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Four banks top cashmanagement poll

From the publishers ofAugust 2015

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GlobalCapital August 2015 1

CONTENTS

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Contributors to this report: Mark Baker, Anthony Chan, William Cox, Paolo Danese, Carrie Hong, Rev Hui, Rashmi Kumar, Ben Power, Ellen Sheng, Matthew Thomas, Elliot Wilson

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Also in this report21 Philippine Bank RegulationBank supervisors in the Philippines face more risks than most if banks ght back.

34 Asean IntegrationFinancial market integration has lagged behind other developments.

37 Australian Power PrivatisationsMore Australian states are nally getting the sell-o�s of electricity assets on the agenda.

40 Asean Bond Market RoundtablesThe Jakarta leg of our 2015 series of issuer and investor panel discussions.

48 Frontier Market Focus: Sri LankaPolitical stability is now required for Sri Lanka to full its potential.

52 Frontier Market Focus: VietnamVietnam is working to open its markets, but it is not a tiger economy yet.

56 GlobalRMB DigestThe devaluation of the yuan, Green Panda bonds, and the IMF's SDR review.

60 HK Stars IndexIn the latest update, why the index is outperforming the Hang Seng.

Cash management2 Sophisticated simplicityFor all the scope it o�ers regionally ambitious rms, the Asean Economic Community will put new demands on cash managers.

6 Spreading the loveCompanies are increasingly moving away from traditional relationships for their cash management services.

10 Cash Management PollDeutsche Bank, DBS, SMBC and Citi top the overall rankings in Asiamoney's latest Cash Management Poll.

28 Cover StorySustainable growth: DBS keeps ambitions on trackDBS is just three years younger than Singapore, which celebrates its 50th anniversary this year. The bank's rise has mirrored that of the city-state, but CEO Piyush Gupta is hoping it is now positioned to seize the opportunities of a fast-growing region better than its competitors.

Contents-Masthead-r4.indd 1 21/8/15 9:25 pm

2 GlobalCapital August 2015

Cash Management

Cash management is changing at an extraordinary pace. A slice of the corporate world once largely invisible to outsiders — and even overlooked

by many C-suite executives — is now more important, powerful and in�uential than ever before. Across the Western world, treasurers still carry out the vital task of husbanding a �rm’s cash resources. But they also guide corporate thinking on issues ranging from tax policies and data privacy, to outsourcing and the changing face of regulations.

That same story is now playing out across Asia and, more precisely, within the fast-growing Asean region, where a bywater of the corporate and �nancial world is being transformed beyond all recognition. Western treasurers now assess threats and opportunities stemming everything from market and funding risks, to liquidity and counterparty risks.

“That mindset,” says Amol Gupte, region head of treasury and trade solutions at Citi Asia Paci�c, “is now spreading across the region, largely driven by multinationals who have based their regional operations in an Asean country, or who have placed shared service centers in Asean countries.”

As multinationals push harder into Southeast Asia, attracted by rising growth and internal consumption (the OECD tips Malaysia’s economy to grow by 4.8% in 2015 and 5.1% in 2016, with Indonesia’s expanding by 5.3% and 5.9%, and the Philippines by 6.3% and 6.2%), the pressure rises on global and regional lenders to o�er the highest possible level of cash management service.

That in turn is creating a race to the top, as countries and city-states vie to become regional cash management hubs, attracted

by the allure of securing a larger share of this super-stable growth industry.

This transformation is playing out both within corporates and the banks that help them manage their cash reserves. And like any good revolution, change is taking place everywhere, in every corner of this once-ponderous industry. Take for example the rising demand for real-time information by treasurers. “We are seeing the development of real-time clearing systems, and the growth of non-traditional payment instruments such as mobile payments,” notes Citi’s Gupte.

Or look at how the globalisation of the payments industry, and the increasingly global convergence of capital and trade �ows, are transforming ageless aspects of the sector, such as transactional foreign exchange management. “It is clear that regional treasury departments have never been more focused on FX management,” says Faisal Ameen, head of treasury products, Asia Paci�c, at Bank of America Merrill Lynch.

To others, one of the more nuanced challenges for treasurers is how to roll out new cash management services without making them overly intricate, and thus unusable. This isn’t easy. Globalisation by its very nature is complex. Lenders reach more companies (and companies reach more customers) across a bewildering array of markets and time zones, o�en working to a host of di�erent economic norms and �nancial regulations.

Complicating matters for global �rms with regional aspirations, and for Asean corporates heading in the other direction, while boosting their local presence, is the almost dizzying array of rules that gird business activity. For all its manifold problems, Europe is a single, homogenous market. The same is true in the United States, where a product or service can be sold in all 50 states if it’s approved in one.

That isn’t the case in Southeast Asia, where governments o�en build forti�cations around favoured companies and industries, yet grumble about the protectionist tendencies of the nation next door. And where even the most capable treasurer at the largest and most diverse multinational struggles to keep track of and conform to every regional regulatory twitch and tweak.

“For company treasurers, the biggest regional challenge is legal and regulatory complexity,” says Kee Joo Wong, head of global payments and cash management, Asia Paci�c, at HSBC. “FX regulations, di�ering legal standards, an absence of uniform payment and collection practices.

"The �rst things US and European multinationals ask us are: ‘How can I simplify Asia or Asean? And how can I navigate the region’? Multinationals are dealing with multiple currencies in multiple countries and

Sophisticated simplicityAsia's corporate treasurers, and the banks that serve them, are facing more challenges than ever. The Asean Economic Community (AEC) o�ers plenty of opportunities to regionally ambitious �rms, but also requires more sophisticated ways of keeping things simple, as Elliot Wilson reports.

AMOL GUPTEregion head of treasury and trade solutions at Citi Asia Paci�c.

Cash Management 1-r3.indd 2 21/8/15 5:46 pm


Cash Management

that whole mix of currencies is di¨cult to govern.”

To this end, innovation, at least in terms of the nature of the service extended to a customer by a �nancial provider, can o�en mean making a product easier to understand and use. “Treasurers are paying more attention to having simpler and more e¨cient solutions than seeking a better rate on deposits,” notes Philippe Jaccard, global head of payments and cash management at ANZ. “They tend to think that more complex solutions present uncertainty — accounting, tax, operations, regulatory — so simple is better.”

DIVERSITY, COMPLEXITYThat the Asean region, as well as the broader Asia region, is a regulatory mine�eld for industry practitioners, is beyond dispute. Multiple markets, diverse regulations, a few partially closed capital accounts, and a welter of currencies, most now �oating but a few still pegged to the US dollar, all present a constant headache for treasurers.

“Corporates are faced with complexities including market-speci�c requirements for setting up entities, unique central bank reporting frameworks, and questions around how best to mobilise cash,” notes BAML’s Ameen.

One way to tackle this problem is to consolidate a �rm’s regional cash management operations in a single, legal-, business- and tax-friendly jurisdiction. For global corporates, this would seem to be necessary and entirely logical. “Centralisation remains a top priority for corporates…and we continue to see global multinationals moving their treasury centres to Asia, in particular Singapore, Shanghai and Hong Kong,” notes Citi’s Gupte.

This process should be given a boost by the Asean Economic Community (AEC), set for launch (having been delayed by 12 months) on the last day of 2015. To many, the multinational body is long overdue. Its charter is simple and worthy, and focuses on the pressing need to form a single competitive market, fully integrated into the global economy.

When complete, notes Citi’s Gupte, “it will generate bene�ts for businesses in Southeast Asia, transforming the economic and commercial landscapes of member nations. Companies will be able to move goods, capital

and people more freely in the region, and have greater access to capital.”

Harmonising rules and regulations, and abolishing tari� and non-tari� barriers for AEC members, should boost growth and trade �ows, raise productivity and e¨ciency, and reduce vulnerabilities to external shocks.

“The AEC has the potential to be a signi�cant player in the global economy,” says HSBC’s Wong. “If Asean were a nation, it would be the world’s seventh-largest economy. As a group, the AEC will have more people than Europe and a growth rate faster than anywhere in the world except China. This has the potential to turn Southeast Asia into an integrated economic powerhouse that will fuel the next phase of global growth.”

But unifying the region economically, and creating a �nancial industry that adheres to a codi�ed set of �nancial rules, are two di�erent and o�en disconnected ambitions. Centralising treasury operations across the

region remains a distant dream. Despite all the unifying potential of the AEC, “across Asean, incongruous and changing regulations across markets means unique solutions are needed for each country,” laments ANZ’s Jaccard.

BAML’s Ameen agrees. “The lack of a uni�ed regional currency regime, and diverse regulatory regimes, present speci�c challenges to treasurers operating both inside and outside” the region, he says. Clients, in turn, “increasingly demand solutions that address FX risk, enhance payment processes, and provide advisory, as they are looking to improve the cross border payment process.”

CENTRALISATION TRENDThis lack of regional symmetry — a problem exacerbated by a multi-speed and staggered pace of development — can force even the bulkiest multinational to pursue a multi-faceted approach to regional cash management services. So while corporates proclaim the need to centralise their regional treasury operations, they are prepared quietly to tweak their setup to cater to local rules and norms.

“We are observing a trend amongst more centralised treasury departments to localise some activities on a targeted basis,” advises BAML’s Ameen. Another quandary stems from this lack of joined-up thinking. The Asean region is awash with cities and countries straining to present themselves as cash-management hubs. Shanghai is emerging fast, boosted by the stop-start process of renminbi internationalisation, while both Malaysia and Thailand are desperate to de�ne themselves as vital and central to the industry’s cause.

