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Trends supporting mergers, acquisitions and consolidation will leave the Asia/Pacific banking industry much transformed from the pre-crisis years. The trends congregate around five main themes. We enumerate these themes to help banking industry players understand what the post-crisis landscape looks like for banks in the Asia/Pacific region, and Australian banking institutions in particular.

The Rise of super-RegionalsWe continue to see the interesting emergence of Asian super-regionals. These banks have become more aggressive despite current adverse conditions, and they have recognised the merits of building a franchise beyond their home markets. Their regionalisation objectives are intentionally more paced, however, and they have chosen to manage regional units that are close in proximity, and limited to one part of the region.

Super-regional, of course, is a term most used by ANZ Banking Group, which has had a head start in building a significant

pan-Asian presence. Another Australian bank, Commonwealth Bank of Australia, has gained a few regional units as well.

Elsewhere, we note super-regional strategies from all three domestic banks in Singapore, as well as Malaysia’s CIMB and Maybank. Other Malaysian groups like RHB and Hong Leong Bank appear to have regionalisation designs as well. Some banks in India, China, Hong Kong, and Taiwan, which have recently made their first acquisition moves on one or two banks abroad, might be starting their own super-regional bases as well.

The rise of super-regionals occurred just as international players such as RBS, AIG and ING retreated from the region or offloaded shares in specific banks (as in the case of Bank of America and RBS selling stakes in Chinese state-owned banks after lock-up periods). While we expect these organisations to fill some of the vacuum left by the global players, we believe that these players are creating their own unique propositions as truly Asia-centric powerhouses.

The Consolidation

scenario

By Michael Araneta

moving forward post-crisis

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Consolidation and Top-Tier ConcentrationIn December 2009, we looked at the combined market shares for loans and deposits for the top five institutions in select Asia/Pacific markets in 2004 and 2008. Shifts have occurred in the top-tier concentration over the years. Five out of eight markets have become more concentrated, with the top banks in Malaysia, Taiwan, and Australia reporting the highest gains in combined market shares. In the year ahead we expect consolidation activities to further intensify levels of concentration in these countries and others.

Regulators have desired greater concentration as they recognise the benefits of scale economies. Time and again we have heard regulators state that they would like to pare down the number of institutions to a handful of anchor banks, typically using capitalisation requirements to arrive at the magic four or five institutions. Several issues have to be noted here, however:• Recent experience has taught the industry

that size does not necessarily exempt organisations from collapse. We foresee industry guidelines and master plans shifting away from specifying asset size to emphasising the quality of assets. For example, the master plan in Malaysia calls for “reputable” institutions.

• The growing dominance of the largest players highlights not only too-big-to-fail arguments but also systemic risk – both issues gaining prominence worldwide in the recent crisis. However, the banking sectors in Australia and Singapore, two of Asia/Pacific’s most concentrated markets, have remained healthy and have emerged relatively unscathed from the crisis. This supports the case for continued size-building and further increases in the market share concentration of top-tier banks.

• Niche propositions will continue to be formulated by small to mid-size banks, and these institutions will still play important roles in the industry. Opportunities in niche areas will also usher in newer banks into the system. In the discussions above, we noted that some banks will focus on selected business areas like microfinance, rural banking, payments, or trade finance. Others, meanwhile, will differentiate on great customer service, better turnaround time, or product excellence.

• The increasing concentration among top banks highlights issues of collusion or unfair pricing power. In Australia, for example, larger institutions have been advantaged by greater access to liquidity and lower cost of funds. To this, Competition and Consumer Commission Chairman, Graeme Samuel, has remarked: “When you’ve got less competition, you’ll have higher prices being charged.”

new Financial sector Master PlansSeveral countries are coming up with new financial sector master plans – Thailand and Malaysia are bringing to market formal master plans soon, but other markets like Taiwan, Vietnam, and India are introducing salient changes to rules governing competition in the banking sector.

These master plans aim to lift the efficiency and competitiveness of the industry, typically by encouraging consolidation and opening up the sector to a greater number of new (or foreign) players. New master plans and new guidelines typically cover insurance as well, and a round of mergers or acquisitions might take place among insurers akin to what we are expecting from banks. We therefore have

These master plans aim to lift the efficiency and competitiveness of the industry, typically by encouraging consolidation and opening up the sector to a greater number of new (or foreign) players.

