Asia 2020 -- Asia's banks face long road to recover

Asia 2020 -- Asia's banks face long road to recover

By Marguerite Nugent

SINGAPORE (Reuters): Many banks in Asia face a long road to
recovery from the region's financial crisis, but when they do
they should be ready to meet the challenge of regional and global
competitors, analysts and economists say.

Asian banks are undergoing a metamorphosis as they struggle
with problem loans that have come to characterize the financial
crisis gripping the region.

But once they undergo the required restructuring and
consolidation and swallow the harsh medicine of stricter
supervision, they will emerge far healthier than they are today.

"There will be fewer but larger players," said Thomas Monaco,
regional banking analyst at Bear Stearns in Hong Kong.

In fact, as we advance into the 21st century, he said
financial supermarkets were likely to replace individual banks.

"You will be able to have all the businesses in one operation
-- banking, securities, insurance," he said. Also, conglomerates
may step up as owners along with global giants like Citicorp and
Standard Chartered Plc.

Before all these changes take place, the banking industry will
face some hard times.

This year's financial crisis in Thailand meant the closure of
58 financial institutions, an effective devaluation of the
currency in early July, a drop in the stock market, a bailout
package from the International Monetary Fund (IMF) and,
eventually, the downfall of the government.

The crisis became known as the "Asian contagion" as it spread
to Indonesia, the Philippines and South Korea.

Japan had its own financial crisis brought on by the collapse
of its oldest brokerage house, Yamaichi Securities Co Ltd.
One common denominator of the crisis was problem loans, which
were made when the good times rolled and when economic growth in
many countries was in double digits.

But then the bubble burst and many analysts, investors and
academics have debated whether the "Asian Miracle" is over.

While the debate continues, there is a consensus that if Asia
is to get back on the economic fast track, countries in the
region will have to restore their financial systems to a level
that will support growing economies, inspire investor confidence
and make them competitive.

Among the problems facing the region is the question of
transparency.

"Governments are beginning to recognize that the release of
timely and accurate economic and financial data is a critical
element to the maintenance of financial stability," U.S. Federal
Reserve Chairman Alan Greenspan said recently.

"Banks are more likely to get into serious bad debt problems
if they are not even required to properly recognize, account for,
provision against and report bad debts," said Goldmans Sachs'
regional banking analyst Roy Ramos.

"This was certainly the case in India until the past several
years and Thailand until now," he added.

Bear Sterns' Monaco said some improvement was apparent in
Thailand, which was forced to begin detailing its problem loans
when it agreed a $17.2 billion bailout package with the IMF.

"Their non-performing loans are getting worse, but the
disclosure is better," he said.

However, there can be drawbacks, especially for developing
economies such as Thailand, which proved very vulnerable to
market forces.

"This (the Thai) experience has made some Asian policymakers
very wary about how available data are interpreted and used by
financial market participants," said the San Francisco Fed's
senior economist Ramon Moreno.

"It also has raised the...debate on whether policymakers
should respond by further increasing transparency...or by curbing
the activities of market participants," he said in a report for
the Fed's Center for Pacific Basin Monetary and Economic Studies.

Thailand and Indonesia already have been forced to face
reality and close troubled financial institutions, some of which
will remain closed permanently, while others will look for new
owners.

But rather than push for expansion in the industry, many
governments in Southeast Asia are calling for consolidation and
encouraging banks to merge on the theory that larger, better
capitalized institutions can effect cost savings and be stronger
competitors.

"Malaysia is making progress...encouraging merger and raising
capital standards," Bear Stearns' Monaco said.

He also believes that down the road mergers with international
giants will be allowed along with mergers with regional big-wigs.
While the strength of Hong Kong banks cannot be denied, analysts
believe that eventually, Chinese banks, particularly the Bank of
China, will become more aggressive regionally as will other state
banks.

The scene could have taken place in a number of Asian
countries.

A senior bank executive is called into his central bank to
explain why the bank extended so many loans to a steel company
which had just gone bankrupt.

The executive says the reason is very simple. "Steel is an
important national strategic industry."

The exchange, which took place in South Korea, is used by Chan
Huh, an economist at the Federal Reserve Bank of San Francisco in
a report on banking in the four Asian Tigers to illustrate the
type of lending practice that can lead to problems, regardless of
the intention.

Goldman's Ramos lists other practices such as excessive
lending for margin loans and property speculation, weak credit
and industry risk assessment systems and weak bad debt
recognition and provisioning.

"Simply put, poor lending and banking practices may continue
to be the undoing of banking systems in Asia," said Ramos.

"Asian banking systems must become better and more prudent
financial intermediaries. Failure to do so would risk further
loss of economic momentum for the bank's host countries...," he
said in recent banking report.

To be sure, none of the measures the banks undertake will mean
much if troubled Asian economies fail to resume strong economic
growth.

Analysts and economists doubt a return to the heafty days of
eight to 10 percent growth, but even slower growth rates could be
sufficient to provide growth that may prove more sustainable than
the double digits.