But in truth, the picture is far simpler. “Singapore,” notes HSBC’s Wong, still “dominates overall in Asia. It leverages the large number of multinationals that house their regional headquarters within its borders, as well as the multitude of �nancial institutions that use the country as a base from which to service neighbouring markets.”

Add to this the Lion City’s ra� of attractive tax schemes, its robust legal frameworks, and its deep and liquid pools of foreign exchange and experienced human resources, and the result is a high-class �nancial hub that acts as catnip to global and regional treasurers.

In recent times Hong Kong has begun to catch up, �agging up its position as the

PHILIPPE JACCARDglobal head of payments and cash management at ANZ.

KEE JOO WONGhead of global payments and cash management, Asia Paci�c, at HSBC.



Cash Management

gateway to China (and as the premier RMB clearing and trading hub), along with a zero-rate withholding tax and the adoption of favourable tax rates for treasury centres. These are no small bene�ts.

“The renminbi is becoming a major focus for Asia corporations, particularly in Hong Kong,” says HSBC’s Wong. “For Chinese multinationals expanding their overseas operations, and for multinationals with signi�cant de�cits outside China, the rationale for integrating RMB with existing global liquidity programmes is immediately self-evident. Its rise as a trade currency continues unabated.”

Even here, though, the region’s myriad regulatory tangles undermine e¨ciency and e�ectiveness. Despite the imminent launch of the AEC, “regulatory and tax environments in Asean countries continue to be very diverse, limiting the economies of scale and scope for �nancial centres such as Singapore," says Lum Yin Fong, global head of product management, cash management and trade �nance at DBS. "New regulations regarding �nancial data privacy are bringing additional constraints, limiting data sharing and outsourcing.”

Lum also warns that despite its manifold advantages, Singapore is also becoming a more expensive place in which to do business.

ONE-STOP SHOPMaking cash management services across the region march to the same regulatory rhythm is vital for everyone. As Asean’s corporate champions expand into new markets, they want to work with �nancial partners capable of o�ering a full suite of services, from electronic banking and round-the-clock liquidity, to data visibility and robust risk-management tools.

Global lenders — the likes of HSBC, Citi and BAML — are venerable specialists in this �eld. But a host of sophisticated Asean and pan-Asian lenders, from DBS and ANZ, to Maybank and CIMB, are also seeking to pro�t from the global aspirations of regional corporates. To that end, laws that codify Asean cash management practices, placing every lender on the same, level playing �eld, would be a big help.

Correcting regional regulatory imbalances will not only bene�t a region increasingly dependent less on exports

than internal consumption, but will also boost �nancial stability — which is, notes HSBC’s Wong, a prerequisite for stronger economic activity. “A robust payment infrastructure plays a critical role in providing that stability, and removing the current cost and logistical barriers to international payments would be a major step towards unlocking Asean’s full internal growth potential,” he says.

The region still lacks a robust payment infrastructure for settling transactions — a move that would help under-pressure corporate treasury departments to e¨ciently manage their liquidity in order to support growth objectives.

But progress is being made. “Discussions about the adoption of common payment messaging standards are taking place, and various countries are implementing or upgrading their payment systems,” adds Wong. “Over the next 12 months, we can expect regional treasury centers, for example in Hong Kong or Singapore, to get even stronger. And we can also expect multinationals to continue to assess the business case for the centralisation of [their] treasury processes across the region.”

Again, that latter point is vital for the long-term aspirations of global corporates, desperate for greater regional visibility and control over their cash. Treasurers are under rising pressure to make the best possible use of cash reserves in each jurisdiction. This o�en leads to cash sweeping, where �rms transfer money from foreign divisions to their headquarters, reducing the need to borrow in order to manage cash�ow.

“This is certainly happening in Asia, and it is accelerating at a fast pace,” says Citi’s Gupte. “The root cause driving this is the unending search for e¨ciency in this hyper-competitive environment. This, coupled with increasing deregulation and competition among countries to attract foreign clients, is supporting this trend. We have helped release billions of dollars of liquidity to support regional or global concentrations of our clients.”

Treasurers are also tapping new forms of technology as they look for ways to boost the e¨ciency of transaction processing and information handling. Corporates across Asean increasingly demand real-time access to transaction and account details, including liquidity positions across multiple devices. Firms looking to minimise borrowing costs and optimise working capital, are also demanding sophisticated data analytics that support cash�ow forecasting.

“On the internal front, banks are starting to adopt agile delivery methodologies to enhance core banking applications to operate in more of a service oriented framework,” says Vineet Harnal, head of digital channel delivery at ANZ. “This allows banks to be more nimble in addressing evolving client and market needs.”

In many ways, the future of cash management lies in the ability of �nancial service providers to harness the power of technology, and for treasurers and their deputies to understand it, and then put it to work.

“Technology continues to be the key enabler in the cash management business,” says HSBC’s Wong. “Growth in cash management is tied to economic growth as well as the development of companies themselves. The larger the company, the more they have to rely on technology to support their business, the more they need cash management.”

It’s yet another sign of how rapidly the cash management industry is changing, not just in Asean and the wider region, but across the world. Once, treasurers were invisible; now, they are both visible and omnipresent, and vital to the success of any multinational company. Across the Asean region and beyond, the role of the corporate treasurer has come of age. ◼

LUM YIN FONGglobal head of product man-agement, cash management and trade �nance at DBS.



Cash Management

Corporates are getting �ckle. Where once upon a time banks could be fairly certain of being able to rely on their cash management clients to

mostly stay put and provide a steady stream of business year in, year out, that's no longer the case.

The trend now is to maintain relationships with a suite of banks, o�en to help navigate the speci�c challenges of di�erent markets. Companies doing business in China, for instance, are likely to keep an account with Bank of China for those transactions.

Gone are the days of a primary bank securing the vast bulk of business. Growing networks and complexity have created a shi� toward “multi-banking”. According to research from East & Partners Asia, primary banks now get 51.4% of market share while secondary banks get 28.3%. Compare that to �ve years ago, when primary banks got 61.3% market share while secondary banks got 20.1%.

“Part of the balance of power has shi�ed the customer away from the bank,” said Lachlan Colquhoun, chief executive of East & Partners Asia, a business banking market research �rm.

During and in the immediate wake of the global �nancial crisis, companies hung on to their primary banks and were reluctant to go elsewhere. Now, as business conditions have improved, they are looking around more — and they see multi-banking as prudent risk management.

Many Asian companies are expanding rapidly, particularly within Asia, spurring increased demand for cross-border cash management products and solutions. Intra-regional trade has been growing especially fast. Post-crisis, companies have also shown less loyalty and are more willing to move banking business to competitors

if and when an opportunity presents itself. According to Ernst & Young, nearly one in �ve companies has changed its primary bank in the past year.

Notably, there is a big gap in customer satisfaction in emerging Asian markets compared to developed Asian markets. Some 27% of companies in emerging markets have reported changing primary banks in the last year, compared with 10% in developed Asian markets.

This shi� toward using multiple banks for cash management is part of the same trend that companies have been adopting in other areas of banking – diversifying in order to reduce counterparty risk. This has caused banks to lose some footing while corporate customers have gained leverage.

The result has been shrinking market share for market leaders. And industry insid-ers say this doesn’t seem to be a temporary or cyclical trend.

While the big three of Standard Chartered, Citi and HSBC have managed to hold the majority of market share for now, others, such as DBS, Bank of China and ANZ, are looking to gain market share and convince customers to make them their go-to primary bank.

“In an uncertain banking landscape, clients increasingly prefer to diversify their bank portfolio as a risk mitigation measure,” said Chyn Kin Wee, head of transaction banking for Asia Paci�c at BNP Paribas. Those risks are linked to the banks’ capacity to process payments in a timely manner and to act as a safe harbour for deposited funds, he said.

Others agree. “I would have been a little cautious two years ago because the trend was very new then, but this is directly correlated to the growth potential in the region," says Mahesh Kini, Deutsche Bank's head of cash management corporates for Asia Paci�c.

"Because of the increased complexities, the pie has become bigger. I would think it’s a fundamental change."

In the past, it made sense to pick one bank or to share business among core relationship banks, Kini said. But now companies are looking for best-in-breed everywhere; they want to pick the best in each country instead of one bank for the whole region. Research from McKinsey found that Asian medium and large companies used an average of 30 or more banks.

BNP Paribas’ Wee said that multi-bank-ing created opportunities for banks to o�er clients multi-bank platforms for payment initiation and transaction reporting. BNPP, for instance, has introduced Centric, a single portal that integrates various platforms and gives customers a full range of banking services, such as trade and supply chain management as well as foreign exchange.

GROWING PIE, SHRINKING SHAREThe bullish outlook for the cash management business in Asia has attracted a plethora of players. Global, regional and local banks are competing for market share.

In addition, banks are also facing more and more competition from non-banks such as technology companies, internet �rms and alternative asset managers that are expand-ing into lending, trade �nance or foreign exchange.

Non-banks are moving into �nancial services in a big way in Asia. China featurs Alibaba's wildly popular online payment platform, Alipay, while Tencent has ventured into online banking with WeBank. Philippine telco Globe o�ers an increasing array of pay-ment services, while PayPal is also gaining momentum in Asia.

Cash management is one of the more vulnerable �nancial subsectors to competi-

Spreading the loveAs business conditions pick up, companies are increasingly looking away from traditional relationships for their �nancial services requirements. That’s both good and bad news for the banks that are helping corporates manage their cash. Ellen Sheng reports.



