Can we bank on bancassurance?

ING Barings head of FIG, Grenville Thynne shares his views

We seem to be seeing a trend towards the decline of the Asian family bank. Is this a positive trend for Asia?
What we've seen particularly in Singapore and Hong Kong, is that family controlled banks have been successful, by being very relationship-driven. It is seen as a positive by customers to be able to deal with a family member. This is changing with customer acquisition and maintenance more a function of wider product offerings and price.  Combine this with declining margins low asset growth and high IT spend, we are now moving towards a situation where the family bank is not as strong as it used to be These are all factors that are precipitating the decline of the Asian family bank

The Dao Heng transaction has created a lot of speculation about M&A in Hong Kong. What is your view?
Our view on consolidation in Hong Kong is it will continue, but gradually over time. We've seen the First Pacific bank sale last year, the sale of Chase's credit card business to Standard Chartered, and the Dao Heng deal. I do think a lot of the banks are talking to one another about what their strategy is going forward in this kind of environment. But they are not rushing into it.So I see it as a medium to long term trend driven by commercial considerations.

Do you sense that the families behind the Hong Kong banks know the good times are over?
They are certainly seeing that their business is not getting the returns they were previously, but they do believe very much that the family relationship inside the bank is quite important to customer loyalty. These customers could be corporates, and small to medium-sized enterprises.

That's also a problem, isn' t it? Hong Kong has fewer and fewer SMEs as it hollows out and business moves to Guangdong.
There's a lot of things happening in Hong Kong that don' t play to their strengths. But they also don' t see the necessity at this point in time of doing mergers. The Bank Consortium Trust is an example. There 10 banks got together, realizing they can create synergies without a full-blown merger.

DBS's acquisition of Dao Heng seems to have been received unfavourably by the market, judging by the share price. Why has the market taken this view?
The market has taken quite a short-term view focusing too much on the goodwill premium paid and the impact on earnings rather than the strategic benefits. DBS is taking more of a long-term view recognizing the importance of scale in such areas as credit cards and consumer banking that Dao Heng delivers. It remains to be seen whether they have made the right decision in the long term.

Are the banks in the Philippines family banks?
A lot of the banks in the Philippines do have strong family influence, and they are also going through a situation where they have to look at asset quality and their own domestic political situation, and the ability to get growth out of a market that is relatively stagnant.

In Malaysia, the government has said it doesn' t want families controlling banks.
The Malaysian Government acted very quickly when the crisis struck, moving from 57 financial institutions to 10 and implementing very strong corporate governance rules - in terms of the control of the families. It has yet to be seen whether this is successful or not, but the Malaysians needed to act quickly and they have. It has created a new financial market that should be able to better withstand any future crises that hit the economy.

Is consolidation by diktat a good way of reforming a banking sector?
We are in favour of market-driven consolidation, but in some situations like Malaysia, it was necessary to have government intervention. In other markets such as Taiwan we've seen legislation introduced in order to offer incentives to encourage consolidation.

Can you foresee a merger between a Singaporean and Malaysian bank?
I don' t foresee it in the medium term due to regulatory hurdles. I see them as a natural fit. If it was to happen over the longer term, it would make sense because of the trade flows between Singapore and Malaysia.

What' s your view on Thailand's banks? The families are still very entrenched there.
The problem in Thailand continues to be asset quality, and the inability to go the bankruptcy court in order to liquidate those non performing assets. That is continuing to drag the banks down in terms of their performance.

Will the Thai banks stand out in five years where the top banks are still very heavily family controlled?
We know that the family is quite influential at Bangkok Bank, but the family has also recognized the need to bring in foreign-trained bankers to strengthen the bank. So I believe you will see less family influence and more from outside bankers who can assist in management.

Do you see their shareholding going down, the way it is trending in other markets?
No, I don't.

So it will be somewhat unique. In Singapore, families are getting together in mergers. No one family is in total control. But you think Thailand will be different?
In the case of banks in Thailand families will continue to have an influence.

Do you see much interest from foreign banks in buying in Indonesia, and maybe taking a bit of 10-year punt?
The clients we've spoken to about Indonesia, are concerned about the unstable political situation and low asset quality.  As a result they have decided not to pursue opportunities in Indonesia at the moment.

The buzzword at the moment seems to be bancassurance.
Generally Bancassurance is a tough business model to execute. In Asia, selling life insurance has been predominantly agency and therefore relationship driven as a result I believe a bancassurance strategy will be even tougher to execute than in say Europe. However, there is a recognition among the banks that they need to diversify their income base, and start looking at non-interest income. Selling insurance products is a way of doing that. But in order to make it successful the insurance companies need to train the bank's staff to sell the product.
It also depends on the local legislation.
In Singapore and Malaysia it is permitted to sell insurance products through the banks. Insurance companies can manufacture the product, and the banks distribute.

Where is legislation a problem?
In Thailand for example it's a problem not only because legislation does not permit banks to sell insurance product through their branches but also due to the privacy laws preventing the sharing of client information. The Government is also reviewing legislation to possibly permit bancassurance in Korea.

Given you are the most successful bancassurance player in Europe, does that become a strength for you on the FIG advisory front?
When marketing to clients, it is an advantage to present case studies, and be able to bring people in to talk who have expertise in that area, which we have.

Why are the Australians so seemingly lacking in interest in Asia?
We've seen a lot of consolidation in the Australian market. We've also seen a shift towards the bancassurance model, for example, the CBA acquisition of Colonial and the NAB acquisition of MLC. There is recognition amongst Australian banks of the benefits of multi-channel/multi-product distribution. Therefore there has been no necessity at this point in time to look at Asia. Also Australian banks are more comfortable in markets where they know the legal system and the language. Also being able to acquire a bank that delivers them critical mass in Asia is very tough. To buy in Hong Kong, say a First Pacific Bank with a 1.5% market share, doesn't deliver them a lot.
So they would have to buy a bank the size of Bank of East Asia to make it interesting?
If a Bank of East Asia was available that would be interesting to many foreign banks, because of the scale opportunity it gives you in a market like Hong Kong.

Is a Singaporean-Australian bank merger likely?
I don't see that as a possibility in the near term, especially with what is going on in Singapore at the moment. But the natural markets for Australians to launch their Asian strategy would be from Singapore or Hong Kong.
 
Would the Australian regulators insist that the headquarters was in Australia?
I don't think the Australian government would be too interested in seeing decision making going offshore.

What probability in the next five years of their being a Singapore-Australia bank merger?
10%.

And Singapore-Malaysia?
A higher probability - 25%.

And in the next five years, how likely there will be mergers in Hong Kong?
I would say you will see two to three more mergers in Hong Kong in that timeframe.
Imagining that regulatory issues don't exist, does it make more sense for shareholders of Singapore banks to acquire in Malaysia or Hong Kong?
That's a tough one. A merger between a Singaporean and Malaysian bank would be more driven by capturing the trade flows between the two countries and realising some cost savings. Whilst the Hong Kong acquisition strategy may be more about gaining a presence to expand into the greater China market. It might be a longer term payback.