Interview: Batara Sianturi, Wick Veloso, Herminio Famatigan Jr and Mahendra Gursahani
To what extent can further liberalisation strengthen domestic companies for ASEAN integration and facilitate the entrance of more foreign players, particularly in the banking sector?
BATARA SIANTURI: Regarding opportunities generated by ASEAN integration, there are three secular trends that will shape the banking sector in the region: globalisation, urbanisation and digitisation. Globalisation can be seen in portfolio flows to and from developed and emerging markets, enabling banks to contribute to their connectivity. With 45% of ASEAN’s 600m population living in urban centres, urbanisation will be key and global banks can play a unique role by connecting cities around the world. Lastly, digitisation is an irreversible trend for corporate and retail banking, with mobile internet and digital banking shaping our future. Policies that will support this trend will certainly enhance and strengthen the upcoming economic integration.
WICK VELOSO: ASEAN will become the world’s seventh-largest economy, and the main consideration for banks’ ability to move from one country to another will lie in how well they can raise capital, as more capital is required in any banking transaction right now. As the BSP further liberalises the industry for foreign banks, so long as they comply with requirements like subsidiarisation, it is now important for them to raise their own capital locally.
For ASEAN banks to be able to really have an impact on the Philippine market, they have to take a look at how their local economy enables intra-ASEAN trade. Come ASEAN integration and the collapse of tariffs among its members, a regional bank would need to see what domestic commodities can be shifted to the Philippines and vice versa.
MAHENDRA GURSAHANI: Conceptually, ASEAN integration will offer regional banks more opportunities to use their liquidity to expand beyond their own shores and become relevant in other ASEAN member countries. Practically, however, integration in itself may not incentivise Philippine banks to expand their operations and offerings beyond domestic opportunities.
Similarly, ASEAN integration will not confer any particular advantages on regional banks, as they will still have to establish themselves to create scale, differentiate and compete with more established industry players. Likewise, it is difficult to see foreign banks willing to participate as universal banks, which would require massive capital investment even if they were still unable to compete effectively with more entrenched players. Unless one can bring something very specific, whether technical expertise, product knowledge or new product offerings, it would be difficult for a foreign bank to become relevant, particularly in the retail space.
What advantages do economies of scale and greater regional penetration offer to international banks vis-à-vis domestic banks in terms of products and services?
HERMINIO FAMATIGAN: Regional banks are strongly positioned to take advantage of ASEAN integration for the simple reason that they have a presence in all ASEAN countries. Anytime one liberalises or eases the flow of capital from one country to another, banks physically positioned in the countries that are going to be affected can theoretically better identify opportunities than banks that are not present. To not have a branch in the country does not mean a bank cannot do business; however, a physical presence facilitates trade with counterparts and vice versa.
International banks would need to differentiate themselves, and this will not depend on pricing. Whereas rates may differ, consumer motivations are largely similar, therefore competitiveness will lie in the speed and frequency with which banks are able to address customer fulfilment.
Regional banks can effectively deal with that through process improvements, as they can directly apply best practices that have been tested, while also increasing automation efforts and improvements in overall margins.
GURSAHANI: It is very rare for an international bank to compete head-on with the larger domestic banks. In the past, there has been an element of customers feeling more secure with large international banks, but this gap is narrowing as the technology they have come to expect is just as accessible to local banks. However, what domestic banks perhaps lack is the exposure to advances in financial instruments and products, and the ability to have them tried in test markets. Therefore, the key advantage for international banks operating in the domestic market is related to the franchise model. A local bank may experience constraints in securing skilled employees to deliver innovative products, whereas internationals banks can tap into a wider resource pool. Additionally, international banks can play a leadership role in delivering cross-border solutions, international trade finance and by providing the funding for propositions like public-private partnerships or infrastructure investment; the know-how to string these together and introduce them into the marketplace; and the links with interested international parties to facilitate their implementation.
How can technological innovations and new transactional platforms enhance accessibility to banking services and products? In what ways can it improve customers’ experiences?
FAMATIGAN: As the Philippine market moves forward, bricks and mortar are going to continue to be important. However, digitisation or virtual banking presents significant opportunities if done in the right way. Although more and more things in the banking industry are technology-driven, banks ultimately sell the same product, namely the ability to borrow, invest and make deposits. Additionally, people’s motivations do not change, as they will look for value, speed and convenience. What has changed is the ability of banking players to make services immediately available to customers.
