Foreign banks are struggling in Asia; JOSEPHINE MOULDS assesses how well the region’s expatriate financial institutions have been able to maintain momentum in the midst of a banking crisis

MARCUS AGIUS, CHAIRMAN OF THE UK’S US$35 billion Barclays Bank, is earnestly discussing pig husbandry in a shack located deep in the heart of the Mekong Delta. Crammed into a home that doubles as the village shop, he is with a group of women gathered for a meeting about their village’s savings and loans scheme.

This unlikely scene has come about as Agius takes time out of his annual visit to Asia to see some of the bank’s corporate social responsibility programmes in action. Given the current banking crisis, this diversion could be considered frivolous, if not downright irresponsible. On the other hand, it demonstrates how Barclays uses its CSR programmes to further its business ambitions.

While in Vietnam, Agius is also meeting actual and potential clients, ranging from Vietnam Airlines to commercial lender Vietcombank. A stop at the Philippines allowed him to combine a visit to a UNICEF project in Manila’s slums where he conducted press briefings to announce the opening of a representative office that will take advantage of the country’s growing capital markets.

“It’s a kind of arbitrage,” says Agius. He is looking much more the chairman, ensconced in a five-star hotel and in a sharp suit, after days out in the field in chinos and a wicker hat. “[Vietnam] wants to develop fast and [to do] that they need capital. So there’s a lot of business we hope to do with them,” he says.

“When you do a bond issue it’s going to be for billions [of Vietnamese dong]. Charging a standard commission off that in the normal way covers the investment in our community budget many, many times over.

“When you’re dealing with the people we met [in the Mekong Delta], they’re dealing in pence; therefore our investment goes an awfully long way. So if we can help a lot of people at one end and at the same time do meaningful business at the other, that’s a win-win arbitrage.”

Expansion in Asia is a core feature of Barclays’ aim to “maintain a strategic momentum while dealing with the crisis”, to borrow Agius’ words. Already he says the bank is enjoying advantages from having China Development Bank as a major investor. “We have got a number of joint ventures. They spend a lot of money financing commodity-related government activities and we help them with their risk management. We’re exchanging professionals so they can learn about our business – including about how we do sustainability – and we can learn about theirs. It’s not just a naked shareholding.” Now the plan is to increase investment banking and investment management across Asia.

Foreign banks have been swarming into Asia ever since they were permitted. The UK remains the world’s leading exporter of financial services, reaching a record US$59 billion (net) in 2007, up from US$45.5 billion in 2006. This was despite the turmoil in the credit markets that began mid-2007. But traffic has started moving in the other direction as performance has faltered and a number of institutions have retrenched staff to deal with the crisis at home.

While Asia has held up well in the banking crisis, foreign banks have struggled as stimulus packages have boosted domestic lenders. In Shanghai for example, foreign banks issued 7.2 billion yuan, or US$1-billion less, in new loans this February, compared with a year earlier, after a 1.8 billion yuan decline in January. This stands in stark contrast to a surge in lending by Chinese banks. Many of the projects set in motion by Beijing’s four-trillion-yuan stimulus plan are funded by the country’s large state-owned banks, leaving foreign banks to cater mostly to multinational companies or local SMEs.

Data from India paints a similar picture. The growth in loans issued by 30 foreign banks slowed to 17% in 2008, against 31% for 2007. Deposit growth shrank even more dramatically, from 34% to 12%. In contrast, public sector banks growth in lending rose from 20% to 29%, and deposit growth remained stable at 24%.

The severe downturn in Western economies means the banks back home cannot support their Asian offices, and in some cases have been forced to sell foreign assets to bolster their balance sheets. Royal Bank of Scotland, most notably, may sell the lucrative Asian business it acquired when it bought Dutch bank ABN Amro. RBS is now 70% owned by the UK government, which perhaps unsurprisingly wants the bank to focus on the business of lending money to its taxpayers.

The Asian units are expected to be sold piecemeal. At press time, Australia’s fourth-largest bank, ANZ, was believed to have lodged the most substantial bid for RBS’ Hong Kong and Singapore assets. However, sources at the bank say that its two major rivals for the assets, HSBC and Standard Chartered, may still lodge bids.

One banker, who declined to be named because of the sensitivity of the situation, said: “The one thing that is valuable is distribution. There are regulations in Asia that restrict us in terms of the number of banks you can have in certain geographies.”

