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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

    F500 ARCHIVE
1998: Fixing the Banks
In the fifth year of the Asiaweek Financial 500, the Great Shakeout begins

1997: The Agony and the Insolvency
On its fourth year, the behemoths of The Asiaweek Financial 500 face the region's biggest financial turmoil in decades

1996 | 1995

SEPTEMBER 10, 1999 VOL. 25 NO. 36

A New Breed Rising
How recovery from the Asian Crisis is creating a leaner, nimbler, stronger Asiaweek Financial 500
By JONATHAN SPRAGUE and ASSIF SHAMEEN


Cheeseburger, fries - and 50,000 yen to go, please. Now that's my idea of a Happy Meal. And the Bank of Yokohama's. Scrambling to streamline operations and boost returns, the Japanese lender thought of shutting down an old branch near a train station in suburban Yokosuka. Instead, it gave the space to McDonald's and put its automatic teller machines inside the hamburger chain's new outlet. Result: lower costs and more satisfied customers. Not to mention another jolt to the Japanese banking system's staid, conservative ways.

"Such a new service style would have been absolutely unthinkable for a bank 10 years ago," says McDonald's store manager and ex-bank staffer Yokote Yasuaki. Now that deregulation and competition are rewriting the rules, old-fashioned banks are having to renew themselves to gain an edge on their rivals or keep up with them. And fast: any banker who thinks "McBank" is a tasty idea had better get his order in pronto. Not only are other Japanese institutions asking Bank of Yokohama how to do it, Thailand's Bank of Asia already put an ATM in a McDonald's last year.

The renewal of Asian banking is proceeding apace - with the inevitable bumps, delays and backsliding, to be sure - but it's happening. Amid the rubble of bad loans, failed borrowers and shaky lenders left by the Asian Economic Crisis, banks are struggling not just to survive, but, for many, to transform themselves into leaner, sounder, more profitable and better-run institutions, with innovative services and an engaging new style to woo clients and win over rivals. Plus a rash of mergers and acquisitions is recasting the banking business across the region.

    FINANCIAL 500 1999
Renewal
How the Asian Crisis is spawning new banks and recasting the Financial 500

McBank A Japanese bank gets creative

Mandiri Troubling signs that a new bank is not independent

Scandal The Krung Thai fiasco jeopardizes reform

Niche Player Keppel targets the middle and the region

Bounce Back South Korea's financial system continues to reorganize

Giants Creating the world's biggest bank

Weddings Mergers made in heaven?

Ambition Equitable aims to be number one

Internet Banking Managing money via modem

The Foreign Factor Insurers still face closed doors

  THE 500

How the Nations Fared
in the 500


1-50 | 51-100 | 101-150 | 151-200 | 201-250 | 251-300 | 301-350 | 351-400 | 401-450 | 451-500 |

This year's Asiaweek Financial 500, the sixth annual ranking of the region's largest commercial banks, bears the marks of the Crisis, with Japan, Indonesia, Malaysia, South Korea and Thailand showing overall deficits when bank profits are netted against losses. The eight Japanese banks in the ranking's top 10 all lost money - $28 billion in all - due to bad-loan write-offs. Yet that flood of red ink is itself a sign of renewal: more and more banks are owning up to dud assets and beefing up their capital to offset losses. And as loans and lenders fall by the wayside, stronger institutions backed by new money, management, services and ideas, are picking up bargains and market share and moving to the forefront of the emerging new regional banking landscape.

Thus, the Financial 500 has begun to show the first stirrings of the region's "new" banks. Hardly anyone is setting up brand-new institutions. But nationalization, recapitalization, restructuring, mergers and acquisitions are revitalizing battered banks. The most widely publicized exemplar of the renewed institutions is the alliance to be formed by Fuji Bank (No. 2 in the 500), Dai-Ichi Kangyo (No. 4) and the Industrial Bank of Japan (No. 8), to create the world's largest bank next year with assets exceeding $1.2 trillion (see story, page 66). Indeed, what ties the new banks together is a new-found respect for bigness while enhancing management, technology and products.

"Size is the name of the game," says chairman George Go of the Philippines' Equitable Banking Corp. (No. 319), which took control of PCI Bank (No. 284) in May. Bigger banks mean larger capital bases and greater economies of scale. But bulk is not enough. "Our next [step]," says president Wee Sung Bok of South Korea's Cho Hung Bank (No. 55), following its merger with Kangwon Bank (No. 305), "is to adopt international best banking practices." With stronger foundations, better control of risks and costs, and a closer eye on profitability, Asia's new banks are preparing the ground for sustainable growth.

