Singapore banks missing the boat in booming SE Asia

The three local banks are not having a good year, mostly due to forces beyond their control, but they seem to be also scoring own goals - missing opportunities right on their doorstep, our South-east Asian neighbours.

The past two decades have been a waste in terms of what they should have done, formulating and working out a thoughtful strategy of expansion in ASEAN countries but efforts have been half-hearted and sometimes marred by ineptitude.

Singapore contributes the bulk or the lion's share of profits to DBS Group Holdings, OCBC Bank and United Overseas Bank (UOB) but domestic sluggish growth, a slump in the property market and a prolonged period of weak interest rates are translating to poorer earnings.

What could have helped is if the banks have a larger presence in the region which is booming; some countries this year and the next are projected to grow more than 6 per cent against 1-2 per cent for Singapore.

Year to date, the stockmarkets of Indonesia and Vietnam are posting double-digit gains while it's in the high single digit for Thailand and the Philippines. Singapore equities by contrast is a minus 2 per cent.

For various reasons, the banks have pretty much neglected the Philippines, Thailand and Vietnam, concentrating on expanding in Greater China.

All three have Indonesian subsidiaries but progress in getting meaningful traction in ASEAN's largest economy has been slow. And payback for their Greater China strategy is taking a very long time.

In Q2, DBS said China recorded a net loss of S$15 million compared with a net profit of S$79 million a year ago and S$23 million in the previous quarter.

Net profit for Hong Kong halved to S$161 million from S$320 million a year ago.

OCBC's Greater China pre-tax profit was unchanged at S$253 million in Q2; UOB posted a pre-tax profit of S$66 million for Greater China, down almost 30 per cent.

From Malaysia, where OCBC and UOB are among the largest foreign banks, contributions there are somewhat underwhelming.

In Q2, OCBC's Malaysia pre-tax profit was up 11 per cent at S$214 million making up 19 per cent of total group earnings.

UOB's Q2 pre-tax profit from Malaysia fell almost 9 per cent to S$125 million, and contributed 13 per cent to group total.

The banks had a golden opportunity to acquire banks in the debt-strapped ASEAN countries following the 1998 Asian financial crisis but they let that slip after some missteps.

DBS tried with forays in Thailand and the Philippines but quit after huge losses.

Today, it has some activities in Indonesia which are so small that the bank lumps it under South and South-east Asia. Still, Q2 net profit of South and South-east Asia of S$46 million from breakeven a year ago shows the potential.

OCBC's Indonesian business posted Q2 pre-tax profit of S$76 million, or 7 per cent of group total, and up from S$47 million a year ago.

UOB, which has the most extensive operations in South-east Asia including 157 branches in Thailand and 190 in Indonesia, tried to buy a bank in the Philippines in 1999.

But stymied by minorities, the bank pulled back in 2005, efforts which left its then chairman and chief executive "allergic" to the Philippines.

UOB's Q2 pre-tax profit from Thailand and Indonesia came to a combined S$78 million or 8 per cent of group earnings.

For sure, it will never be smooth sailing to venture into these countries given that their sometimes chaotic domestic politics, frequent changes in policy, and weak adherence to rules, factors which deter all but the most stout-hearted foreign investors.

Venturing out of Singapore will always be tough but our deep-pocket banks have the resources.

The potential of South-east Asia is well documented: the 10 South-east Asian countries with a US$2.4 trillion (S$3.3 trillion) economy and population of 626 million forms one of the largest markets in the world which remains under-banked. It also has a burgeoning educated middle class that is receptive to financial services and products.

What our banks need is staying power and agility to navigate these unwieldy markets, before they entirely miss the boat.

This article was first published on October 13, 2016.
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