There is a clear consensus falling trust raises operating costs – companies have to do more to convince customers to deal with them, they have to spend more time defending their actions to politicians, they incur more regulatory intrusion. To that extent, higher levels of trust translates to a competitive advantage.
It is true financial services and banking in particular are leveraged plays on economic growth so any economic slowdown in Asia is likely to impede profits.
Trade, in particular, is an issue because so many Asian economies are trade dependent. Hence the current anti-globalisation and even mercantilist agendas gaining ground in the US, the UK and Europe in particular are a concern.
However to date the evidence does not show a sharp retraction in trade. According to the Institute of International Finance’s monthly growth and financing data, the IIF Emerging Market Growth Tracker advanced for the fifth consecutive month in March, marginally adding to a five-year high.
The major driver was emerging Asia. The IIF also noted ongoing portfolio inflows: such inflows to EMs rose to $US29.8 billion in March.
“All four EM regions saw positive inflows for the second consecutive month,” the IIF said. “China saw net capital inflows in February for the first time since 2014, while net capital inflows to EM ex-China reached a four month high.”
The trade story though is mixed. On a recent run through Asia, ANZ head of institutional banking Mark Whelan told the South China Morning Post “there has been a slowdown in trade already (post-President Trump) and you’ve got to take into your thinking that there might be further disruption.”
The challenge – as always with Asia – is the variety and disparity in the region and the time frames involved.
McKinsey was quite negative: “An increasing volume of nonperforming loans is putting added stress on banks, as interest-coverage ratios decline at large companies throughout the region, especially those in China and India,” the report said.
“Our analysis indicates that by 2020, banks in Asia need to raise $US400 billion to $US600 billion in additional capital to cover losses from non-performing loans while maintaining capital-adequacy ratios.”
“Our analysis of 328 banks in the region showed that while 39 per cent posted an economic profit in the period from 2003 to 2006, only 28 per cent did so from 2011 to 2014.”
OPPORTUNITY & THREAT
McKinsey though was clear: this is as much an opportunity for disciplined banks able to innovate as it is a threat to passive incumbents.
The firm noted the keys to success would be focused growth; digital transformation; strong balance sheets; adaptability and a willingness to partner – for example with financial technology start-ups.
On that front, Asia does have promise. Outside of Silicon Valley, Singapore is considered a hot bed of fintechs but it is not alone.
China too is aggressively sponsoring such businesses and its major online firms such as Alibaba and Tencent are highly innovative in core banking sectors like e-commerce and payments with Alipay and WeChat Pay – to the extent the cashless economy in China has penetrated deeper than the US.
Then there is India: in a recent report, venture capital analysts CB Insights noted foreign investors have rushed to capitalise as the country’s GDP continues to grow at a steady clip.
“Looking at Indian fintech specifically, funding to private companies in the sector boomed from about $US175 million in 2014 to a high of $US2 billion in 2015 (buoyed by mega-rounds to Paytm) and then slid to $US530 million in 2016.”
“Still, 2016′s total funding was more than 200 per cent higher than total funding in 2014,” the firm said.
“A host of global corporations and their venture arms have entered the fray, eager to reach India’s mostly unbanked population and profit from the country’s tech-friendly regulatory environment.”
It’s an exciting time to be in Asian financial services – if your heart can take it.
Andrew Cornell is managing editor at BlueNotes