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to look at the changes in the banking industry as part of a wider-scale transformation that also affects nonbanks, insurers, and capital market players. Further, rules specifying single presence or regulating ownership by banks of insurers (and vice versa) will further up the ante for industry-wide consolidation.

government is Playing a key Role in ConsolidationGovernments across the region will still be able to drive a significant number of mergers, acquisitions, and other consolidation activities. The influence of the government is, of course, seen through government subsidies and tax incentives, new financial sector master plans, and new guidelines governing mergers. The government can still unload stakes in several important institutions, thereby effecting significant consolidation. China’s government virtually controls all the Big 4 banks, even after allowing foreign stakeholders into these giants. The central government also controls development banks in the mainland, which are huge channels for lending. Strong government control is also noted in India (where the government controls eight of the top 10 banks) and Vietnam (where state banks control 65 per cent of the market).

Meanwhile, some state-owned institutions in markets like Indonesia, Thailand, and Taiwan corner significant share in their respective markets. These include Indonesian players like Bank Mandiri, Bank Rakyat Indonesia, and Bank Negara Indonesia; Krung Thai Bank in Thailand; and Bank of Taiwan and Land Bank of Taiwan. Any consolidation involving these players will shift league tables and transform market dynamics. For Australia, the regulatory-governmental consideration is simple: will the Four Pillar policy stand firm in the post-crisis environment?

Continued Branch growthIn a 2005 report, we estimated that the number of bank branches in 10 Asia/Pacific markets would grow from 116,944 in 2004 to about 119,600 by 2009. Our current count for the same 10 markets is around that number – at 120,400. The region has seen an increase in not only the number of locations but also branch-type channels (kiosks, sub-branches, supermarket branches, microfinance outlets),

underscoring how face-to-face interaction is still a key element in the pursuit of growth in Asia/Pacific banking. We also point out the following:• The greatest branch network expansion is

expected out of India and Vietnam, in light of new players entering the market and a relaxation of branch licensing guidelines. In the previous sections, we also noted similar easing of branch opening rules in Malaysia and Thailand (after the launch of new master plans), as well as in China.

• Moves by Westpac Banking Corporation to “bring the manager back to the branch” is proof that face-to-face interactions are still crucial. We expect a slight uptick in branch-related investments in 2010. Australian banks will look intently at their current branch footprint and see opportunities for improving efficiency and productivity.

• Elsewhere, there have been huge cutbacks in branches for some banks in China. The Big 4 banks have been especially aggressive in closing locations, seeing a decrease of more than 14,400 branches in five years. These branch closures were partly in preparation of their public offerings, but mainly in support of banks’ operational efficiency objectives. The story for China is currently not necessarily about branch growth, but about channel effectiveness. Still, mid-tier players and foreign banks are taking full advantage of new licenses given to them, as well as the easing of rules concerning enlarged branch networks in the country’s rural regions. Post office networks, especially in Vietnam and China, offer a ready distribution network for banks. Expect tie-ups for payments, deposits, or card issuance. Banks will continue to optimise overlapping locations post-merger. Banks in Taiwan (e.g., Chang Hwa Bank and Hua Nan Commercial Bank) and Korea (Kookmin Bank) have been closing branches to bring down operating costs – although these initiatives would also be one off in nature. Banks will still hesitate to close branches, considering that branch licenses are hard to come by, and all the more difficult to regain once given up. *

Michael Araneta is a Senior Research and Consulting Manager at IDC Financial Insights Asia/Pacific

The region has seen an increase in branch-type channels (kiosks, sub-branches, supermarket branches, microfinance outlets) underscoring how face-to-face interaction is still a key element in the pursuit of growth.

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situation OverviewIt is important to note that despite being in a fluctuating global economic environment that features varying degrees of recession and slow growth, along with fear of capex on the part of all financial institutions, investments in ICT are being made. That bears repeating: financial institutions are continuing to make investments towards a more positive future. Looking forward, financial institutions that survive will further maximise value from existing customers, ramp up their risk management and regulatory compliance capabilities, and begin to redefine their business models in how they approach their markets. Strategic initiatives in 2010 and 2011 will be dominated by operational efficiency, customer centricity, and innovation.

iCT spending in Banking, Financial services and insurance (BFsi) in 2010The Australian finance market comprises several distinct sub-industries: banking, financial services and insurance.

