S'pore banks regional expansion overrated?
DAMNED if you do and damned if you don't - Singapore banks probably feel that way when it comes to regional expansion.
There is doubt that going regional will pay off, given the experience of multinational banks - some of whom are still licking their wounds from the 2008 financial crisis.
And yet, a saturated local market leaves Singapore lenders little choice. Like other Asian banks, they have stepped into the gaps that opened up when European banks retreated from providing loans in this region.
But they have to fight entrenched domestic banks. Data shows that, despite their years in markets such as Malaysia, Indonesia and Thailand, their presence is hardly a challenge to the domestic banks there.
The market share of local banks in markets such as China, Indonesia, Malaysia and Thailand is between 40 and 60 per cent, a Moody's report this month showed.
United Overseas Bank (UOB) and OCBC Bank have made the most progress in Malaysia, where they each hold about 5 per cent market share. DBS Bank does not operate there.
With scale, bigger domestic banks in Asia enjoy lower funding costs, thanks to a larger and sticky deposit base, which translates to stronger returns than those of second-tier local competitors, Moody's said.
Meanwhile, foreign banks that insist on building a retail presence for access to deposits in Asia must put up with hefty accompanying costs.
Analysts have also questioned if the universal banking model - where a bank offers a suite of retail services, corporate lending, investment and private banking in several markets - is sustainable amid today's regulatory costs and constraints.
Multinational banks which have gone into these regional markets have failed to challenge the big boys in most jurisdictions in Asia, and have not built scale, according to a Macquarie report in May.
It noted that, for multinational banks, most of the network value and benefits get diluted by cost inefficiencies, regulation and increased complexity.
It said: "Most often, international expansion is usually about top-line growth story, but it rarely improves the banks' profitability profile. We prefer a strong market position in the home market and manageable exposure to a limited number of overseas markets."
Also, there is a sense that going regional to diversify risk is a strategy that has been worn down.
A Bank for International Settlements study in March looked at the banking systems of emerging markets, and noted that "gains from diversification may be harder to reap if countries' business cycles - and economic shocks - are or become more closely correlated".
To be clear, banks in Singapore report a stronger return on equity (ROE) - the income returned as a percentage of equity - than many of their Western peers, whose ROEs are in the single digits.
In Singapore, the best performer on an ROE basis is UOB, with 12.3 per cent last year.
Still, Singapore banks' cost profile as a percentage of income is also lower than that of the Western lenders' operations in Asia, the report said.
THE BUSINESS TIMES