Cash Management

tion from non-banks, according to a report from Ernst & Young. One of the traditional advantages banks had was exclusive access to international networks for cross-border clearing and settling. That is still the route for most business but third-party plat-forms do make it increasingly possible for banks and non-banks to o�er customized cross-border services.

In a survey conducted with more than 2,000 commercial banking customers last year, Ernst & Young found that 10% of respondents already used a non-bank for cash management services. A further 29% would consider doing so.

In this, corporates are showing them-selves to be much more ¨exible than individuals: in a similar survey of wealth management customers, only 4% of respondents said they use a non-bank and 14% said they would consider doing so.

Customer loyalty in Asia is particularly complex, and the fragmented nature of the region's juridisctions and regulations makes it diªcult for any single bank to excel in all countries. There are still markets with non-convertible currencies and limited ways to repatriate funds.

As expected, the less developed the jurisdiction, the more scope there is for non-traditional players to secure a foothold. In the E&Y report, 71% of respondents in emerging markets in Asia Paci�c said they currently use a non-bank.

Teaming up can be one way for banks to capture business they might other-wise miss out on altogether. Deutsche is working with regional and local banks to deepen networks, notes Kini. In China, for instance, some tax payments require a local bank, so Deutsche Bank partners with a local Chinese bank to facilitate the transactions.

The smaller regional banks, meanwhile, can bene�t from these relationships with larger global banks on power clearing and technology. This gives smaller regional banks a leg up and levels the playing �eld to some extent.

It's worth trying every possible route into business at the moment, as the cash management market in Asia is looking extremely attractive. The region has emerged as the largest transaction banking market in the world, according to McKinsey, with post-risk revenue of about $323bn, or 53% of global transaction banking revenue. Revenue is estimated to reach $578 billion by 2017, and China is expected to account for about two third of that.

McKinsey suggests that banks are increasingly overlapping and going a�er the same customer segments. Global players are targeting mid-corporate and even smaller or medium-sized enterprises, which were traditionally serviced by domestic banks.

Meanwhile, local banks are expand-ing and in some cases matching foreign

institutions in cash management services. Foreign bank market share in domestic cash management in Asia fell to 60% in 2012, down from 74% in 2005, according to Greenwich Associates.

MORE THAN TECHTo compete better, banks need to di�erentiate and boost value-added ser-vices, but it seems they remain largely focused on technology.

The industry has focused a lot of resources on upgrading technology in the last few years, but customers are now

clamoring for improvement on liquidity management and short-term debt, says East & Partners’ Colquhoun, noting that satisfaction with these two products — both of which were rated as most important by CFOs and corporate treasurers — is lagging far behind.

“Banks are getting the tech and plumb-ing right but not the value-added bit right,” he said.

BNP Paribas says its focus is on o�ering clients more tightly integrated systems and ¨exible architectures that give customers access to real-time or near real-time data. Another key theme for the bank is integrat-ing payments along the client’s operational value chain. To do all these things on a global level requires more investment in technology — revamping old systems as well as dealing with regulatory restrictions, BNPP's Wee explains.

Kini at Deutsche says the bank has been focused on optimising liquidity and working with CFOs to improve business processes. Another area of focus has been combining cash management with foreign exchange.

While the growth outlook for cash man-agement in Asia remains bright, it’s clear that banks need to step up to grab and hold on to market share. McKinsey's conclusion is simple: banks need to rethink which markets they want to compete in, and then hone their strategies. ◼

USE AND CONSIDERATION OF NON-BANK PRODUCTS AND SERVICES

SOURCE: ERNST & YOUNG GLOBAL COMMERCIAL BANKING SURVEY 2014

Asset �nance (e.g., equipment leases, computers, transport)

Corporate credit/debit/purchasing cards

Foreign exchange (currency conversion and/or hedging)

Cash management

Loans/commercial lines of credit

Merchant services

Retirement/pension plans

Investment banking

Interest rate risk management and/or derivatives (i.e., hedging)

New borrowing (past 12 months)

Trade �nance/supply chain �nance

Commercial mortgage(s)

Personal wealth management

Business checking/current account

Currently use a non-bank Would consider using a non-bank

14%

15%

9%

10%

10%

10%

11%

10%

10%

7%

9%

7%

9%

32%

32%

31%

29%

29%

28%

27%

23%

22%

22%

22%

18%

14%

0%

4%


22-23 September 2015 • InterContinental Hangzhou, China

The China Global Investment SummitChina’s new economy and future industries

Co-hosted with the Province of Zhejiang and the City of Hangzhou, this Euromoney-produced Summit will focus on China’s new economy and the development of future industries. Through interactive plenary discussions, Chinese and international business leaders will discuss the global business environment and what China’s new strategic policies including ‘One Belt, One Road’ and ‘Made in China 2025’ will mean for their companies – and yours. This unique summit, which will be simultaneously interpreted in English and Chinese, will bring together over 600 by-invitation-only participants from over 30 countries to explore China’s increasing role in the global economy and the opportunities that it brings. Key topics include:• The Business Outlook on Innovation and lobalisation• The Internet Economy, E commerce, and Fintech• The Ne t Industrial Revolution: Industry 0 Vs ade in China 202• Financing Chinese rowth Companies• FDI and Chinese ODI in China’s New Normal’• Opportunities in China’s Pharmaceutical and ealthcare Industry• Combating Climate Change and Sustainable Development About HangzhouHangzhou is the capital of Zhejiang Province in Eastern China. As one of China’s seven ancient capitals and a cradle of Chinese culture, Hangzhou was referred to by Marco Polo as 'the most beautiful and elegant city in the world'. The city is home to some of China’s best known attractions including the picturesque est Lake In 2011, the est Lake tourist cluster was listed as a orld Culture eritage site In 201 , ang hou’s DP was R B 20bn and per capita

DP was 16, 1 Since 200 , ang hou has consitently been rated by Forbes as the best mainland city for doing business In 200 , ang hou was ranked first in the orld Bank’s survey for investment climate in 120 Chinese cities Hangzhou has focused on the secondary and tertiary industries while developing the economy. These two industries have accounted for of ang hou’s DP in 201 The cultural and creative, financial services, software and IT services, internet of things and the tourist industries are becoming the key drivers of ang hou’s economic growth In 201 , the ang hou Pilot Cross border E commerce one of China was launched ang hou is focused on promoting its information and intelligence economy as a priority.

For more information or to register, please visit www euromoneyconferences com hang hou or e mail us at [email protected].

Supporting Organisations | 支持單位Official Hotel | 官方酒店

Host | 主辦單位

浙江省人民政府The People’s overnment of he iang Province

Organisers | 承辦單位


Cash Management Poll

Coping with market uncertainty requires prudence and �exibility. What matters to corporates and �nancial institutions seeking to

optimise their cash in complex business environments is liquidity access, cost e�ectiveness, risk management and technology.

The winners of Asiamoney’s Cash Management Poll 2015 demonstrate their excellence in these areas and more. The poll, which surveyed more than 10,000 senior �nancial and treasury sta� from corporates and �nancial institutions, assessed global and domestic banks in the Asia Paci�c region across a wide range of cash management product and services categories.

Deutsche Bank was a big winner among corporates, claiming top rank in the small

(less than $100m in turnover a year) and large (over $500m in turnover a year) cat-egories. Unsurprisingly, corporates were most concerned with competitive pricing from their service providers, followed by security and �exibility in solutions, respectively. Counterparty risk and pro-fessional sta� were also high concerns, and these are the very areas in which the winners of Asiamoney’s Cash Management Poll excelled.

“We o�er best-in-class solutions for clients seeking in-depth consulting and customisable cash management solu-tions to meet their business demands," said Mahesh Kini, regional head of cash management corporates, Asia Paci�c, Deutsche Bank. "As a leading cash man-agement provider in the industry, our teams are able to harness resources and

expertise from across the bank to provide clients with award-winning and value-creating solutions.

"Deutsche Bank’s achievement in this year’s Asiamoney Cash Manage-ment Poll is indicative of our strong partnership with clients in Asia Paci�c."

Corporates in Asia today are facing a unique environment of ongoing market volatility and so require solutions to provide transparency, e�ciency and greater control at global, regional and local levels. However, this has proven to be challenging for corporates, especially in Asia, due to the heter-ogeneous nature of the regulatory landscape.

The poll results show that cost e�ectiveness remains a top criterion when corporates shop around for

cash management services, but there is also high demand for secure and �exible services. Safe, customisable solutions supported by well-trained knowledgeable personnel are deemed indispensable for Asia’s corporates.

Treasury is now increasingly given a strategic role within corporates, so ways are sought to reduce cost, ine�ciencies and risks. One challenge is to e�ectively ful�l such requirements while providing corporates with convenient and easy online facilities.

“Electroni�cation of transactions in the region, which involves converting paper to electronic, batch processing to real time and cash to cashless, is open-ing up new opportunities for corporates to re-evaluate their cash management and working capital processes," adds Deutsche's Kini.

"This presents a signi�cant oppor-tunity for banks like Deutsche Bank to introduce innovative solutions to help its clients optimise and fully leverage the latest technology. Deutsche Bank recently announced its commitment to digital banking and investments in cash manage-ment with Strategy 2020 to support the bank’s market leadership in cash manage-ment and transaction banking."

DBS BUILDING BLOCKDBS, the other big winner, proves it ranks among the best by winning the small and medium ($101m to $500m turnover a year) categories as voted by �nancial institutions.

“Cash management has been a priority for us and is viewed as a critical building block for strong and long-standing client relationships," says Navinder Duggal,

Asia's kings of cashDeutsche Bank, DBS, SMBC and Citi topped the overall rankings in

Asiamoney's latest Cash Management Poll, our biggest ever. Clients favour competitive pricing, but security and �exibility are also top

concerns, as Anthony Chan reports.

