Asia/Pacific regulators speak more to data integrity, data privacy, and information security, the focus on effective governance of vendor relationships has indeed been heightened. We expect that in the medium term, more specific guidelines on vendor due diligence and monitoring will be put in place, following IT risk guidelines in Singapore (Internet Banking and Technology Risk Management Guidelines) and Hong Kong. This is similar to the developments we saw in the United States, where the Gramm-Leach-Bliley Act's mandates for privacy and integrity of customer information gave way to vendor due diligence and vendor risk management rules.

The Post-Crisis CXO

Tags: asia/pacific, banks, economic crisis, financial services

The post-crisis landscape will be a much different place for financial services institutions. Will the banks and insurers that survive the downturn be managed by a new breed of leaders?

What will the post-crisis CXO look like? We ask this question as we evaluate a good list of up-and-coming CEOs, COOs, CFOs, CIOs. In the Asia/Pacific region in particular, we are seeing that the average age of CXOs in the financial industry has fallen quite significantly. This is something worth noting, considering that we are talking about an industry composed of many different kinds of organizations - from large international and regional players, to dynamic domestic champions and small, family-run organizations.

Several qualities will be common among the industry's new leaders, foremost among which is, of course, competency in risk management. We have seen over the past years how risk management executives have become more prominent, playing ever more critical roles in the organization. The crisis will serve to underscore the need for astute risk management skills. Some other "new" qualities worth noting: marketing savvy and a keen appreciation of technology as a value-creator.

We also believe that alongside the rise of these future leaders, the industry will witness an upsurge of today's next-generation banking initiatives such as cloud computing (and its derivations), Green IT, Web 2.0, social networking and its use in financial services and Generation Y banking. It will be interesting to witness how the rise of the future CXO and the rise of new technology will change the dynamics of our industry.

1Q2009 Performance: How are Asian Banks Stacking Up?

Tags: asia/pacific, banks, economic crisis

We are seeing what seems to be three camps of financial performance being released. In the left corner are institutions in countries like South Korea and Malaysia which are still facing lackluster performance. In Korea for instance, whilst the banking industry has turned round the corner in 1Q2009 with most institutions returning to the black on lower-than-expected provisions (Korean banks are estimated to have logged a combined net profit of around US$146 million for the Jan-March period mainly from decreased loan-loss reserve), profit margins are expected to remain squeezed in the near-term. Banks continue to feel the sting of surging NPLs stemming from the slumping economy. We do not expect the market to achieve any form of stability till at least 2010 when loan delinquency rates get sorted out.

Meanwhile, clocking in commendable results despite the persistent global credit crunch and economic downturn are Hong Kong, mainland China and Vietnam. In the former two countries, the banks are generally coping well, being less impacted by their counterparts in the West. The Chinese government's stimulus package - with measures such as extending corporate credit and expanding bank guarantee deposits - has shored up financial stability. China's banking sector has consequently improved on the back of the stronger-than-expected corporate loans growth, deposits, domestic demand and consumption, and rebound in wealth management fees. Over in Vietnam, a recovery in overall lending activities resulted in joint stock banks performing better than expected in Q12009. Though the financial turmoil hit the Vietnamese market hard in 2008, with the government's subsidized loan stimulus program and banks relying on credit activity growth to boost bottom lines, there appears to be some modicum of stability in 2009. 

Nations that are witnessing the most robust 1Q2009 results to-date include India and Indonesia. In India for instance, Yes Bank's profits leaping a stellar 40% in its fiscal fourth-quarter (Jan-March 2009), while that for HDFC Bank surged 34% from the year-earlier period, boosted by higher loans growth. Most banks in Indonesia have yet to release their numbers, though early indications likewise point to a majority still being able to report hearty profits. A number of Indonesian banks have confirmed acquisitive growth plans, including Bank Raykat Indonesia (expectations for net profit expansion of 15% in 2009, with this optimism reflected in channel investments that include rolling out 4,000 new ATMs), Bank Mandiri (targeting a general insurance company acquisition to complement AXA Mandiri's life insurance business), and Bank Rakyat (considering a second tier bank purchase to expand its SME business). 

The Age of The Stimulus: Which Banks Will Win?

Tags: banks, financial services, government

The total price tag for government-led stimulus programs in the Asia/Pacific region will easily tip over US$1.5 trillion by mid-2009. This massive injections of liquidity will up the ante in the already fierce competition of banks. In Thailand for example, Bangkok Bank has proven that bank network reach is still king, as the bank won the right to distribute stimulus checks for over 10 million Thai citizens. A reported price of 2 baht per check is loose change for a giant institution, but is not a  laughing matter either, given the ardent competition for every revenue generation opportunity.

Meanwhile, banks are expected to realign their loan growth targets as governments highlight priority sectors and greenlight huge infrastructure build-outs. Financial Insights Asia/Pacific's average loan growth estimates for 12 key Asia/Pacific markets is now at 8.7%, reduced further from previous estimates of 10.3% in November 2008. We will get a clearer picture of the aggregate and sectoral loan growth numbers by June 2009. However, we are certain that growth rates in 2009 will still be robust relative to the dire predictions in the United States and Europe. Respectable growth rates are expected out of countries with large populations such as China, India, Indonesia, and Vietnam.

Technology implications for banks?

Banks that are able to showcase operational efficiency aside from reach and distribution will win in the governments' cash-to-the-public programs. In the public spending side, key factors of success will be capability to build out lending models and the capability to scale up growth in priority sectors. Further, loan origination systems was a strong initiative for banks in the Asia/Pacific region prior to the crisis, and will be critical area of focus now.

We estimate that about 60% of loan origination systems of the top 250 Asia/Pacific banks were (and are still) outdated and could not cope with an upsurge in lending. Leading banks are expected to invest heavily in modeling and analytics (good news for leading players like SAS, FICO, etc). Building of course on quality data, these investments in scoring, models, and analytics will help in key areas such as decisioning, pricing, servicing, fraud prevention, and even collections and recovery

The full report, Asia/Pacific Banking in 2009: Opportunities Amid a Crisis, is available on the Financial Insights' Web site.