More NewsLocal Asian Banks Catching Up to Foreign Banks in Transaction Services

Local Asian Banks Catching Up to Foreign Banks in Transaction Services

As Asian companies cut back on the number of banks they use for domestic cash management services, it is often foreign banks and global competitors who are getting the boot. The reasons are that companies across the region see many Asian banks as financially more solid than their western peers, and local banks are fast closing the quality gap that has long existed between themselves and their foreign rivals.

The results of Greenwich Associates 2011 Asian Large Corporate Cash Management Study reveal that, until quite recently, companies in large Asian countries like China and India could find few local banks with the service level, operations quality and national network to provide satisfactory coverage across the expansive nations. Companies often used individual banks for individual regions and turned to foreign banks to manage these domestic providers consistently via partnership agreements.

Over the past several years, however, growth and development among Chinese and Indian banks has produced a number of competitors with networks and robust operations and service capabilities that meet companies’ needs throughout these countries. Companies have responded by working directly with local banks instead of adding a foreign bank as additional ‘overlay’.

Even in smaller countries, however, Asian companies have been trimming their lists of providers of domestic cash management services. As these companies pare their bank lists, it is frequently foreign banks that are getting cut because domestic banks are closing the quality gap between themselves and their global competitors.

The bottom-line result of these shifts: as recently as 2005, large foreign banks held approximately three-quarters of large Asian companies’ domestic cash management relationships. After years of steady erosion, that share dipped to just 60% in 2011.

International Cash Management

At the same time Asian companies are deepening their relationships with local banks in domestic cash management, many are also reaching out for the first time to global banks for cash management support of growing international businesses. In 2008 only 55% of Asian companies employed a bank for cross-border cash management services. By 2011 that share had increased to two-thirds as companies expanded from domestic and pure export-based businesses to international concerns with suppliers, manufacturing and other operations in foreign markets. That trend has been especially pronounced in China, where the share of companies employing a bank for international cash management increased to 69% in 2011 from just 11% in 2008.

Global banks are a natural choice for this business. “Companies in every Asian country, save South Korea, rate the international product capabilities of foreign banks as superior to those of domestic banks when it comes to international cash management,” said Greenwich Associates consultant Markus Ohlig. “In South Korea, companies rate the country’s domestic banks as being on par with global providers.”

Trade Finance

Historically, companies employed trade finance primarily as a means of mitigating counterparty risk, especially in cross-border business. The results of Greenwich Associates 2011 Asian Large Corporate Trade Finance Study reveal that for many companies in Asia, however, trade finance is now employed mainly as a tool for working capital improvement and as an important alternative source of funding. In fact, the only two Asian markets in which companies view trade finance through the traditional prism of risk management are Singapore and Hong Kong. In these two regions, 56% and 66% of companies cite the mitigation of counterparty risk as their primary reason for using trade finance. Only about 40% of companies in these markets see trade finance as a tool for improving working capital management.

The cause of these differences: in the relatively small and well-developed markets of Singapore and Hong Kong, companies have many established sources of financing and are exposed to significant levels of counterparty risk from their focus on international business. Nearly 80% of trade finance fees paid by companies in Singapore are related to cross-border trade flows within Asia, as are nearly two-thirds of fees paid for trade finance services by companies in Hong Kong. In China, meanwhile, 78% of trade finance fees paid by companies are associated with domestic trade flows, and open-account trade finance accounts for 43% of total fees. Lacking the counterparty risk concerns that preoccupy companies in markets dominated by cross-border trade, Chinese companies employ trade finance primarily as an important source of alternative funding in a market in which less developed bank loan and bond markets provide fewer options for financing.

Greenwich Associates recommends companies hold discussions with both domestic and foreign providers to assess potential benefits and efficiency gains. “Domestic banks are rapidly improving and building out capabilities in transaction banking,” said Ohlig. “Some of these will soon emerge as cross-border competitors capable of providing integrated cash management and trade finance services at a regional level. Meanwhile, foreign banks that maintain their resource commitments to the Asian region represent an opportunity to access platforms that integrate these functions electronically and at a global level.”

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