Asian banks are gaining ground on their global rivals by stepping up their service quality in corporate banking and by stepping in to fill the void left by retrenching foreign European banks, according to a new report, Asian Companies Forge New Ties With Local Banks, from Greenwich Associates.
The global financial crisis and its aftermath have presented Asian banks with a unique opportunity.
The European banks that have traditionally claimed corporate banking and cash management relationships with large Asian companies have come under pressure from balance-sheet constraints and from difficulties in securing U.S.-dollar wholesale funding.
This combination of challenges has led some global banks — including banks that in the past maintained a commanding presence in the Asian marketplace — to narrow their Asian strategies and to cut back on the resources they commit to the region.
Closing the Quality Gap in Corporate Banking and Cash Management
For the past few years, Greenwich Associates research has documented Asian banks’ success in exploiting this opportunity.
Asian banks are making significant investments in talent and technology. As a result, at a time when some foreign banks have given Asian companies reason to question their long-term commitment to the region, some local Asian banks are emerging as a more stable and reliable option in the local market.
“By closing the quality gap with global banks, Asian banks have made the prospect of partnering with a local provider an increasingly viable alternative,” says Greenwich Associates consultant Markus Ohlig.
Asian banks’ improvements have contributed to sizable gains. In 2009 Asian banks held 57% of corporate banking relationships with large companies in the region, versus 17% for European banks and 17% for U.S. banks.
By 2012 Asian banks had grown their share of relationships to 61%, versus 16% for U.S. banks and 13% for European banks. Japanese banks account for the balance of relationships with stable share over the time period.
“That growth is all the more impressive in light of the fact that it occurred during a period in which currency mismatches and associated swap costs were affecting the ability of non-U.S. banks to provide U.S.-dollar funding,” says Greenwich Associates consultant Fion Tan.
In corporate cash management, as recently as 2008, the top five cash management banks in Asia — a group composed entirely of European and U.S. players — controlled 46% of market share. Today, the combined market share of those top banks has dwindled to just 37%.
To be sure, companies still perceive foreign banks in aggregate as delivering superior cash management service quality overall. Foreign providers remain dominant in international cash management and continue to capture a larger share of Asian companies’ fees and compensating balances in both the domestic and cross-border business.
But an increasing number of Asian companies are concluding that the upgraded capabilities of local providers can meet their needs — especially given that local banks often offer significantly cheaper domestic cash management services than foreign competitors.
Although bilateral bank credit remains far and away the primary source of capital for Asian companies, the rapid development of the region’s debt capital markets and historically cheap funding rates have presented companies with an important alternative and banks with a promising source of growth.
Corporate issuance of Asia ex-Japan G3 currency bonds boomed last year as Asian local currency bond markets continued to grow. Greenwich Associates research suggests that growth should continue in 2013 if interest rates remain low.
Two-thirds of large Asian companies expect to issue public bonds in the coming year and 40% plan to tap dollar bond markets in the next 12 months.
Asian companies expect their expanding businesses to increase their demand for a variety of funding vehicles — but especially for debt capital markets.
Between 30% and 40% of Asian companies expect to rely more heavily on each of term loans, revolving credit facilities, commercial paper and equity funding over the next two to three years. Meanwhile, 70% of companies expect to be relying more heavily on debt capital markets.
Demand Heats Up for Acquisition Finance
Increased demand for acquisition financing among large Asian companies could point to a pick-up in M&A activity throughout the region in 2013. Thirty-one percent of the large Asian companies taking part in the Greenwich Associates study say they expect their need for acquisition finance to increase in the coming year. That’s up significantly from the 18% making the same prediction in 2011.