Restructuring Singapore series: Banking opens up 0 comments

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Following my last article on Singapore business going global, I thought a series of writeups on where Singapore appears to be heading would do justice to the topic, instead of just one or two. The rise of China and India has created the urgency for economic restructuring that was sorely lacking in the 1990s, given their intrusion into the core export sector (of most Asian countries). In particular, Singapore runs the danger of losing its status as a trading and business hub, given that it is not exactly near Northeast Asia where all the action is.

One of Singapore's core strengths, built up over the 1980s, has been its financial centre status. It is intimately linked to our status as a trading and regional business hub, given the importance of financing and credit to business. Fairness, efficiency, liquidity and transparency are all key attributes for a top banking system, and these have all been key features driving Singapore's rise as a financial centre. It is to MAS's credit (and also a follow-through to the dominant late-twentieth century trends of globalisation, deregulation and liberalisation) that they have recognised since the 1990s that to drive the next phase of growth (towards the Swiss standard, to employ Goh Chok Tong-speak) the Singapore banking sector has to open up to foreign competition.

The banking landscape is already morphing as we speak. MAS issued full qualifying banking licences to six foreign banks (Citibank, ABN Amro, Maybank, HSBC, BNP, Stanchart) through 1999-2002, the most privileged status for foreign banks that allows them to open new branches locally and to develop their ATM network. At the same time new wholesale licences (the next most privileged status) were given to banks from Switzerland, Japan, France, Australia etc. The number of branches that these banks can open, and the number of ATMs that they can operate, both key measures of permitted penetration into the local commercial banking sector, are set to rise further (you might have read of Citibank's intention to expand its presence into the heartlands).

The local banks have responded to the coming foreign competition by a process of consolidation to achieve the necessary operational scale: DBS with POSB, UOB with OUB, OCBC with Keppel-Tat Lee. On the investment banking side, there are the less-publicised acquisitions of Vickers Ballas by DBS and Kay Hian by UOB. The three main local banks are also required by the government to dispose of non-core assets by 2006: a measure probably designed to prevent conflicts of interest and abuses of the great power bankers wield over their clients, and presumably also to give greater focus to the core banking business. Additionally, we have seen a wave of expansion overseas: DBS bought Dao Heng Bank in Hong Kong to establish a Northeast-Asia presence, UOB established a strong presence in Malaysia (long-standing) and Thailand (through Bank of Asia), while OCBC built on its traditional presence in Malaysia. Trust the banks to diversify their revenue sources and risks in view of the coming foreign threat onto local shores.

Over the years, local retail banking has opened up to a new range of services, some with not entirely welcome consequences: insurance products and fund management services have burgeoned, credit card banking has become a major segment of consumer banking, and the new hot sectors now are wealth management and private banking. All this ties up with Singapore's transition from developing to developed nation status: the trend of high savings in the developing years is turning to an environment of high consumer demand (credit-driven) and investments (shares, unit trusts) typical of developed countries like the US.

Businesses, in particular SMEs, need access to funds for growth, and such financing is typically achieved by loans through commercial banks. An increase in competition (through a rise in number of banks) can only mean better financing rates for private enterprises, a sector the government is trying to encourage. The currency crisis of 1997-98 when the danger of excessive leverage was illustrated clearly also shifted the emphasis towards equity financing for many, and this is where investment banking comes in -- a traditional strength of foreign banks, in particular those of the Anglo-Saxon variety where equity financing has tradtionally been preferred. Foreign banks bring in foreign fund managers and private equity -- a source of new liquidity to absorb new share and corporate bond issues. They also bring in new instruments and methods: observe the new investment instruments springing up these few years or being planned for the future: REITs, structured warrants, index futures, single-stock futures, commodity futures.

Seen in such a context, the liberalisation of the banking sector is crucial to the transition process of the Singapore economy. Having acquired the critical mass of wealth, technological expertise and economic goodwill, the priority now is on how to manage it ie. capital allocation. Not only would banking sector liberalisation provide the competitive jolt to the local banks and eliminate unfair practices due to their hitherto protected status, it would also allow the new foreign banks to bring in their established expertise and best practices in consumer credit, investments and equity financing, banking segments which are crucial (and which local banks, long accustomed to traditional lending, might be lacking in) as Singapore seeks to boost domestic consumption, local entrepreneurship and foreign investments in local assets. A vibrant banking sector would further secure Singapore's position as Southeast Asia's financial hub.

References:
(1) MAS press releases
(2) ATM Marketplace news article Apr 17 2002: Singapore opens banking market, more ATMs follow