BFSI is the largest vertical market in terms of ICT spending in Australia, accounting for 21.6 per cent of the total ICT market

(hardware, services, software and telecommunications). Spending on ICT will continue and IDC forecasts that BFSI organisations will spend A$9,763 million in 2010. Additionally, IDC forecasts this sector will increase at a compound annual growth rate of (CAGR) of 5.1 per cent between 2010 and 2013, to reach A$11,352 million. It is worth noting that this growth rate is higher than the average Australian ICT market CAGR of 4.6 per cent for the same period.

Top of Mind in australian Banking in 2010Customer Service & InnovationTrue innovation is exactly what will drive future success in financial services, either from lower costs, increased revenue, or a combination of the two. Given the past 18-24 months, most would agree that the financial services industry needs to take another look at its business models with an eye towards positive change. IDC expects a practical, back-to-basics foundation to most new models. This will provide a cornerstone for managing risk within the industry as well as drive continued efficiency and revenue growth. Innovation will be an integral part of this transformation going forward. Customers clearly want the innovation to continue as the take-up rate of internet banking has been faster than ATMs or phone banking. New ways of making payments are increasingly replacing the use of cash. Banks are working on new technologies that will further improve the banking experience, making it easier and even more convenient to do our banking business.

Australian BFSI ICT Market (A$M)

2010 2011 2012 2013 2010-2013 CAGR (%)

BFSI 9,763 10,232 10,797 11,352 5.1ICT Market 45,195 47,256 49,554 51,829 4.7

Source: IDC, 2010

you Can Bank On iT: The Banking iCT Market in australiaBy Melissa Martin

Banking Financial services Insurance

68%

17%

15%

Source: IDC, 2010

Australian BFSI ICT Market, 2010 (A$M)

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Banking 2.0 & Gen-Y Australian financial services institutions have unexploited opportunities to secure their share of the Gen-Y market by offering them enhanced services on mobile devices and through social media. With the Gen-Y market now making up approximately 20 per cent of the population and approximately 25 per cent of the financial service sector’s customer base, banks could be growing this profitable part of the market by adopting technologies such as instant messaging, mobile services, and collaboration tools such as videoconferencing to meet Gen-Y’s needs for choice, convenience, and manageability.

Cloud Computing & SaaS Anecdotally, banks appear divided into two lines of thought on Software-as-a-Service (SaaS) and cloud computing. On one side is a group that believes payments were too mission critical for their bank and therefore they would never consider SaaS and cloud services for this tier 1 application. However, they do agree that there are other tier 2 and 3 applications that would be appropriate for these models (e.g., reconciliation). The other camp articulates that the cost benefits of SaaS and cloud were too compelling to ignore in the payments space and that Australian banks were already moving in this direction, albeit the appropriate level of security and performance considerations. IDC believes that payments, while near and dear to a bank’s identity, will eventually make its way into these models. In reality, some level of payments processing is already happening outside the bank’s firewalls; for example, card acceptance, SWIFT messaging and cheque image archiving.

Essential guidance for australian BanksIDC offers the following guidance to Australian BFSI institutions for business success in 2010 and 2011:• When targeting Gen-Y it is the interaction

that counts. Thus focus on new media, Web 2.0 content, mobile banking and face-to-face interaction.

• IT organisations have weathered the crisis by focusing on optimising IT assets, consolidating infrastructure and focusing

on ROIs. These should be carried over to the period of economic revival.

• Optimisation has become more evident in the push to integrate and optimise data assets, in virtualisation projects, as well as in building standardised platforms;

• Integrated data resources that allow the institution to work on the “same truths” will help the bank attain much needed transparency. It can ascertain not only the bank’s competitive differentiation, but its very own survival.

• The crisis has not held off a select group of technology vendors from further improving offerings. Banks should look to those initiatives as indications of a vendor’s long-term commitment to the industry.

• The crisis will likely shift market shares and bring new market leaders into the fray – both from the BFSI side and the vendor side. On the BFSI side, we see new entrants into the markets. For example, Richard Branson, is making a renewed push into the Australian market, with a new joint venture with U.S. banking giant, Citibank, set to unveil a range of products (including credit cards and deposit accounts) in the next 12 months.

• Improved economic prospects will reenergise banking-of-the-future programs. Banks should bring together brain power and execution capabilities to bring to light innovative projects. *

Melissa Martin is Senior Market Analyst, Vertical Markets at IDC Australia

Australian financial services institutions have unexploited opportunities to secure their share of the Gen-Y market by offering them enhanced services on mobile devices and through social media.