May 2014

Asian and Australian Banks Cross-Over:
Growth and Safety
Banks based within Asia and Australia are crossing over more frequently, however how well do they stack up against each other? Will Australian banks have the ability to develop a competitive advantage in highly banked Asian capital markets, and will Asian banks offer a compelling alternative to Australian banking propositions?

Asian banks cost-to-income ratios have fast become the envy of the world, yet despite an extended period of strong performance by Australian banks, overall return-on-capital is yet to match that of their Asian counterparts.

Singapore continues to represent the central financial hub for Asia, with banks such as DBS, OCBC and UOB actively investing more broadly across the region. This has resulted in an almost fifty percent increase in pre-tax profits in the last year alone, indicating highly capitalised banks are deploying their resources diligently.

Despite these strong results, underlying growth rates favour banks based in smaller economies, for example Vietnam and Cambodia. Regulators and investors remain cautious of emerging markets ability to sustain growth, focusing on bank consolidation and shadow banking oversight.

Moves to deregulate financial markets in China are also viewed in a positive light. A small number of large banks coupled with hundreds of smaller banks dominate financial markets in most Asian countries.

Further consolidation provides a stronger underpinning for additional growth, ensuring Tier 1 capital can comply with minimum Basel III regulatory capital requirements.

Of the Australian banks, ANZ has exhibited the most commitment to the region however Commonwealth Bank, NAB and Westpac are following suit.

Although the number of banks competing for business is significantly higher in Asia, the recent trend of many European banks retreating from the region leaves a considerable opportunity for both local and international banks.
Several Asian banks are targeting further growth in Australia as the mining boom is replaced by a rapid home construction expansion. Asian lenders are strongly placed to extend lending facilities to Australian borrowers, as banks focus less on non-core wealth and investment functions, favouring traditional roles such as funding small business ventures and retail consumer finance.

Moves by the Australian Prudential Regulatory Authority (APRA) to tighten home lending standards will place pressure on new entrants to compete on more than just price. Owner occupied housing growth is being consistently outweighed by self-managed superfunds and investors, particularly in Sydney and Melbourne.

Expansion into Asia does not fit these categories, with wealth management and trade finance offering excellent opportunities in an evolving financial markets landscape.

Australian banks have made significant steps to safeguard themselves from another financial crisis. S&P have recently rated Australia’s banks amongst the safest in the world, based upon consistent reductions in impairments and bad debts. A low interest rate environment has also seen loan repayments increase.

Australian banks seeking ROC outcomes achieved by Asian banks are closely monitoring the success of the Shanghai free trade zone, presenting as an excellent opportunity to engage with businesses in the region more broadly.

An easing of Chinese capital controls is attractive to new entrants, however in many countries across Asia the unique challenge of competing with such a high number of individual banks will push their strategic positioning to new lengths.

Asian banks entering Australia are seeking the safe, confident and robust revenue streams that have made Australian banks such valuable propositions. The trade-off between stability and growth will continue to define the cross-over between Australian and Asian banks.
Loan Balances
% of Total
Asian Bank Share of Australian Loan Balances 1.9
Australian Bank Share of Asian Loan Balances 0.9

East estimates based on central bank data

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