Regional expansion among Asian banks, which has accelerated over the past five years, brings diversification benefits but may also present greater uncertainty to banks’ growth strategies, according to global ratings agency Moody’s Investors Service.
In its report, “Regionalization of Asian Banks: Will Diversification Benefits Offset Changing Risk Profiles?” Moody’s noted three factors that support the expansion of Asian banks in the region: higher growth potential in Asia compared with the rest of the world; continued momentum of intra-regional trade; and a reduction in the lending market share of Western banks in Asia since the global financial crisis.
Banks in the Association of Southeast Asian (Asean) region have particularly benefited from fairly robust operating conditions in the region, and recorded good growth and profitability, it said.
As a result of their regional expansion, Asian banks have increased the proportion of overseas loans in their loan mix. Consequently, the income mix of Asian banks has become more diversified, with greater proportions of income generated by sources outside the banks’ domestic markets, the report explained.
According to the Moody’s report, scale is a differentiating factor when a bank enters a new market, as the bigger banks tend to have much better retail funding franchises that are key profit centers for these banks.
The report acknowledged that while acquisitions have proven to provide banks with the quickest access into their target markets, particularly in Indonesia, Thailand, and Hong Kong, the process of integrating the acquired bank into the acquirers’ operations and realizing any cost cutting and revenue synergies is often long and challenging.
“Regional expansion for Asian banks is typically accompanied by greater complexity in operations, different regulatory environments, and varying operating conditions,” Simon Chen, a Moody’s Assistant Vice President said in a statement on Tuesday.
“As such, whether regional expansion is credit positive or credit negative for banks in the region depends on execution,” Chen added.
The Moody’s report suggested the true test to the regional strategy for banks will come when the economic cycle turns and the idiosyncratic risks in each of the markets become more apparent.
In the meantime, the report said that regional strengths have helped banks build up sustainable competitive positions in niche segments.
This includes segments like trade finance and the cross-selling of treasury products to corporations, it said.