KUALA LUMPUR: The formation of the Asean Economic Community (AEC) this year will enlarge the banking sector’s earnings pie — but it is still too soon for any of the players to be able to carve a bigger slice from it.
This was because the actual realisation of a regional economic integration that will see a free flow of banking services and low barriers of entry into Asean neighbours by banking groups is still quite “a few years away”, according to Maybank Kim Eng Securities’ regional head of banking and financial research Steven Chan.
Non-tariff barriers still remain visible obstacles to expand freely in the region, but the benefits that the sector may reap from the regional integration — once things are in place — are huge, he told The Edge Financial Daily on the sidelines of the recent Maybank’s Invest Asean 2015 held in Singapore last month.
“The key opportunity from the continuing development of the AEC (for the banking sector) lies in better intra-Asean trade, which should help improve gross domestic product (GDP) growth in Asean countries. Through that, Asean is expected to see an emergence of larger middle income population and a skilled labour force.
“With that, the banks will first benefit from trade-related fee income and trade finance. Secondly, investment banks will benefit from opportunities for bond underwriting and fundraising because of Asean’s need to accelerate infrastructure projects,” he said.
In addition, the development of a more affluent Asean population as a “side effect” of the AEC also presents banks with the opportunity to expand its income source by growing its transaction volume and product sales as well as developing new products.
“An increasing number of middle class population will likely stimulate consumption. From the banks’ point of view, they would probably benefit from transaction volume of credit cards and possibly the personal loans business. Also, because income has improved, some customers may now be willing to buy wealth management products and invest with banks,” he said.
Citing China as an example, he said banks are benefitting from the use of e-commerce as well as new products, such as virtual debit and credit cards.
“This may be the kind of developments that we will see in Asean in the future,” he said.
But at this stage, it is still not easy for Asean banks to enter one another’s country.
“There is still no free flow of services, especially for the banking sector. We are moving in the right direction in terms of tariff barriers, but there is still much more to do with non-tariff barriers before the AEC can work for the banking sector,” explained Chan.
This, he said, also means that intra-Asean mergers and acquisitions (M&As) between banking groups will be deterred by non-tariff red tape.
“M&As between banks in a specific country will be possible. But, intra-Asean bank mergers are another question altogether. There are barriers to that,” he said.
In addition, he highlighted differing economic growth, business cycles and currencies as challenges in establishing an intra-Asean banking network as well as steady capital flow between the countries.
“There is a big difference in economic growth and stability in countries within Asean. The concern is that free flow of capital out of weaker economies to stronger economies could be a concern if there is any political instability. Banks would also be concerned about weaker asset quality in weaker economies,” he said.
Closer to home, Chan said he has a “neutral” view on the Malaysian banking sector, with declining crude oil price and possible credit rerating of the country as key concerns.
“The concern for Malaysia would not be the formation of the AEC. It would still be crude oil price because this may affect asset quality of banks which deal with oil services or commodity trading companies. Secondly if crude oil price continues to be at a low level, this will lead to a sovereign risk downgrade and this would affect the funding cost of bank,” he said.
This article first appeared in The Edge Financial Daily, on May 5, 2015.