MAHESH KINIregional head of cash management corporates, Asia Paci�c, Deutsche Bank.

CM Poll mag-r1.indd 10 21/8/15 5:47 pm



global head of cash product management at DBS Bank.

"Aligned to our group’s commitment to making banking more interactive and intuitive for our clients, we devote special attention to building holistic relationships and providing innovative solutions. The key underlying theme is to help improve clients’ pro�tability and productivity.”

Today in Asia, �nancial institutions are expanding out of their home markets and establishing subsidiaries, and are there-fore needing more sophisticated cash management services — especially solu-tions for multi-location and multi-entity operations, managed through a central or regional treasury function.

There are also clear trends in the spread and development of electronic transaction initiation, automated reconciliation solutions, optimisation of working capital and faster payment delivery.

Tokyo-based Sumitomo Mitsui Banking Corporation, a strong cash management services provider for many years now, spares no e�ort in engaging clients throughout the region, especially as competition heats up in this vibrant geography.

“We have �nancial institutions professionals in all main Asia Paci�c markets and, in addition to our dedicated

Japan-based client service team which regularly travels the region, we pro-vide regular direct contact and support to our Asian FI customers," explains Koichi Nishijima, head of global clearing solutions & network management group at SMBC.

"Our meetings and seminars help �nancial institutions with the latest updates and provide understanding into Japan-speci�c factors such as charging practices for JPY payments. At the same time, we receive inquiries and feed-back, enabling us to o�er solutions and enhancements in a timely manner.”

Timely is the operative word. Devel-oping Asia is advancing swi¢ly and commercial and regulatory environ-ments demand not only increased �exibility and responsiveness but also the acumen to best leverage resources,

knowledge and capabilities to formulate the best solutions. Technology, of course, facilitates all this.

“The market is changing. For �nancial institutions, regulations, digitalisation and integration of products, infrastruc-ture and platforms are reshaping this industry," says Nancy So, head of sales for Asia Paci�c, institutional cash, within institutional cash and securities services at Deutsche Bank. "To operate e�ectively, �nancial institutions have to be more stringent with know-your-cus-tomer and anti-money laundering processes. However, customers are the ones dictating the relationships. They require speedy implementa-tion of solutions, and to be able to self-administer tasks using online platforms and apps."

Indeed, for increased operational e�ciency and pro�tability, the increased focus on automated and digital solutions, such as mobile solutions, e-commerce and real-time payment, is inevitable.

There is a salient rise in collab-oration between banks and ERP providers, logistics companies, and the partnerships between banks and FinTech companies driving the evolution of innovative use of technology in the banking sector. Nevertheless, changing regulations,

low interest rates, cyber crime and social engineering still present challenges in cash management.

More cash management activities are expected in the near future as the opening up of large trade markets such as China, India and Asean presents unprec-edented opportunities. The liberalisation of the renminbi also adds to the changing cash management landscape. ◼

The market is changing. For financial institutions, regulations, digitalisation and integration of products, infrastructure and platforms are reshaping this industry.

NAVINDER DUGGALglobal head of cash product management at DBS Bank.

NANCY SOhead of sales for Asia Paci�c, institu-tional cash, within institutional cash and securities division, Deutsche Bank.




BEST GLOBAL CASH MANAGEMENT BANKS IN ASIA-PACIFIC AS VOTED BY FINANCIAL INSTITUTIONS, 2015

SMALLRank 2014 Bank Average

1 2 DBS 8.7342 6 CIMB 8.5433 4 SMBC 8.4944 7 J.P. Morgan 8.3935 3 Deutsche Bank 8.296

MEDIUMRank 2014 Bank Average

1 7 DBS 8.8322 3 Deutsche Bank 8.6843 2 SMBC 8.6194 – CIMB 8.2705 – Bank of Tokyo-Mitsubishi UFJ 8.196

LARGERank 2014 Bank Average

1 1 SMBC 9.0452 3 Deutsche Bank 8.8973 6 J.P. Morgan 8.5294 8 DBS 8.4875 2 BNY Mellon 8.381

BEST CASH MANAGEMENT BANKS AS VOTED BYFINANCIAL INSTITUTIONS, 2015

Best USD Cash Management ServicesRank 2014 Bank %

1 4 DBS 12.202 3 Deutsche Bank 11.653 5 Citi 9.65

Best EUR Cash Management ServicesRank 2014 Bank %

1 1 Deutsche Bank 22.982 4 DBS 10.213 2 Commerzbank 7.91

Best JPY Cash Management ServicesRank 2014 Bank %

1 1 SMBC 23.092 2 Bank of Tokyo-Mitsubishi UFJ 14.393 5 DBS 9.66

Best at Understanding Business Strategies, Objectives and RequirementsRank 2014 Bank Average

1 2 SMBC 9.2892 3 Deutsche Bank 8.9033 8 DBS 8.869

Best at Implementing Cash Management SolutionsRank 2014 Bank Average

1 2 SMBC 8.9692 3 Deutsche Bank 8.6743 6 DBS 8.560

Best A�er-sales Customer ServiceRank 2014 Bank Average

1 2 SMBC 8.9832 5 Bank of America Merrill Lynch 8.7263 3 Deutsche Bank 8.719

Best Electronic Banking PlatformRank 2014 Bank Average

1 1 SMBC 8.7872 9 Bank of America Merrill Lynch 8.6583 3 Deutsche Bank 8.418

Best Overall Cash Management ServicesRank 2014 Bank Average

1 1 SMBC 9.0342 – Bank of America Merrill Lynch 8.9173 3 Deutsche Bank 8.758

BEST LOCAL CURRENCY CASH MANAGEMENT BANKS (BY CURRENCY)AS VOTED BY FINANCIAL INSTITUTIONS, 2015

Country:Currency BankAustralia:AUD NABChina:RMB Bank of ChinaHong Kong: HKD DBSIndia:INR Deutsche BankIndonesia:IDR Bank PermataJapan:JPY SMBCKorea:KRW KEB

BEST GLOBAL CASH MANAGEMENT BANKS IN ASIA-PACIFIC AS VOTED BY CORPORATES, 2015 (ACCORDING TO THE SIZE OF THE CORPORATES' ANNUAL TURNOVER)

SMALLRank 2014 Bank Average

1 1 Deutsche Bank 236.8862 2 SMBC 232.7483 6 Bank of Tokyo-Mitsubishi UFJ 180.5724 4 HSBC 160.3445 5 DBS 156.373

MEDIUMRank 2014 Bank Average

1 2 Citi 153.5872 3 SMBC 153.0343 1 Deutsche Bank 151.6784 5 DBS 135.2895 4 HSBC 134.510

LARGERank 2014 Bank Average

1 2 Deutsche Bank 183.5982 4 HSBC 165.3653 5 DBS 138.2264 1 Citi 131.2995 3 SMBC 121.938

Country:Currency BankMalaysia:MYR CIMBPhilippines:PHP ANZ, Deutsche BankSingapore:SGD UOBTaiwan:TWD CTBCThailand:THB Siam Commercial BankVietnam:VND Vietcombank


HongkongParisNew York London

BOC Global Cash ManagementIntegrated Global Financial Management Solutions for Multinational Corporations

Bank of China’s Global Cash Management allows you to learn about changes in global accounts on a real-time basis, handle fund �ows easily, arrange investment plans properly and control �nancial risks e�ectively. We tailor our integrated �nance solutions to suit you, and remove time and geographical barriers to your global �nancial management.

Account Management Collection and Payment Management Cross-border Cash ManagementRisk Management Investment and Financing Management Liquidity Management

Worldwide network that covers China including Hongkong, Macau, Taiwan and 40 other countries Four clearance centers for US Dollars, Euro, Japanese Yen and Australian Dollars More than 10,000 international financial expertsGlobal financial management platform

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150811亚洲货币英文版216X292.pdf 1 15-8-11 下午6:38



BEST FOREIGN CASH MANAGEMENT BANKS AS VOTED BY CORPORATES, 2015(according to the size of annual sales turnover of each corporate respondent)

AUSTRALIABest Foreign Cash Management Bank (across all categories)

Rank Bank AverageSMALL

1 Bank of Tokyo-Mitsubishi UFJ 7.5002 SMBC 7.131

MEDIUM1 SMBC 7.160

LARGE1 SMBC 6.333

CHINABest Foreign Cash Management Bank (across all categories)


1 UOB 9.6462 Citi 9.3803 DBS 9.0344 SMBC 8.6985 Deutsche Bank 7.860

MEDIUM1 UOB 9.2842 DBS 8.8523 HSBC 8.6294 Citi 8.608

5 Deutsche Bank 8.584

LARGE1 DBS 8.8442 SMBC 8.8113 UOB 8.7154 Standard Chartered 8.7145 Deutsche Bank 8.480

HONG KONGBest Foreign Cash Management Bank (across all categories)


1 DBS 8.1602 CTBC 8.0883 UOB 7.9394 Deutsche Bank 7.3615 SMBC 7.301

MEDIUM1 DBS 8.3692 Deutsche Bank 8.3033 SMBC 8.0704 ICBC 7.648

5 UOB 7.595

LARGE1 DBS 7.9992 SMBC 7.3333 Bank of China 7.3254 Bank of America Merrill Lynch 7.2805 Citi 6.269

INDIABest Foreign Cash Management Bank (across all categories)