Take Singapore. Only nine institutions from the city-state made this year's 500 ranking, down from 12 last year, but their total assets went up to $171 billion from $153 billion. That's because Oversea-Chinese Banking Corp. (OCBC, No. 59) and Overseas Union Bank (OUB, No. 79) absorbed their once-autonomous units, Four Seas Bank and International Bank of Singapore, respectively, while Keppel and Tat Lee merged into Keppel TatLee (No. 149). In South Korea, the number of banks in the list dropped to 19 from 28, also due to mergers and closures, while assets rose to $452 billion from $395 billion. Indonesia, where the Crisis hit hardest, saw both the number of banks and their assets drop - from 50 banks with $108 billion in assets, to 36 with $52 billion.

Count on this trend to continue and spread. Singapore regulators want to cut the number of major banking groups from five to just two or three. Malaysia is combining 22 commercial banks, 12 merchant banks and 25 finance companies into six large entities. Not everybody is happy with the process. While managers of bigger banks preach the new gospel, those running smaller institutions often insist they still have a role to play. Many banks are controlled by families. Being merged or acquired can mean relations losing authority, perquisites and status - perhaps their very jobs. "Many [families] have decided that if they get a 15% return on equity instead of the 30% they got during the good days, that's still good enough," says Bruce Freedman, regional bank analyst at Donaldson Lufkin Jeanrette in Hong Kong.

In fact the primary impetus for the building M&A wave is not bankers seeking greater efficiencies or profits but banking officials trying to strengthen financial systems. "Regulators and supervisors are the main drivers of mergers and consolidation in Asia," says Brett Williams, an analyst with Thomson BankWatch in Hong Kong. "Otherwise there is little compulsion for bank owners and sponsors to merge."

Nor has the process gotten very far. "You can still count all Asian bank mergers on your fingers," says Robert Rountree, chief strategist for Prudential-Bache Securities Asia in Hong Kong. Moreover, not all mergers are equal, he adds. Japanese banks are notorious for maintaining separate personnel departments for years after union. "What's the point of merging when there is no synergy, no layoffs, no cost savings and more waste of management resources?" Rountree asks.

Putting together two or three bad banks could create just a bigger mess. And after organizational and financial overhauls, too many banks don't change strategy. "The people running new or restructured and recapitalized banks are the same guys who ran the old bad banks," says Thomson's Mark Jones. Finally, the banking environment often retains quagmires - immature regulatory regimes and institutions, cozy relations between bankers and regulators or borrowers, political influences in business. They can bog down the reform momentum. Like the payment by Indonesia's Bank Bali (No. 393) of a $72.8-million "commission" to get funds from the bank restructuring agency IBRA.

Download the complete 1998 Asiaweek Financial 500
Still, the renewal process is moving forward. Singapore's merger wave will gain more impetus next month, when the government will license new foreign banks to do local business. The current consensus sees DBS Bank (No. 32) and OCBC eventually gobbling up United Overseas Bank (No. 69) and OUB. "When consolidation in Singapore is over, you will have two or three of the region's strongest banks," predicts analyst Girish Kumar of Merrill Lynch in Hong Kong. Despite criticism that Asian mergers never fulfill their promise, past Singapore mergers like those between DBS and POSBank or Keppel and Tat Lee show that substantial cost savings and other benefits are achievable, he says.

Malaysia's grand consolidation plan has whipped up fears that it favors the well-connected and dilutes ethnic-Chinese interests. Still, says Pru-Bache's Rountree, "if you leave aside the politics and controversy, the announced merger scheme is very comprehensive." Hidden debts remain a concern. "If the balance sheets are clean and there are real cost savings and synergy, you could end up with a few large, profitable banks capable of funding Malaysia's recovery," he says. Cost savings could be elusive if officials block mass layoffs or slash-and-burn restructuring. "If that's what Malaysia's real intention is, they are wasting their time and effort merging the banks," says one Singapore-based analyst.

The pace is lagging in the Philippines and Thailand, but should pick up as banks consolidate in Malaysia and Singapore. "Once those mergers go through, there will certainly be pressure on regulators in other markets to ensure banks in their supervision enjoy similar benefits," says Merrill's Kumar. The Philippines has already had four or five deals in the past year, and is likely to see two or three big ones in 2000, he says. In Indonesia, the restructuring agency IBRA is taking steps like the formation of Bank Mandiri out of four state banks, although the situation is hampered by political uncertainties and the sheer scale of economic devastation.

