Banking sector still tied up in red tape

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 Malaysian lender CIMB Group Holdings scrapped a planned merger with two domestic financial institutions. 
WATARU YOSHIDA, Nikkei staff writer
 
SINGAPORE  While manufacturers gush over the abolition of tariffs within the ASEAN Economic Community, companies in the service sector see relatively little reason for optimism. Banks, in particular, are unhappy with the pace of progress.  
     Yes, the AEC aims to free up the flow of capital. Yet after a long preparatory period, the establishment of the community is close at hand and banks are still looking for tangible benefits. 
     "I am not seeing any signs on the horizon that the situation is going to change very rapidly," Piyush Gupta, CEO of Singapore's DBS Group Holdings, said at the end of August. "Banking is the most protected industry," he added.
     Gupta began to doubt the AEC in mid-2013. DBS, Southeast Asia's largest bank, had announced in April 2012 that it would buy all the shares of Bank Danamon Indonesia, a midsize Indonesian institution. The goal was to gain a foothold in the ASEAN bloc's most populous nation.
     The plan fell through because of growing anxiety within the Indonesian government about foreign ownership of banks.
     Bank Indonesia, the country's central bank, in May 2013 decided to allow the Singaporean bank to buy only a 40% stake in the Indonesian bank. DBS was disappointed that it would not be able to take charge of Bank Danamon's management and dropped the bid that July. The Indonesian authorities' policy still bothers Gupta, who says they are "going the wrong way."
     A major Thai bank encountered a similar barrier. It had been preparing to apply to open a branch in Indonesia, hoping to move into the country by the end of this year. The government, though, insisted the only option for accessing the market was to take a stake in a local bank. "We will not be looking to Indonesia for a while," an executive of the bank said.
     The AEC's banking integration framework allows member countries to designate their banks as Qualified ASEAN Banks, or QABs. These banks will be allowed to do business more freely across the region. Nevertheless, it is up to individual countries to strike agreements with one another to implement the rule. Until that process is further along, banks will continue to face high hurdles.
POWER DISPARITY   One reason for the delay in liberalizing the banking sector is the vast gulf between more and less developed markets. In a ranking of listed ASEAN banks by total assets, Singaporean institutions take the top three spots, with DBS at No. 1. Malaysian banks round out the top six. Indonesia, on the other hand, still has numerous relatively small banks. And authorities in less advanced countries worry that if they open up their financial markets, it will put them at the mercy of the big players.
     The stock market, meanwhile, seems to have lost interest in the AEC and its potential impact on finance. CIMB Group Holdings, Malaysia's second-largest bank, announced in July 2014 that it was preparing to merge with two major domestic financial institutions. The bank was aiming to bulk up and expand regionwide. Yet after the merger talks started, CIMB's stock plunged nearly 30% over about half a year.
Having failed to win the backing of investors, the banks scrapped the merger plan this past January. CIMB Chairman Nazir Razak said he was "frustrated" at the slow progress of AEC liberalization.
     One ray of hope for financial services companies is the rapid spread of smartphones across the region. Citibank, which has branches in six ASEAN countries, sees mobile banking and other online services as critical. "Thinking about moving people and building physical distribution is no longer the ambition for financial institutions," Michael Zink, head of ASEAN countries at the U.S. bank, told a Bloomberg-sponsored seminar in Bangkok on Dec. 3.
     "The ambition is to be allowed to deliver our financial services right through the iPads you're looking at this moment, and I don't have to build the branches," Zink said. The trouble is, regulations still need to be tweaked to accommodate this new age. The original plans for the AEC were adopted in 2007, the year Apple released the first iPhone. "The men who created the AEC weren't thinking about the network flow we now have," Zink said. "We want transparency and clarity on what we can and cannot do."
     Gupta said DBS, too, is focusing on using its "digital platform as opposed to a brick-and-mortar platform." 
Nikkei staff writer Yukako Ono in Bangkok contributed to this story.
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