1 BNP Paribas 8.8202 SMBC 8.4373 DBS 8.0874 Deutsche Bank 8.0325 Bank of Tokyo-Mitsubishi UFJ 7.796

MEDIUM1 Citi 7.3902 DBS 7.3673 Deutsche Bank 7.2024 BNP Paribas 7.1755 Standard Chartered 7.054

LARGE

1 DBS 8.0682 Citi 7.8143 Deutsche Bank 7.3234 BNP Paribas 6.9805 Standard Chartered 6.196

INDONESIABest Foreign Cash Management Bank (across all categories)


1 DBS 8.7702 CIMB 8.3893 Citi 8.0604 Mizuho 7.8705 SMBC 7.834

MEDIUM1 CIMB 8.5812 DBS 8.3853 OCBC 8.2404 SMBC 8.114

5 Citi 7.868

LARGE=1 DBS 9.018=1 SMBC 9.0183 CIMB 8.7324 HSBC 7.2145 Citi 7.122

JAPANBest Foreign Cash Management Bank (across all categories)


1 DBS 7.3672 Deutsche Bank 6.489

LARGE1 Deutsche Bank 7.4832 HSBC 6.237

KOREABest Foreign Cash Management Bank (across all categories)


1 Deutsche Bank 9.2002 Standard Chartered 5.5933 SMBC 5.500

MEDIUM1 Deutsche Bank 9.767

LARGE


MALAYSIABest Foreign Cash Management Bank (across all categories)


1 UOB 8.6392 SMBC 8.3553 Bank of Tokyo-Mitsubishi UFJ 7.3814 Deutsche Bank 7.0765 OCBC 6.733

MEDIUM1 UOB 8.9122 Deutsche Bank 8.0533 SMBC 7.7364 Citi 6.567

5 HSBC 6.523

LARGE1 UOB 7.9292 HSBC 7.3173 Deutsche Bank 7.1824 Standard Chartered 7.0005 Citi 6.975

THE PHILIPPINESBest Foreign Cash Management Bank (across all categories)



MEDIUM1 Deutsche Bank 8.800




SINGAPOREBest Foreign Cash Management Bank (across all categories)


1 Bank of Tokyo-Mitsubishi UFJ 7.4002 Hong Leong 7.2733 Citi 7.2714 SMBC 7.1885 CIMB 7.102

MEDIUM1 CIMB 7.9002 HSBC 6.9553 ANZ 6.8374 Maybank 6.6925 Standard Chartered 6.528

LARGE

1 Bank of China 7.7302 Deutsche Bank 7.6523 Standard Chartered 7.5864 Bank of Tokyo-Mitsubishi UFJ 6.7715 HSBC 6.679

TAIWANBest Foreign Cash Management Bank (across all categories)


1 SMBC 9.2052 DBS 8.6173 ICBC 8.4694 Deutsche Bank 7.8885 ANZ 7.690

MEDIUM1 DBS 8.6672 ICBC 7.7413 HSBC 7.0604 Citi 7.046

LARGE

1 Citi 9.2002 DBS 8.7973 Deutsche Bank 8.7674 HSBC 7.967

THAILANDBest Foreign Cash Management Bank (across all categories)


1 Deutsche Bank 9.2822 UOB 9.1223 CIMB 8.7744 Mizuho 8.3105 SMBC 7.705

MEDIUM1 UOB 9.0472 CIMB 8.8893 Deutsche Bank 8.5154 SMBC 7.8225 Citi 6.505

LARGE1 Deutsche Bank 9.7262 UOB 8.5893 CIMB 8.2414 SMBC 8.0065 Citi 7.846

VIETNAMBest Foreign Cash Management Bank (across all categories)


1 Deutsche Bank 8.3672 SMBC 8.2093 Mizuho 8.0004 Bank of Tokyo-Mitsubishi UFJ 7.1675 HSBC 5.213

MEDIUM1 SMBC 8.6722 Mizuho 7.9003 Bank of Tokyo-Mitsubishi UFJ 7.025

LARGE


For full results, log on to

www.globalcapital.com/asia


Media Partners

30 September 2015 • Hanoi, VietnamVietnam Global Investment Forum

Co-host:

Ministry of Planning and Investment

of Vietnam

Vietnam is quickly becoming one of the fastest growing economies in Asia. Located strategically in the heart of Southeast Asia, the country’s economy grew 6.28 percent in the first half of 2015. Led by a government that has demonstrated strong commitments to its global investment agenda through substantial improvements in macroeconomic fundamentals and its recent achievements in attracting big ticket investments, Vietnam is well poised to grow on the back of the forthcoming conclusion of Trans-Pacific Partnership (TPP) and ASEAN integration.

Join us at the Euromoney Vietnam Global Investment Forum, which is supported by the Ministry of Planning and Investment, to meet with over 500 delegates representing government officials, international and local business leaders, foreign investors, industry experts and economists.

Confirmed keynote speaker: HE Bui Quang Vinh, Minister of Planning and Investment, Socialist Republic of Vietnam

Topics include:• Vietnam’s economic recovery and outlook for 2016• TPP, FTAs and ASEAN integration• To what degree are tensions with China affecting growth?• Vietnam’s leadership transition in 2016• Banking sector reform, NPLs, consolidation• Infrastructure and energy development• SOE equitisation, foreign owenership limits, strategic investments• Real estate, agriculture, consumption opportunities• FDI trends

For more information, please visit the website:www.euromoneyconferences.com/vietnam

Co-Sponsors

Lead Sponsors

Supporting Organisation


BEST LOCAL CASH MANAGEMENT BANKS AS VOTED BY CORPORATES, 2015(according to the size of annual sales turnover of each corporate respondent)

AUSTRALIABest Local Cash Management Bank (across all categories)


1 ANZ 7.5002 NAB 6.025

MEDIUM1 ANZ 5.080

LARGE1 ANZ 6.747

CHINABest Local Cash Management Bank (across all categories)


1 China Merchants Bank 9.2292 Bank of Communications 8.0163 Bank of China 7.9024 China Construction Bank 7.4745 ICBC 7.427

MEDIUM1 China Merchants Bank 9.1762 Bank of Communications 8.2263 ICBC 7.7414 China CITIC Bank 7.706

5 Bank of China 7.296

LARGE1 China Merchants Bank 9.5662 Bank of Communications 8.4423 China Construction Bank 7.7914 ICBC 7.7835 Bank of China 7.661

HONG KONGBest Local Cash Management Bank (across all categories)


1 HSBC 6.9492 Bank of China (Hong Kong) Ltd 6.8903 Hang Seng 6.5994 Standard Chartered 6.455

MEDIUM1 Standard Chartered 7.5462 Bank of China (Hong Kong) Ltd 7.3923 Hang Seng 7.3384 HSBC 6.820

LARGE

1 Standard Chartered 7.4502 Hang Seng 7.2013 HSBC 7.1204 Bank of China (Hong Kong) Ltd 6.892

INDIABest Local Cash Management Bank (across all categories)


1 Kotak 7.7672 IndusInd Bank 7.3473 Axis Bank 7.0354 HDFC 6.8425 ICICI 6.690

MEDIUM1 Kotak 8.3492 HDFC 6.8873 ICICI 6.792

LARGE

1 Kotak 8.3132 ICICI 7.1403 HDFC 6.819

Asiamoney invites you to celebrate your achievement at our annual Summer Awards Dinner 2015 at the JW Marriott, Hong Kong on Wednesday, 16 September 2015. Winners

£om Asiamoney’s 2015 O¥shore RMB Poll, Asia Islamic Bank Awards, Private Banking Poll, Best Domestic Bank Awards, Cash Management Poll, Best Managed Companies and

FX Poll across Asia are invited to participate in this evening.

Please reserve your table(s) in advance due to the limited seats available. The cost of taking a table for 10 guests is US$8,500

To con�rm your booking, please contact Connie Ng on +852 2912 8081 or email: [email protected]

Summer AwardsDinner 2015



INDONESIABest Local Cash Management Bank (across all categories)


1 BNI 46 8.6532 Bank Permata 8.3893 Bank Danamon 7.3024 Bank Central Asia 7.2745 Bank Mandiri 7.179

MEDIUM1 BNI 46 8.5902 Bank Permata 8.0153 Bank Central Asia 7.3854 Bank Mandiri 6.843

5 Bank Danamon 6.727

LARGE1 BNI 46 9.1122 Bank Permata 7.9563 Bank Central Asia 7.6564 Bank Rakyat Indonesia 7.5405 Bank Mandiri 7.103

JAPANBest Local Cash Management Bank (across all categories)


1 SMBC 7.3882 Mizuho 6.9163 Bank of Tokyo-Mitsubishi UFJ 6.483

MEDIUM1 SMBC 7.3062 Mizuho 6.1673 Bank of Tokyo-Mitsubishi UFJ 5.684

LARGE1 Mizuho 7.5182 SMBC 7.3123 Bank of Tokyo-Mitsubishi UFJ 7.151

MALAYSIABest Local Cash Management Bank (across all categories)


1 CIMB 7.8852 Public Bank 6.6943 Hong Leong 6.6184 Maybank 6.4195 RHB 5.983

MEDIUM1 Public Bank 8.0602 CIMB 7.5743 Maybank 6.6104 RHB 5.667

5 Hong Leong 5.338

LARGE1 CIMB 8.4162 Maybank 7.1273 Hong Leong 6.1994 Public Bank 5.829

SINGAPOREBest Local Cash Management Bank (across all categories)


1 UOB 8.1422 DBS 7.4583 OCBC 6.723

MEDIUM1 UOB 8.0592 DBS 7.5583 OCBC 7.280

LARGE

1 UOB 7.7802 DBS 7.5823 OCBC 6.166

TAIWANBest Local Cash Management Bank (across all categories)


