Rebuilding the Banks

Article excerpt

The region's banks are mostly small and inefficient

Now that has to change

Asia's local financial institutions can no longer afford merely to tinker at the edges; more open markets, more demanding customers and foreign institutional investors, and more intense competition from abroad are all putting extraordinary pressure on private and state-owned banks to raise their game to unprecedented levels. To survive, such banks will have to improve their performance hugely over the next few years. In fact, they will have to remake themselves from the ground up.

The transformation of Asian financial institutions will unfold in three stages. In the first, they will have to secure their lifelines by recapitalizing and restoring public confidence in their basic solvency. In 1998, foreign banks like Citibank, HSBC, and Standard Chartered were flooded with deposits from Hong Kong, Malaysia, and Singapore as frightened depositors moved money from local institutions to these seemingly more secure multinational ones. To win back such deposits and reassure long-term corporate borrowers, local banks will certainly have to show that they are financially sound by writing off bad loans, receiving new capital, and implementing more transparent policies.

Refocusing, stage two, will have to proceed nearly in parallel with the first or follow it immediately. During this second stage, which is likely to last two or three years, institutions will have to refocus on areas where they can build the greatest competitive advantage. Accustomed until now to being all things to all people, they will have to redirect their efforts to customers and products that attract the least intense foreign competition. Of course, the banks must also recruit staffs capable of developing and implementing these more focused strategies, and they will have to learn how to analyze their opportunities in a more sophisticated way. That in turn will mean relying on ideas from staff members who are close to customers, not on commands from senior management. In short, refocusing presents local financial institutions with a twofold challenge: they must alter not only their strategies but also their basic management culture.

Finally, in the third stage they will have to raise their skills to world-class levels in management leadership, human resources, marketing, distribution, processing, and risk management,(*) steadily narrowing the gap between themselves and foreign organizations like ABN AMRO and Citibank, which are expanding in Asian markets. To meet this challenge, surviving local banks will almost certainly be forced to import managers and techniques from abroad.

Asia's strongest local financial institutions could complete all three stages of the transformation by 2005. Banks that do so will benefit from, and perhaps drive, the coming boom in mergers and acquisitions. Those that do not will be swallowed up. But since the challenges facing private and state-owned banks differ so markedly, it is best to consider the problems of each separately.

State-owned banks

During much of the 1990s, the major state-owned banks dominated many Asian banking markets; as late as 1997, they held significant shares of the action in China, India, Indonesia, Malaysia, Singapore, and Taiwan [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. In some cases, governments saw their participation in banking as a critical element of a centrally controlled supply-driven economic strategy of funneling money to specifically targeted priority industrial sectors, Indeed, governments hoped to manage the flow of funds to key corporate sectors not only by exercising firm control over state banks but also by guiding all banks through ministries of finance and central banks. Moreover, state ownership of banks sometimes benefited powerful government officials financially.

State banks were not managed to maximize their economic performance. Although this history of serving political rather than economic ends did not prepare them well for the future, some of their assets will prove very valuable. …