Technology will be important; however, it channels the very same products clients wanted 30 years ago and will want 50 years from now. Banking will continue to be about people making sure they keep their money with companies they trust, being able to borrow what they have to, and having the convenience to pay for certain things. As an international bank, our advantage rests on having performed these things in various markets across the region, and our challenge now is to localise it to cater to domestic customers.
SIANTURI: For a global bank like Citi, technology is an area where we can bring value to the table because of its worldwide footprint. We are in more than 100 countries and are in a strong position to leverage that presence. For corporate banking, an international bank can bring technology applications to the area of payments and settlement, while in retail banking we can do so in the areas of internet and mobile banking. Although a customer may prefer to go to a physical branch, cutting-edge technology has now enabled us to bring the bank experience to the palm of his or her hand. There are big opportunities for banks in both digitisation and electronic banking, especially as these serve to simplify products and make them more customer friendly, while meeting new clients’ expectations for speedy delivery of services and products.
What challenges and opportunities are involved in expanding banking penetration and reaching the unbanked population and informal sector? How can this segment be better integrated?
GURSAHANI: It is massively challenging for international banks to play in that space, as a large part of the unbanked and under-banked population lives in rural communities where our reach is quite weak. Foreign banks have limits not only to their licences, but also to their ability to deliver the services needed at the grassroots level.
However, international banks can participate by finding ways to fund microfinance institutions. Unlike most economies in ASEAN, where big conglomerates or multinationals do not drive the economy as much as small and medium-sized enterprises (SMEs) do, in the Philippines the SME sector is quite small. A reversal of this may occur as multinationals bring some of that ancillary industry into the Philippines, making foreign banks want to work with medium-sized enterprises that they can help grow; however, serving small companies will remain a challenge in terms of reach and distribution.
SIANTURI: In 2015 the Philippines will have an ideal demographic window in which at least 64% of its population will be within the ages of 15-64, representing an immense potential source of economic growth. The key will be to provide jobs and support for SMEs to grow into larger corporations that then will require increased financing. The highly underpenetrated SME segment is an attractive opportunity given the liquidity of the domestic market.
Challenges for banks going into these areas lie in improving credit bureaux and ensuring quality portfolios as banks compete to grow assets. Fortunately, the Philippine banking sector is well capitalised to accommodate this growth.
VELOSO: At the end of the day, international institutions like us will not be able to cater to everyone, primarily because of very rigid know-your-customer rules – policies that only aim to secure and protect our valued clients. A foreign bank would need to be able to establish that it is banking the right people in the right segments. While there is a recognised challenge in expanding penetration on the asset side, foreign banks can further expand their reach through credit cards, subject to and guided by the same know-your-customer process and principles. Outside of that, foreign banks will not have that kind of magnitude, unless they can expand their presence and popularity in each and every part of the Philippine archipelago, which is not exactly where we would want to focus our efforts. Instead, we would focus on connectivity between international countries that have good economic trade numbers.
How can new measures help to accelerate the reversal of low loan-to-GDP ratios, while still ensuring mechanisms to mitigate credit risks? Which sectors have been neglected in this regard and could present new opportunities?
VELOSO: In the Philippines, the BSP has carefully watched the real estate market, implementing measures to prevent banks from overextending in this space. In other areas, guiding sustainable growth is a matter of encouraging more participation, allocating capital to critical infrastructure spending, agriculture and tourism, and focusing on the opportunities present in the Philippines.
Considering its population of 100m, the three main requirements are power, water and transportation. Few companies have concentrated on these critical economic areas, and these are where the opportunities lie. Moving forward, one’s ability to raise capital onshore will increase given how abundant liquidity is, and opportunities will arise to transfer domestic capital into markets that are untapped.
FAMATIGAN: So long as banks stick to the way that they have traditionally approached credit – lending to someone whom they deem creditworthy – the market will not overheat. One should not lend to certain businesses purely for speculative reasons, but rather to companies that have viable business propositions and a fair chance of being successful, generating jobs and spurring further economic activity. In the aftermath of the 1997 Asian financial crisis, bank managers at both domestic and international banks have become very seasoned at applying risk management systems and managing risk appetites.
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