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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE ASIAWEEK FINANCIAL 500
FIXING THE BANKS

Page 4

CRUNCH TIME


IN VIRTUALLY EVERY ASIAN market where banks are in trouble, problems will remain even after the last bad loan is expunged from the books. It has been clear since well before the crisis began that banks in general were overstaffed and inefficient. That hasn't changed. In the United States, the consolidation that has taken place during the past decade has helped to streamline the industry. Merged banks have been able to cut costs by eliminating duplicate branches, accounting systems - and people.

Some Asian countries had begun to consolidate their banking industries even before the Crisis. But nearly everywhere there is scope for improved efficiencies. Given that most developed European countries have only a handful of large banks each, it can be assumed that Asia's shakeout will be severe. "Nobody really knows what the right number of banks is for any particular country," says Fitch's Marshall. "If you look around the world, the inevitable trend in the developed countries is toward consolidation."

Look at Indonesia: It had 66 banks in the 1996 Financial 500, 58 banks on the 1997 list and 50 this year. Of those that remain, two dozen are among the smallest 60 banks. If the assets of those 24 banks had been valued in terms of today's rupiah-dollar exchange rate, instead of the year-end 1997 rate we used for every bank, none would have made the list.

When Asia's financial crisis began, the nation was home to about 237 banks. As of four months ago, according to the Hong Kong office of Moody's Investors Services, 28 had been closed and 44 were under the supervision of the Indonesia Bank Restructuring Agency, which was set up to supervise - read close - the banks with the worst financial problems. Today, after another round of restructuring, those not under IBRA control may number fewer than 150. In 1997, Thailand had only 15 banks, but many more finance companies. Last year, the government shut down 56 of them.

Japan allowed Hokkaido Takushoku Bank, which had a negative equity of $9 billion, to go bankrupt 10 months ago. But otherwise the nation seems unwilling to allow any but the smallest financial institutions to fail. That may be why Tokyo is putting intense pressure on Sumitomo Trust & Banking to take over Long-Term Credit Bank. The government says it expects to provide up to $4.2 billion to recapitalize the bank and help it survive until Sumitomo decides. Meanwhile, LTCB is restructuring massively. The bank said recently it is closing all 13 of its overseas branches and 21 subsidiaries outside Japan. It will write off more than $5 billion in bad loans. And all its top executives, including the president, will resign.

"If one of the financial institutions that represents Japan should fail," said Prime Minister Obuchi Keizo last week to the Japanese Diet, "the impact it will have at home and abroad would be tremendous." Unfortunately, if Japan's moves to save its banking industry don't capture the confidence of investors, the impact will be equally as tremendous.

In South Korea, which has fewer than 30 banks, the government is encouraging institutions to merge too. The government says it will buy the shaky assets of weaker banks and will not require stronger banks to inherit the entire workforce of its new partner. One mega-merger, between Hanil Bank (No. 52) and Commercial Bank of Korea (No. 67), indeed promises major savings - a cut of up to 6,000 employees, or 40% of the combined workforce. But "let's face it, laying off people in the middle of a recession isn't a very good option for many banks," says Schuler of Moody's. And as the recent strike at Hyundai Motors demonstrated, South Koreans will fight long and hard to keep their jobs. The banks have tried to placate labor unions by pledging to eliminate half of the executive positions at the combined bank and lay off the top men at both Hanil and Commercial banks.

But beyond mergers, an equally important transformation is needed in Asia's banking industry. It involves hard-to-pin-down qualities like innovation and customer service - "software" changes in the parlance of management specialists. In South Korea, banks have vowed to undertake serious reforms in management, though bank boards have been immune from changes so far. One thing is certain: If foreign banks are brought in, the corporate cultures of many Asian financial institutions can be expected to change dramatically.

Indeed, in the coming shakeout only the best-managed banks are likely to survive. Even strong executive teams, such as the one at Bank Internasional Indonesia (No. 235), part of the Sinar Mas group owned by the Widjaja family, are facing difficulties. A poor management team hardly has a chance. The same is true for banks who have to follow instructions from governments about how much to lend and to whom. "If you have a banking system in which the government tells you whom to lend to and at what interest rate, there isn't much for the bank management to do," says Marshall. "We can criticize them for not engaging in risk management, but they could answer: 'How could we?' They didn't have the freedom to manage the bank."

A move toward professional, independent banking management has already occurred in Hong Kong, which is one reason its banks haven't suffered as much as others. Schuler says banks in Hong Kong, thanks mostly to the fact that its size does not require a massive and defused branch system, are among the world's most efficient. The overhead (staff and buildings) at Hong Kong banks is just about 30% of revenues. Most global institutions are happy if such costs are 60%. American banks have worked hard to reduce their overhead to 50% of revenues.

The Great Bank Shakeout has just begun. The changes may have been long overdue. But not all were inevitable. Until the Crisis. If the reforms are successful, one day in the not-too-distant future Asia will have fewer banks with more professional, independent management making prudent lending decisions. Overseeing the entire system will be a regulatory network that requires - and receives - accountability and transparency from lenders and borrowers alike. If the shakeout produces anything less - and it could - Asia's recovery will be that much slower.n

- Reported by Alejandro Reyes/Hong Kong, Julian Gearing/Bangkok, Laxmi Nakarmi/Seoul, Dewi Loveard/Jakarta, Murakami Mutsuko/Tokyo and Andrea Hamilton/Singapore

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