Elsewhere, US investment bank Citigroup has sold a retail brokerage and part of its investment banking operations in Japan to Sumitomo Mitsui Financial Group (SMFG) for more than US$5.2 billion. Citigroup put Nikko Cordial, a retail broker with 109 branches, and a large portion of investment bank Nikko Citigroup, up for sale as part of the bank’s efforts to improve its capital ratios.

This desperate need to raise cash has prompted a slew of Western institutions to sell off the so-called strategic stakes they bought in Chinese banks and so heavily trumpeted just a few years ago. Bank of America, for one, has sold US$2.8 billion of China Construction Bank shares at a 12% discount, and RBS accepted 7% less than the market price for its US$2.3 billion stake in Bank of China earlier this year. Insurer Allianz and American Express followed suit, selling a combined US$1.9 billion of shares in Industrial & Commercial Bank of China, the world’s largest lender by market value, as a lockup on their stakes ended.

The downturn is also halting the flow of new entrants into Asia. Belgian financial group KBC said in January it had shelved its expansion plan in China that included setting up a locally incorporated bank, due to economic uncertainty.

This mass retreat plays into the hands of those banks with strong enough balance sheets to take advantage of it. Gareth Hewett, HSBC spokesman in Asia Pacific, says: “Ten years ago our main competitors were international banks; now all the surveys show they are domestic.” He believes HSBC has an advantage because of its international links. “Our customers are companies that want to do cross-border business for wealthy people travelling. The domestic banks find it very tough to play in that space.”

HSBC, which bought 89% of Indonesia’s Bank Ekonomi Raharja last year, is also thought to be ready to swoop on any domestic players floundering amidst the crisis. Indonesia’s Bank Panin is considered a possible target. The British bank is also looking to expand in the region by launching a retail bank in Japan aimed at the wealthy. “Retirement is going to be a big factor,” says Hewett. “There are 120 million people there and it’s an ageing population, so long-term asset management and income provision post-retirement is going to be big business. We have something in terms of wealth management that maybe the domestic banks have not been providing.”

Private banking for the wealthy is a major growth market in Asia, particularly because of the clampdown of secretive banks in Switzerland. UBS agreed in February to pay a US$780 million fine and disclose the identity of some of its clients following a US tax-fraud investigation. Singapore, on the other hand, is holding out against pressure to open its books to Western authorities. At least US$300 billion of money, belonging to wealthy Indonesians, Malaysians, Chinese and other Asians, is managed in Singapore. Commentators say that could double in the next five years.

China is another key market for those foreign banks able to seek growth elsewhere as their home markets stagnate. Qiu Zhicheng, a banking analyst at Guosen Securities in Shanghai, told Reuters: “Most foreign banks regard China as their long-term strategic market, despite troubles at home. Banks in China still enjoy some privileges in terms of market access while interest rates are not fully deregulated, so China is a less difficult market to make money in than developed markets.” Australia’s ANZ is thought to be planning to set up a locally incorporated banking unit in China. Rumours began when the bank hired Christine Ip from rival Standard Chartered as its new chief executive in China. Ip played a key role in helping Standard Chartered set up its locally incorporated operation in 2007, making the British bank one of the first four foreign banks approved for such moves.

Regulatory hurdles do remain high for foreign banks setting up in Asia; they hold a minuscule 2% of assets in China and 8% in India. China’s Finance Ministry recently announced rules that make it harder for foreign investors to buy or sell their stakes, as a result of the fire sales of assets by Western banks.

Beijing also requires all foreign banks to become locally incorporated before gaining fuller access to its retail banking market. Those that manage local incorporation often win fast regulatory approval to set up branches or launch new products. This became easier in May when vice-premier Wang Qishan, China’s lead economic policymaker, pledged to remove barriers stopping UK companies listing in Shanghai. The move should see HSBC list in Shanghai by the end of the year – 90 years after it first applied to do so.

Elsewhere, Asia’s governments continue to liberalise their financial markets, if a little slowly. Hewett of HSBC says: “China has had a fairly well planned liberalisation programme and continues to follow it.” Malaysia, meanwhile, recently eased restrictions on foreign investors wanting to buy into the country’s financial sector. Foreign investors can now increase their holdings in Malaysian insurance and investment banks from 49% to 70%.

It remains to be seen which of the Western banks are healthy enough to take advantage of these moves.