Bigger, stronger banks may emerge after recovery
Bigger, stronger banks may emerge after recovery
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.