Further shakeout seen for vulnarable ASEAN banks

Further shakeout seen for vulnarable ASEAN banks

Eileen Ng, Agence France-Presse, Kuala Lumpur

Southeast Asian banks remain vulnerable five years after the
regional financial crisis and a further shakeout in the sector is
inevitable over the next five years, industry experts say.

ASEAN banks face a new "strategic crisis" driven by new
technology, more demanding customers, deregulation and increased
foreign competition, said Jens Lottner, a principal with U.S.
consultancy firm McKinsey and Co.

Lottner told AFP on the sidelines of an Association of
Southeast Asian Nations (ASEAN) banking conference last week that
regional banks have not fully recovered from the 1997/98
financial turmoil.

Singaporean banks are way ahead of the pack but their non-
performing loans (NPL) level of 8.1 percent this year, down from
12.2 percent in 1997, is still far from the 3.9 percent mark in
1995, he said.

Mixed progress is seen in Malaysia where banks' capitalization
and profitability have been strengthened by the merger of its 54
banks and financial institutions into 10 core groups but NPL
remain high at 11 percent compared to 4.9 percent in 1995, he
said.

Thailand's financial institutions are still struggling, banks
in the Philippines and Indonesia are "in trouble" with weak
profitability and high NPLs while those in Cambodia, Myanmar,
Laos and Vietnam lag far behind, he said.

"Despite progress, ASEAN banks have not returned to their pre-
crisis growth paths and remain in a vulnerable position either in
terms of high non-performing loans, weak capitalization or low
profitability," he said.

Lottner said the number of ASEAN banks have shrunk to between
200 and 300 after the 1997 crisis but many small sub-scale banks
remained.

Banks with less than one percent market share make-up 88
percent or 130 out of 148 remaining local banks in Indonesia,
while in the Philippines they account for 73 percent or 33 out of
45 banks left.

Lottner, who presented a paper to some 150 ASEAN bankers on
boosting competitiveness in the globalization era, said there was
a general consensus among delegates that "banks must get their
acts together."

"There is an urgent need to clear the deck and get things
sorted out. Over the next five years, we are going to see some
significant changes. It is very clear that there will be a
further shake-out," he said.

European and U.S. banks currently "dominate winning positions"
in the region and to compete, ASEAN banks must close gaps in
terms of skills, scale and scope of products, revamp their risk
management, add new capital and manage NPLs aggressively, he
said.

They must seek strategic alliances with foreign institutions
or form a regional consortium to pool their resources to cut cost
and build economies of scale, yet maintain their independence.

"There are enough examples in the world where not the biggest
won but the smartest and fastest, so it's hard to predict who
will be winners.

"There will be banks coming up over the next five years which
will not be on the radar screen right now. The ultimate end game
is likely expansion beyond ASEAN shores to become a regional
powerhouse," he added.

The biennial ASEAN conference, which ended Friday, was aimed
at exploring ways to boost regional banking alliances.

The Association of Banks in Malaysia chairman Rozali Mohamed
Ali has urged banks to discard obsolete practices and be
innovative to cope with market liberalization under the World
Trade Organization.

He said "cross-industry mergers and alliances" would be the
way forward for regional banks.

"ASEAN banks are picking up the pieces after the 1997 crisis
and we must now evaluate to see what's in store for us," said Nik
Hassan Nik Mohamad Amin, Malaysia's Bumiputra-Commerce Bank vice-
president.

"We must be ready before the floodgate opens. We must change
the way we do our business and build new operating models to
survive."