The regional expansion among Asian banks seen over the past five years brings diversification benefits, but may also present greater uncertainties to banks' growth strategies, says Moody's Investors Service.
As a result of their regional expansion, Asian banks have increased the proportion of overseas loans in their loan mix. Consequently, the income mix of Asian banks has become more diversified, with greater proportions of income generated by sources outside the banks' domestic markets.
"Regional expansion for Asian banks is typically accompanied by greater complexity in operations, different regulatory environments, and varying operating conditions," says Simon Chen, a Moody's Assistant Vice President.
"As such, whether regional expansion is credit positive or credit negative for banks in the region depends on execution," adds Chen.
According to a Moody's report, three reasons support the expansion of Asian banks in the region, namely higher growth potential in Asia as compared to the rest of the world; continued momentum of intra-regional trade; and a reduction in the lending market share of Western banks in Asia since the global financial crisis.
While acquisitions have proven to provide banks with the quickest access into their target markets, particularly in Indonesia, Thailand and Hong Kong, the process of integrating the acquired bank into the acquirers'operations and realizing any cost cutting and revenue synergies is often long and challenging.
The Moody's report notes that particularly in the ASEAN region, banks have benefited from fairly robust operating conditions in the region, and recorded good growth and profitability.
However, the true test to the regional strategy for banks will come when the economic cycle turns and the idiosyncratic risks in each of the markets become more apparent.
According to the Moody's report, scale is a differentiating factor when a bank enters a new market, as the bigger banks tend to have much better retail funding franchises that are key profit centres for these banks.
On the other hand, regional strengths have also helped banks build up sustainable competitive positions in niche segments. This includes segments like trade finance and the cross-selling of treasury products to corporate.