1 Cathay United Bank 9.7962 Fubon 8.5983 CTBC 8.3624 Taishin Bank 7.5165 Mega Bank 7.294

MEDIUM1 Fubon 9.7262 Cathay United Bank 9.7113 CTBC 8.7914 Mega Bank 7.840

5 Taishin Bank 7.483

LARGE1 Fubon 9.5502 Cathay United Bank 9.0073 CTBC 8.381

THAILANDBest Local Cash Management Bank (across all categories)


1 Siam Commercial Bank 9.1532 Bangkok Bank 7.2723 Kasikornbank 7.1594 Krungthai Bank 6.2605 Thai Military Bank 5.678

MEDIUM1 Siam Commercial Bank 8.8332 Bangkok Bank 5.9743 Kasikornbank 5.9734 Thai Military Bank 5.7855 Krungthai Bank 5.240

LARGE

1 Siam Commercial Bank 8.7962 Kasikornbank 7.2983 Bangkok Bank 7.1604 Thai Military Bank 7.0445 Krungthai Bank 6.200

VIETNAMBest Local Cash Management Bank (across all categories)


1 Eximbank 8.2332 Vietcombank 6.9363 BIDV 5.700

MEDIUM1 Vietcombank 6.919


In the 25th annual Corporate Cash Management Poll Asiamoney sent the questionnaire to senior treasury and �nance executives in listed companies, multinationals, SMEs and unlisted companies across Asia-Paci�c. A total of 10,585 individual responses were received. A¢er auditing 826 question-naires were made void due to their failure to ful�ll requirements. The 9,534 valid responses came from 8,458 di�erent companies – the geographical breakdown is as follows:

The �rst part of the questionnaire allowed Asiamoney to collect qualitative data regarding the cash management industry. In the second part respond-ents were asked to nominate three preferred cash management providers for the following categories:• most innovative cash management solutions• best solutions for liquidity management• best solutions for receivables & payables• best at understanding business strategies, objectives and requirements

before recommending cash management solutions• best at implementing cash management solutions• best electronic & online capabilities• best a¢er-sales customer service• best corporate cash management outsourcing capabilities• best at technical integration with corporate accounting platforms

Respondents were also asked to nominate their top �ve cash management providers for domestic services, as well as for cross-border services. Finally they were asked to nominate their two preferred local cash management banks (excluding foreign and foreign joint-venture banks).

For the categories requesting three nominations a �rst place ranking was awarded three points, second place two points and third place one point. For categories requesting �ve nominations a �rst place ranking was awarded �ve points, second place four points, third place three points, fourth place two points and �¢h place one point. For the local cash management bank catego-ry, �rst place received two points and second place one point.

To avoid any one institution having more in�uence than others of equal size, multiple responses were fractioned according to the total number received from that one institution.

The rankings have been broken down according to the annual sales turnover in Asia (including Japan) OR Australia for each respondent’s company.

For the overall Asia-Paci�c rankings of the global banks, the accumulative scores across all categories (excluding best local cash management bank) have been weighted according to the location of each respondent’s cash management provider as follows:

• Market depth & economic importance, product sophistication and scope of cash/treasury services used in the market have been taken into account.

Asiamoney would like to thank those who helped design the questionnaire, as well as respondents for taking the time to participate. Further results are available on the Asiamoney website, www.asiamoney.com.

Australia: 21

China: 1,516

Hong Kong: 539India: 591Indonesia: 936

Japan: 118

Others: 32Vietnam: 88

Thailand: 1,655

Taiwan: 1,364

Singapore: 647

Philippines: 5

Malaysia: 928

Korea: 18

2015 Corporate Cash Management Poll – Methodology

Annual Sales Turnover Annual Sales Turnover No. of replies in Asia in AustraliaSMALL <US$100m <US$35m 5,474MEDIUM US$101-500m US$36m-100m 1,861LARGE >US$500m >US$100m 1,123

Countries Weighting

China, Hong Kong, India & Singapore 3Indonesia, Japan, Korea, Taiwan & Thailand 2.5Australia, Malaysia, The Philippines & Vietnam 2All other markets 1

2015 Financial Institutions Cash Management Poll – MethodologyIn the 13th annual Financial Institutions Cash Management Poll Asiamoney sent the questionnaire to individuals responsible for cash management or correspondent banking within �nancial institutions across Asia-Paci�c. A total of 944 individual responses were received. A¢er auditing 84 question-naires were made void due to their failure to ful�ll requirements. The 860 valid responses came from 735 di�erent institutions across the region. The geographical breakdown of respondent institutions is as follows:

The �rst part of the questionnaire allowed Asiamoney to collect qualitative data regarding the cash management industry. In the second part respond-ents were asked to nominate three preferred cash management providers for the following categories:• best USD cash management services• best EUR cash management services• best JPY cash management services• best local currency cash management services

Second part – rating• best at understanding business strategies, objectives and requirements

before recommending cash management solutions• best at implementing cash management solutions• best a¢er-sales customer service• best electronic banking platform• best for overall cash management services

For all nominations, a �rst place ranking was awarded three points, second place two points and third place one point.

To avoid any one institution having more in�uence than others of equal size, multiple responses were fractioned according to the total number received from that one institution.

The votes are weighted according to the total asset size of each respondent’s institution:

A country weighting is also applied, according to the location of each respondent:

* 2014 SWIFT tra�c volumes (excluding intra-regional and intra-company tra�c) have been taken into account, as well as the economic importance of each market.

Asiamoney would like to thank those who helped design the questionnaire, as well as respondents for taking the time to participate. Further results are available on the Asiamoney website, www.asiamoney.com.

Total Asset Size No. of responses Weight

<US$5bn 417 1US$5.01bn-25bn 134 2>US$25bn 184 4

Countries Weighting

China 5.5Hong Kong 5Taiwan 4.5India 4Japan, Korea & Singapore 3.5Australia & Indonesia 3Malaysia & Thailand 2.5 The Philippines & Vietnam 2Others 1

Australia: 6

China: 74

Hong Kong: 96

India: 46Indonesia: 108Japan: 34

Others: 20Vietnam: 22

Thailand: 71Taiwan: 97

Singapore: 86

Philippines: 9

Malaysia: 55

Korea: 11



Philippine Bank Regulation

Protect and servePhilippine bank supervisors, like their counterparts elsewhere, face a complex and o�en thankless task. But unlike regulators in many other countries, they also face the risk of being taken to court and suspended from their jobs if banks decide to bite back. The problem is a longstanding one, but it is �nally starting to be addressed, as Matthew Thomas reports.

In the a�ermath of the 1997 Asian nancial crisis, banks across the region were struggling. Foreign investors had �ed in droves. Mortgages had to

be written down, or written o� entirely. Condence among corporate borrowers was shot. The region had come out of the crisis in one piece, but the hard work was just beginning.

In 2000, in the midst of all this, Urban Bank, a Philippine nancial institution, announced plans to buy Panasia Banking Group, a smaller lender that operated just three branches.

It was not unusual for bank mergers to follow the nancial crisis. Many smaller banks were no longer viable, and were soon closed or swallowed by their larger rivals. But the merger plan showed that Urban Bank, although saddled with a large debt base, still

saw room for some growth in its domestic market.

The bank's executives wanted to re-focus their business on the smaller client base, a�er being downgraded from a universal bank to a commercial bank in August, 1998. The crisis may have hurt their ambitions but, a�er some adjustment, they still had goals to achieve.

Three years later, Urban Bank had col-lapsed, the central bank governor been given a suspension order, and the ability of the regulator to keep a tight grip on the banking system had been thrown in doubt.

The fallout from the collapse of Urban Bank led to four central bank o�cials besides the governor being told they would be suspended.

Urban Bank executives had blamed the central bank, which doubles as the banking

regulator, for their failure. They had sued and, for a brief moment, they had won.

The failure of Urban Bank, on its own, may well have been consigned to a footnote in the long history of bank closures. But the sub-sequent court cases meant that the episode was carved in the memories of old hands as a startling example of the legal risk that bank investigators in the Philippines have long been forced to confront. It also serves as a reminder of the pressures they face today.

THE BLAME GAME"All happy families are alike; every unhappy family is unhappy in its own way," wrote Leo Tolstoy. He may have written something sim-ilar about banks today. The Urban Bank case was, in a sense, a rather simple example of a bank run, a rush by depositors or counterpar-ties to withdraw funds from an institution

Philippine Banks-r4.indd 21 21/8/15 5:48 pm



based on fears over the solvency of a bank. But although Urban Bank collapsed, it col-lapsed in its own way.

The problems at the bank started in August 1998, when it was downgraded to a com-mercial bank a�er proving unable to meet the Ps3.5bn ($76m at current rates) capital requirement that Bangko Sentral ng Pilipinas (BSP), the central bank and nancial regula-tor, had imposed on universal banks.

But as Urban Bank struggled to meet even the capital requirements needed to keep its status as a commercial bank, its executives decided instead on another plan: turning the institution into a holding company for its thri� bank, Urban Corp Development Bank, and its investment arm, Urbancorp Invest-ment.

The news about the plan – and, as Urban Bank claimed at the time, the use of the word

"downgrading" to a thri� bank instead of "refocusing" – spooked depositors and inves-tors. Urban Bank executives complained to the regulator about large withdrawals. They started detailed discussions with the BSP about how to keep the bank a�oat, including how much of a capital injection the bank would need, and which other banks could potentially buy it. On April 25, 2000, Urban Bank declared a bank holiday to stem the heavy withdrawals. The following day, the bank was shut down.

