The end of the suitcase banker

CNPC, the parent of PetroChina, in April issued Chinese yuan-denominated corporate bonds worth the equivalent of $3.16 billion. The same month, Thailand’s Siam Cement issued baht-denominated bonds worth $812 million. You probably didn’t notice either transaction because they were both so normal. Except for one thing: All six of CNPC’s book runners were Chinese domestic banks and all five of Siam Cement’s were Thai.This is news. Traditionally, foreign banks – especially those based in the U.S. and Europe – would have taken the lead on such local debt issues. But no longer. The financial crisis has changed the face of banking, particularly in Asia. Foreign banks, especially those from Europe, are retreating as volatility and stricter regulation back home has diminished their risk appetite. Meanwhile, Asian banks have fully recovered from their own crisis 15 years ago and are better equipped than ever to fill the gap. In 2001, banks based in the developed economies accounted for 92 percent of total market capitalization for all banks worldwide. By 2011, banks based in the emerging and BRIC (Brazil, Russia, India and China) economies had swelled to 48 percent of the global total. Standard Chartered, an international bank with a focus on the emerging world, is now among the world’s 25 largest banks. Market capitalization is particularly telling in this respect because it implies market projections about the future and also investor estimates of current value across an entire banking group, as opposed to rankings based on assets that capture mainly lending activity. While financial crises and regulatory changes in the U.S. and Europe are the proximate cause for this shift, other factors have contributed to the trend and make it more than a passing fad. At root, this shift is a consequence of economic growth, since banks grow and prosper alongside underlying economic activity. The local institutions that hold a growing deposit base from a growing number of companies and individuals will eventually expand into more sophisticated activities, even if foreign banks have previously handled functions such as underwriting initial public offerings of stocks or bond floats. Asian banks also have benefited from being well regulated. Governments learned their lessons after the 1997 crisis, and so did bank managers. While some institutions might have chafed as their Western peers profited handsomely from riskier activities in the last decade, Asia is turning out to be the tortoise to the West’s hare. Capital-adequacy requirements and other prudential regulation, coupled with fiscal discipline by most regional governments, saw Asia through the 2008 financial crisis relatively unscathed. No Asian economy experienced payments problems, and credit continued to flow to companies in most places, even if not quite as much as before. These underlying advantages are combining with the retreat of foreign institutions to give Asian banks new opportunities to play to their strengths. A big one is simple local knowledge. Foreign institutions have always suffered from the “suitcase salesman” problem – experts jetting in from Europe or the U.S. to sell their skills and their vast resources for underwriting and the like. Even institutions with sizable regional hubs in Hong Kong or Singapore have struggled to put sufficient boots permanently on the ground in emerging markets around the region. Asian banks are already in those markets, which gives them sizable advantages. Five years ago, bond deals were sold mostly into the West. Now, 80 percent of a typical bond float is bought by Asian investors – with whom local institutions already have long standing relationships. Even Western investors increasingly prefer the perceived security of buying bond issues where the underwriting bank has been lending its own money to the issuer for years, as opposed to a foreign banker who has just flown in for a one-off deal. This kind of success tends to breed success. One consequence of the rise of Asian banks is that foreign institutions will face a harder slog if they do one day try to return to Asia. Their traditional advantages will no longer appear as competitive. The increased competitiveness of Asian banks is good news for the banks themselves and their investors, but it’s also good news for Asian companies. As the local banks continue to develop their product capabilities they can improve pricing competition, both on their fees and in terms of better bond prices if their local knowledge boosts investor confidence. This is especially relevant today as the Western banks face substantially higher borrowing costs, which translate into higher lending rates. The local banks, which have huge retail deposit bases, are competitively advantaged. While emerging market banks have made huge progress over the last decade, there is still plenty of room to grow. Compared to the emerging-world share of global GDP, emerging-market banks are still under-represented. A decade ago there wasn’t a single BRIC bank in the top 50 and now there are more than a dozen. Today, there isn’t a single Singaporean, Indian, Korean, Indonesian, Malaysian or African bank in the top 50 ... but it’s pretty clear this too is about to change. Lenny Feder is the group head of financial markets at Standard Chartered based in Singapore.