Another view on Asian FIG

A discussion with UBS Warburg''s FIG head, Steven Sun

Are family banks getting less important thanks to globalization?
I don?t know about less important. In Asia a lot of banks are still controlled by families. If the question is whether ownership is going to be institutionalised over time, then the answer is yes. In the near term, for many banks in Asia a lot of critical decisions will still be in family hands. That?s  one of the challenges because there are concerns about corporate governance, there may be regulatory issues, and there may be tensions between regulators and family shareholders.

The Malaysians have taken the approach that they don?t want families owning banks. Is that a good approach?
I suppose it depends on your perspective. From the perspective of a regulator, it might be preferable for reasons of governance and professional management not to have banks dominated by families. From a broader perspective ? of really allowing market forces to run their course ? if the commercial history shows a family has been able to maintain the bank in a way that is satisfactory to all shareholders and hasn?t created undue risk to the banking system then I?d argue there?s no reason why that shouldn?t persist.

Do banks with institutional shareholdings tend to be more stable than family owned banks?
On paper they will tend to have more professional management and better corporate governance, which will long term lead to more stability.  Having said that, there are plenty of examples of family-controlled banks -- particularly in Hong Kong and Singapore -- which have been very stable over a long period of time.  Part of that stability, compared with the experience of family-controlled banks in other Asian markets, comes from the quality of regulation.

What does it mean for corporate Asia? Does it lead to a more efficient allocation of capital?
Exactly, it really puts pressure on the Asian corporates because they have to compete for capital, and in the long run that?s healthy as it leads to better returns.

So the demise of family banks is positive for Asia Inc?
The movement toward professionally run, well regulated banks will be positive for Asia, because capital will be allocated on the basis of risk and return, as opposed to who knows whom.

How do you see this trend playing out in Thailand?
Thailand is a a market where the regulators, the families and the market forces are at a bit of an impasse. That may be one of the issues that?s hindering the ability of the Thai banking system to really get back on its feet. They?ve taken this muddling approach, which will take a long time, and it will have a cost ? that cost being the banking system?s ability to provide credit to the economy
In Thailand you do have more foreign competition now. Will foreign institutions force change?
Over time they will, because they should be able bring better products and services to their customers. The local banks may be trying to adopt the same discipline and approach, but they?ve got this legacy of the existing NPLs hanging over their heads. But foreign banks still make up a very small portion of the Thai banking market.

Returns on equity in Hong Kong have been quite good, but are families now recognising the trend is for banking in Hong Kong to become more and more difficult? How much do the ROEs have to decline before the families decide to sell?
That?s a good question and I don?t know there is a magic number. But the families clearly do see the change in the operating environment, and that is quite different from two or three years ago. It has all become a lot more real, with deposit rate deregulation, a possible deposit insurance scheme, the PRC banks having their eyes on the Hong Kong market ?all of that is going to create continual margin pressure. For the most part the shareholders do see the handwriting on the wall. They may not be sitting around waiting for someone to pull the trigger, but they are looking at the alternatives and considering them much more seriously today than they were two years ago.

Do Singapore?s regulators want to see less and less family ownership?
The authorities in Singapore have been focusing primarily on trying to emphasise professional management. Their banks are being pushed to become world class, professionally managed organizations. They see the broader future of the Singapore banks being in a regional role, and with the consolidation activity we are seeing today, that will probably happen.

Should Australian banks be interested in buying in Asia?
I always thought they would. At the beginning of the financial crisis at least three of the Australian banks were looking very carefully at Asia, as a logical step for their own expansion. But the process was a bit uglier than they were prepared for and they backed away. But over time Asia is a logical place for the Australian banks to expand.

You think a deal would be more likely to be done in Hong Kong than in Singapore?
Well, there are more candidates. After this round of consolidation in Singapore, a deal there would be a much bigger bet.  The Hong Kong banks provide more bite-sized opportunities, as well as a more natural path to the China market.

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