Although bank runs are a common sight in the history of nancial systems – the most recent nancial crisis gave us examples such as Northern Rock and Washington Mutual, the last few months have seen Greek banks su�er similar stresses – the story usually ends there. But the bank run and subsequent failure of Urban Bank was just the beginning.

Teodoro Borlonga, Urban Bank's president, reacted to the closure of the bank by suing BSP governor Rafael Buenaventura, as well as four other BSP o�cials, arguing they had some blame for Urban Bank's collapse. Perhaps surprisingly, the judge agreed with them, ordering the governor and the other o�cials to be suspended for a year.

The decision was soon overturned by a higher court on appeal, allowing Buenaven-tura and his sta� to continue with their duties at the central bank. But the fracas le� a bad taste in the mouths of many market-watchers at the time. It also, more importantly, risked making bank supervisors in the Philippines more cautious when exam-ining the health of banks.

The risk of a similar situation today may be remote, relying as it does not only on bank failure but also the resolve of bank execu-

The Philippine government extended an open invitation to foreign banks last year, when it removed most restrictions on foreign banks opening their own branches in the country or acquiring local institutions. Those banks that have taken advantage of the rule change o�er a telling portrait of the likely results of the move.

In July last year, President Benigno Aquino III passed a law allowing foreign banks to own 100% of lenders, and putting no limits on the number of banks that can come into the country, as long as 60% of banking assets are still owned by local institutions. Five foreign banks have taken advantage of the move already, and they all come from countries with reasonably low domestic growth opportunities for banks.

Japan's Sumitomo Mitsui Banking Corporation, South Korea's Industrial Bank of Korea and Shinhan Bank and Taiwan's Cathay United Bank have all got permission from Bangko Sentral ng Pilipinas to open branches in the country. Taiwanese lender Yuanta Commercial Bank has acquired a small Manila-based thri� bank.

These banks are not being driven by a desire to nd new clients among Philippine corporates, although that will be a welcome bonus. The driving force, according to analysts, is following their corporations overseas. It is no surprise that the ve banks all hail from countries with reasonably low growth. Corporations in those countries are looking to overseas markets like the Philippines, where GDP growth was a whopping 6.1% in 2014, in an attempt to increase their prots. The banks are right behind them.

“There were some foreign banks here already, but the problem is they can not compete on an equal footing,” says Stephen Schuster, senior nancial specialist for southeast Asia at the Asian Development Bank. “Now they can. The business model is going to change. Their focus will be domestic currency loans being provided to the local operations of corporations that come from same country as the foreign bank. They will also try to o�er better consumer service, and greater expertise in types of lending.”

It is too early to tell what the exact impact will be on the Philippines'

biggest banks, if any. It is clear that their prots from Japanese and Korean corporations may come under some pressure, but bank executives are condent that a lot of their day-to-day business from these corporations will hardly be a�ected.

More obvious will be a change in the job market. “We're seeing some pressure on the HR front,” says Reggie Cariaso, managing director of BPI Capital. “The foreign banks will probably o�er up interesting packages to individuals and teams. We need to be very cognisant of our people, and I'm sure other banks are facing the same issues. The threat to the big banks is that we do have the highest quality people, but I believe the mid-sized banks may be more vulnerable.”

There are likely to be many more foreign banks taking advantage of the new, more welcoming environment in the Philippines over the next few years. It is widely agreed that it will be a good thing for the banking system. It also appears that it will be a good for local bankers too – especially when it is time for their pay review. ◼

FOREIGN BANKS TRICKLE IN


Untitled-1 1 17/8/15 1:33 pm



tives to lay the blame at the central bank's door. But it is still a possibility. That is something that makes many in the country increasingly uncomfortable.

“The most important issue in this system is legal protection,” says Jesse Ang, former resident representative at IFC in the Phil-ippines. “Regulators need to be able to do their job. We need a gross negligence stand-ard, but we shouldn't let these poor people be personally liable.”

This is a common view. The legal pro-tection of bank supervisors is considered part of the rmament of nancial sector regulation in many countries. The Basel Committee on Banking Supervision consid-ers it one of the core principles for e�ective supervision. The International Monetary Fund, which has repeatedly pointed to this failing in the Philippine banking system, concurs. The argument, from those who will make it, is simple.

“The need for such protection is based on the chilling e�ect that even the threat of litigation can have on the performance of a banking supervisor’s work,” wrote Ross Delston, a legal adviser to the World Bank, in a 2000 paper that appears to be just as relevant today.

“That threat tends to be greater when, as is the case today, banking systems are under stress. This threat tends to be particularly signicant where large numbers of banking institutions are insolvent, resulting in more stringent enforcement and remedial measures, as well as revocation of banking licences.”

This is not an issue that will make or break the banking system in the Philippines right now. The size of the banking system is still reasonably small compared to the overall size of the economy – domestic credit provided by the nancial sector was around 55.9% of GDP in 2014, according to World Bank data – and analysts say the country's biggest banks are strong and liquid.

“It is quite an unusual situation, because legal protection for investigators is the standard in most of the countries in the region,” says Ivan Tan, a banking sector analyst at Standard & Poor's. “The Phil-ippines is the odd one out. We believe the lack of legal protection has undermined the implementation of prudential policies and measures. That said, the Philippine banks

have strong capital ratios which underpin the resilience of the banking system.”

The argument those in favour of legal protection make, however, echoes Delston's point. In the good times, it makes sense to prepare as best as you can for the bad times. That includes making sure that bank supervisors can do their jobs without fear. This has long been a source of contention between regulators and politicians. There are signs, however, that common ground is starting to be reached.

A QUESTION OF DEGREEThe idea that bank supervisors in the Philippines should get legal protection has been around for many years. In 1999, as the country was still feeling the e�ects of the Asian nancial crisis, the central bank requested a series of legislative changes that would, among other things, provide legal protection to supervisors "in the course of their duties". In 2005, a few years a�er the Urban Bank saga was nally closed, the central bank tried again.

In 2010, the International Monetary Fund pointed to the necessity for those proposals to be nally put into practice. In August 2014, the IMF once again bemoaned the lack of progress on legal protection, among other issues, arguing that “amendments to the BSP Charter related to supervision — limited scope to access data on all banks’ related entities, weak legal protection for super-visors in the conduct of their duties, and the 'extraordinary due diligence' require-ment on supervisors – should be rapidly approved”.

The lack of movement on this may frus-trate many proponents of legal protection, but it is not hard to understand. It is impor-tant for politicians considering banking regulation, and the protections that go with it, to strike a balance, says Sonny Collantes, chair of the House Committee on Banks and Financial Intermediaries. Politicians may want to strengthen bank regulators, but they will also want to make sure the banking system does not su�er as a result.

“We're trying to strike a balance that will strengthen the investigative powers of the BSP while also ensuring that they will not abuse their authority,” says Collantes, who added that he deemed the latter case unlikely. “I have full faith in the BSP.”

Besides, the disagreement between regulators and politicians is not about legal protection per se, but about quite how far that legal protection should extend. The devil, unsurprisingly when it comes to nan-cial regulation, is in the detail.

“It is not entirely accurate to characterise the situation as lack of legal protection,” says Nestor Espenilla, deputy governor in charge of examination and supervision at the central bank. “The BSP has been able to discharge its essential responsibilities, including enforcement actions and shutting down banks when necessary. What we are discussing here is issues of gradation.”

The BSP's proposals to the Philippine Con-gress in 1999 are an example of the way in which regulators and politicians have found common ground in the past. BSP o�cials did make progress. They did get some form of legal protection. But they were also burdened with a key phrase that still leaves some industry gures scratching their heads: "extraordinary diligence".

The BSP's charter, to this day, states that "o�cials, examiners, and employees of the Bangko Sentral who wilfully violate this Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of his duties shall be held liable for any loss or injury su�ered by the Bangko Sentral or other banking institutions as a result..." To hear some people tell it, this turn of phrase did not so much solve the issue as obfuscate it further.

The central bank, unperturbed, is making another attempt at changing its charter,

SONNY COLLANTESchair of the House Committee on Banks and Financial Intermediaries.



Sponsored Statement

Philippine conglomerate SM Investments Corporation (SM) has kept up its steady expansion and is primed for higher growth despite a slight cooling of the Philippine economy.

Philippine gross domestic product grew 5.2% in the first quarter of 2015 compared with a 5.6% acceleration in the same period last year. Defying that trend, SM reported consolidated net income of PHP13.5bn ($300m) in the first half of 2015, an increase of 10% compared with last year. Excluding extraordinary items, recurring income grew 13% in the first half.

“Our core businesses continue to deliver good revenue and earnings growth," said SM President Harley T Sy. "Earnings growth in Property is now in the mid-teens, in line with

our medium term goals. The Retail Group maintained its pace through organic growth and store expansion despite its already sig-nificant size and intense competition.

"Our focus on costs across the group resulted in improved operating margins. While we are pleased with the results so far, we are keeping our eyes on the challenges ahead."

Property led the growth, increasing its share of consolidated net income to 42%. This was followed by Banks, with 38%, and Retail, with 20%.

SM Prime Holdings, SM’s property arm, delivered recurring net income growth of 15% to PHP11.2bn ($249m) in the first half. Pursuing its next phase of expansion, SM Prime is increasing its property footprint by

2018 to 11 million sqm in gross floor area (GFA) for malls; 139,628 residential units; 0.5 million sqm in commercial spaces and 2,187 hotel rooms.

