Bank expansion in troubled times

Accenture partner Pascal Gautheron talks about the regional expansion plans of Asia's banks and says customer trust in the system is critical.
Asian banks want to grow primarily in the region and are using retail banking as their main vehicle for expansion. These are some of the main findings of research recently undertaken by Accenture and headed by Pascal Gautheron, a partner at the firmÆs Asia-Pacific financial services practice.

Earlier this year, Accenture surveyed bank executives from across the world to uncover what factors motivate geographic expansion in the sector, and the methods adopted by different parties.

Of the Asian banks questioned, 90% said that they considered geographic expansion to be important or extremely important to their plans. Low levels of subprime exposure, a significant decrease in the number of non-performing loans and high levels of capital are factors that make Asia's banks well positioned to make the move, says the report.

When queried on the intended business focus of their geographic expansion, participants put high street products at the top of the list: 78% suggested that taking retail deposits is a focus, while 67% are interested in consumer finance and mortgage lending, as well as lending to small businesses. Mutual funds, commercial institutional lending and wealth management were favoured by a much lower 22%.

Gautheron says retail banking is an attractive market in Asia, where product penetration can be relatively low, while net interest margins are comparable with those in the US and Europe, combined with Asian banks' high levels of cash that make the move all the easier. Retail banking also has the advantage that ôyou can better manage your capital base by balancing the levels of deposits and loans that you make so you are less dependent on wholesale markets in order to growö, says Gautheron.

The research was released in the summer, before the financial crisis reached full steam. But Gautheron highlights that itÆs not all gloom and doom in the region: ôThe characteristic we are seeing at the moment is one of optimism with an element of scenario planning behind it. We haven't seen nearly as much of an impact in Asia as we have seen in US and Europe, especially when we are talking about the core retail franchises.ö

Gautheron says that there are a range of growth scenarios that are being mapped out. There are banks which are thinking of taking advantage of the times, making investments that their US and European counterparts are not able to make, thereby accelerating their growth plans. And then there are the more cautious scenarios, which take into account the uncertainly of stock prices, the reduction in interest margins, and further uncertainty relating to non-performing loans.

There are numerous banks across the region that are unruffled by the financial crisis, says Gautheron.

"We see many banks presenting the most optimistic scenario possible; their domestic operations are doing well and they've confirmed a commitment to make a strategic investment in technology or business transformation. They're looking at it from a perspective of "we're strong, we will continue to invest and stay true to our long term strategy," he says.

But Gautheron refuses to be pinned down on which particular banks will benefit, saying only: ôWe would expect large domestic players to play that card. They have the domestic strength, the ability to invest and the ability to weather the storm from a wholesale and an international exposure perspective.ö

An essential part of the expansion of a retail banking network is retaining customer trust in the system, something that has taken a beating in the US and Europe. ôThere's a direct correlation between the financial assets and consumer trust. If you look at it from an asset and liability perspective, the trust relates to the ability of the banks to hold a large deposit base, which is then directly related to the ability to create liquidity and lending in the market. It's a virtuous circle,ö says Gautheron.

Banks come in all shapes and sizes and so too do the methods they adopt for regional expansion. The report outlines four broad models. There is the global powerhouse, exemplified by HSBC, where a large global bank seeks to establish a position across the region via a universal banking model with a common operating structure. Then there are regional retail powerhouses, like DBS in Singapore and Maybank in Malaysia. These banks use their strength in one Asian market to propel themselves into other Asian markets where they have an affinity.

The other two expansion models are the incubators: banks like ANZ, which enter new markets by buying into local partners. And then there are the niche leaders, such as Rabo Bank, which use their expertise to enter a new market as a leading player.
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