In South Korea, the reform movement took a blow with the collapse last week of London-based HSBC's efforts to buy nationalized Seoulbank (No. 87), but officials vow to press ahead. And in Japan, where hopes for reform have died many deaths over the years, the agglomeration of Fuji, Dai-ichi Kangyo and IBJ could start a trend. "Being the biggest isn't necessarily better, but these three needed to merge," says James Fiorillo of ING Barings in Tokyo. "The merger shows that bank restructuring is happening at last in Japan."

Hong Kong is standing outside of the merger trend for the moment, having gone through a round of consolidation in the 1980s and weathered the recent Crisis relatively well. "Eventually there will be consolidation, but I don't think it will happen in the next year or so," says analyst Amit Rajpal of Morgan Stanley Dean Witter. Instead, seven small and medium-sized Hong Kong banks last year began to cooperate and pool resources. They already shared an ATM network together with the Bank of China group and London-based Standard Chartered Bank. Now they are looking at offering joint products and centralizing back room operations. If they succeed, other groups of smaller banks in the region may try to copy the formula, Rajpal says.

On the other hand, merger fever seems headed for Taiwan, also lightly scathed by the Crisis. "We want to merge as we are thinking of our international competitiveness," says chairman Lo Chi-tang of Bank of Taiwan, the island's largest. The state institution is under officials who worry about competition after the island joins the World Trade Organization. "This is part of our policy," a Finance Ministry official says.

One force for change that is playing a smaller-than-expected role is foreign institutions - so far. At the depths of the Crisis, global banking giants, especially the Western money-center powerhouses, had been expected to snap up distressed Asian banks at firesale prices. Some did. The biggest buyer of Asian lenders, Dutch financial group ABN Amro acquired 75% of Thailand's Bank of Asia (No. 280) last year. Standard Chartered has taken Bank Bali and Thailand's Radanasin and Nakornthon (see story above). But there was no feeding frenzy, and some apparent deals are unraveling, like HSBC's bid for Seoulbank (see story page 60).

Buyouts may still happen. Seoul says it still wants "in principle" to sell Seoulbank to foreign investors. Bangkok is preparing to place several nationalized banks on the international auction block. U.S. investment group Ripplewood Holdings is among the finalists to take over Japan's Long-Term Credit Bank (No. 13), which Tokyo salvaged from ruin last year. Many institutions such as HSBC and DBS are still prowling for acquisitions at the right price. And Ireland's top-ranked Allied Irish Bank has formed a strategic alliance with Keppel TatLee, capped by a 19% stake in the Singapore bank.

But even if the global banks have yet to buy dominant Asian banks, their entry into the region's markets is also propelling change. Take Citibank, a unit of U.S. financial behemoth Citigroup. With just 17 branches in Hong Kong, it punches above its weight using technology like online banking, which it introduced to the territory last year. ATMs, phone banking and the Internet account for half of the bank's transactions in the city, says Morgan's Rajpal. "Once a bank like Citibank can generate 75% of transactions through technologies, it will have the critical mass to be a mass market player rather than a niche, high-end player," says Rajpal. "Technology is cutting entry barriers into the mass market, making smaller and medium players more vulnerable" (see story page 69).

And big ones, too. Retail customers rushed to Citibank in Japan in the past year not only because the nation's banking majors are under strain, but because the U.S. bank offered such un-Japanese services as 24-hour ATMs and phone banking. Nor is such a strategy limited to rich markets. Citibank has some 50 ATM boutiques - providing ATM services, phone-banking and passbook printers - in Jakarta at a fraction of the cost of buying a local retail bank. From January to June, deposits in Citibank's Asia branches rose a robust 17%.

As such practices filter through Asian markets, there will have to be a new round of restructuring to create institutions new not only in name or size but in operations. Of course, Asian banks can start adopting newfangled methods now. Keppel TatLee's goal in tying up with AIB is to tap the Irish bank's expertise in a host of functions (see story left). And not every institution has to become a multinational, tech-savvy megabank. Small lenders with a geographic or product niche will thrive if run well, especially as customers begin to differentiate and insist on their individual needs.

Asia is a long and arduous way from all that. Just getting over the effects of the Crisis will take years. So will the restructuring of the corporate clients Asian banks loaned too much to during the boom years, as well as the development of wider bond and capital markets needed to finance healthier growth. Plus the time and effort to nurture new talent to revitalize regional banking. Not all of them will make it, but some of the new banks being born today will be the giants of Asia's tomorrow. Expect to see them in the Financial 500.

With reporting by Julian Gearing/Bangkok, Arjuna Ranawana/Kuala Lumpur, Antonio Lopez/Manila, Laxmi Nakarmi/Seoul, Jane Rickards/Taipei and Murakami Mutsuko/Tokyo


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