A central strategy is the development of “lifestyle towns”, or large-scale, integrated, master planned properties similar to the 60-hectare Mall of Asia Complex in Pasay, one of its largest malls in Metro Manila, in

provinces north and south of Metro Manila, and in Cebu and Davao. Forthcoming is SM Seaside City Cebu, the next regional destina-tion in the south on a 30-hectare property.

Its housing arm, SM Development Corpo-ration (SMDC), is showing greater potential for growth with higher sales take-up, project accomplishments and interest from a robust Overseas Filipino Workers market. SMDC is set to launch 12,000 residential units for the year.

SM is also riding the growth of the strong business and knowledge process outsourc-ing markets as it launched SM CyberWest in Quezon City and unveiled FiveEcomCenter in Pasay. SM also continues to bank on tourism development with the upcoming launches of Conrad Manila in Pasay and Park Inn by

Radisson Clark in Pampanga, as well as new convention centres.

In banking, SM continues to increase services to customers, expand its network and tap opportunities online. BDO Unibank recently signed an agreement with Nomura Holdings for a joint investment in a bro-kerage firm that will initially provide online trading services. Furthermore, it recently completed the acquisition of One Network Bank, the largest rural bank in Mindanao, which will expand the bank’s regional pres-ence in the Philippines.

In retail, the company will keep increas-ing the pace of expansion by working with strong partners such as Citymalls, a community mall operator and Alfamart, one of the leading operators of minimarts in Indonesia. SM also continues to bring in international brands via its SM STORE and is on track with its expansion of new stores.

With its solid performance, SM is poised to grow its presence in the country and in the region, serving as a catalyst for growth as it remains committed to promoting greater economic activity in the service of millions. ◼

SM delivers solid growth in 2015

CONTACT INFORMATION:Corazon P. GuidoteSenior Vice President, Investor RelationsTelephone: +632 8570117E-mail: [email protected]: www.sminvestments.com

SMIC: STRONG UNDERLYING EARNINGS GROWTH

SOURCE: SMIC

1H 2014 1H 2015

PHP

billi

on

Net Income

Recurring Earnings

9.6%

13%

13.5

12.3

Net Income Pro�le

20.5%

41.5%

38.0%

Banking Property Retail

Architect's rendition of the upcoming SM Seaside City in Cebu.

SMIC statement-r3.indd 25 21/8/15 8:10 pm



having submitted a proposal to Congress last year. The language is still being debated and discussed, but the early signs are that politicians are ready to accept something that would at least move the charter closer in line with what the BSP and international bodies institutions like the Asian Develop-ment Bank and the IMF are hoping for.

NO LONGER EXTRAORDINARYIt has never been entirely clear to those keeping close eye on the Philippine banking system what "extraordinary diligence" means in practice. It may be interpreted di�erently by di�erent judges. It may be interpreted di�erently by the regulators and the banks they are overseeing. But although vague, the term does create a window for complaints from bank executives who could argue – convincingly to some, unconvinc-ingly to others – that the conditions for "extraordinary" had not been met.

This is the type of linguistic argument that keeps legal philosophers happy. But it is also the type of argument that can keep bank supervisors awake at night. A�er years of trying, the BSP now seems close to convincing Congress to scrap this language.

“Extraordinary diligence requires that they must undergo a lot of processes in order to be safe from possible legal liabili-ties,” says Collantes. “But now, the claim of good faith would be enough in cases of legal suits being brought against them.”

That change in wording does not o�er the full legal protection that some outsiders are hoping for. The usual demand is for the Philippines to follow other jurisdictions in providing full protection, except in those rare cases when a supervisor's behaviour is criminal and therefore covered by other laws, ones that would apply to bankers as much as bank supervisors, instigators as much as investigators.

But there is reason for banking supervi-sors to cheer the likely agreement between the BSP and Congress. It will make BSP o�cials much more likely to win in court, and as a result, it should reduce the chances of any cases being brought against BSP o�cials.

“There are two issues here – whether you get sued, and whether you lose in a court case,” says BSP deputy governor Espenilla. “There have been occasions when individ-

uals have been sued, including myself. But in most of those cases we have prospered in court.”

The revision to the charter has also forced any cases brought against the central bank or its employees to be tried by either the Court of Appeals or the Supreme Court. This is a major change from the existing situation, which allows lower courts to try cases against BSP o�cials – and, as a result, allows a single judge to decide a case that could have major ramications for inves-tors' faith in the ability of the regulator to do its job.

Collantes and others also point out that bank supervisors would not have to pay lawyer's fees themselves in the unwelcome scenario that a case was brought against them. The BSP is able to indemnify their employees for any legal costs that they occur as a result of doing their jobs.

These changes are some way o� address-ing what international bodies wanted to see. But they do represent real progress in ensuring legal protection for bank supervi-sors, and they show that the BSP is being realistic about exactly what changes they are likely to win from Congress.

“You're seeing a resignation of what can be expected today,” says Stephen Schuster, senior nancial specialist for southeast Asia at the Asian Development Bank, who said the central bank was taking a pragmatic approach. “They will accept what they can.”

The proposed changes have still not passed through Congress. They have won the approval of the House Committee on Banks And Financial Intermediaries, and

are now in their second plenary reading, says Collantes. But it was passing the House Committee that really counted. In 2011, when the BSP was trying to get a similar amendment passed, the proposal was rejected out of hand. Sergio Apostol, who ran the bank committee at the time, said that supervisors should be held responsible for their decisions.

The tide appears to have turned. Collan-tes and the current members of the House Committee are taking a more accommo-dative stance. They have not just agreed to strengthen the legal protection of bank supervisors – albeit stopping just short of full protection – but have also moved to strengthen the central bank in more eye-catching ways, increasing the BSP's capital to Ps200bn, a big jump from the Ps50bn the central bank previously had to work with.

This is clearly good news for bank super-visors worrying about the legal risks they face while doing their jobs. But is it bad news for the banks, who may face a tougher, more aggressive regulator if the law is passed? It seems not.

The legal risk facing regulatory o�cials in the past may have encouraged a rela-tively cautious approach to supervision, one that relied more on a long list of rules than on the ability of supervisors to be �exible and treat each case as unique. The tweaking of the law could change that, making bank supervisors more able to see each institu-tion's strengths and faults individually. It may be, despite Tolstoy, that all happy families can be di�erent, too.

“The tendency for supervisors that lack legal protection is to be overly cautious, prescriptive, and always stand by the letter of the law so they don't get sued,” says IFC's Ang. “Legal protection could make the regulator be less prescriptive and more innovative.”

This is perhaps the key benet that will come from greater protections for bank supervisors in the country. The problem is not simply allowing them to do their jobs better. It is making sure that they don't need a lengthy set of rules to fall back on in the unwelcome scenario of a court case.

That is something that bank executives could hardly complain about – even if it means they will not have their day in court. ◼

JESSE ANGformer resident representative at IFC in the Philippines.


C o n s t a n t l y i n m o t i o n .B u i l d i n g m o m e n t u m .C r e a t i n g p o s s i b i l i t i e s .E n h a n c i n g p e o p l e ’s l i v e s .

www.sminvestments.com

This is the Dynamic World of


Cover Story : DBS Interview

Sustainable growth: DBS keeps ambitions on trackDBS is just three years younger than Singapore, which celebrates its 50th anniversary this year. The bank's steady rise has mirrored that of the city-state, but chief executive Piyush Gupta is hoping it is now positioned to seize the opportunities of a fast-growing region better than its competitors. Mark Baker reports.

Piyush Gupta has plenty of ambitions for DBS, the bank he joined as chief executive in 2009. Being global is not one of them.

Sitting down with Asiamoney in the wake of the depar-tures of the chief executives of Barclays, Credit Suisse, Deutsche Bank and Standard Chartered, Gupta is in pragmatic mood — and perhaps relieved to be away from the pressures of trying to make a global business model work in an increasingly regulated industry.

"I have no desire to be a global bank. There is so much happen-ing in our region. I'd much rather focus on growing the business where we can," he says.

"Our agenda is to be world-class, not global."Something is certainly going right with that agenda. In August

the bank posted another strong set of quarterly results, and while a little down from the record �rst three months of 2015, the second quarter still extended the bank's run of year-on-year quarterly earnings growth to 24 consecutive quarters.

First half revenues were S$5.4bn (US$3.86bn), up 14% from the same period in 2014. Pre-tax pro�t rose 11% to S$2.7bn. Assets were up 6% to S$440bn.

Revenues in the �rst half of 2009 (Gupta took over in November of that year) were S$3.5bn, with pre-tax pro�t of S$1.3bn. Assets totalled S$263bn.

GUPTA: more than happy to stay regional

Cover Story-r6.indd 28 21/8/15 9:31 pm



If DBS doesn't want to be global, what does it want to be? For Gupta, the dif-ferentiation boils down to two things: a pan-regional focus that he thinks is miss-ing from most of his local competitors, and an ability to service the entire supply chain that he thinks is missing from the globals.

He argues that his regional competitors have mostly chosen to focus on a subseg-ment of Asia. He sees the likes of CIMB, Maybank and Bangkok Bank striving to be Asean banks. He doesn't see Indian banks in north Asia and nor do Taiwanese or Hong Kong banks have much traction in south or southeast Asia.

"We decided to be the only Asian bank that emulates the HSBC, Citi or StanChart approach of being in all three segments — north Asia, south Asia and southeast Asia. That's because our own view is that over 10 years that’s where the big �ows are going to be and frankly already are. If you look at the big movements of capital, it's not within the subsegments, it's across the three."

Then there's product. In the corporate sector, the emphasis is on being a solid transaction bank — and that o�en starts with trade �nance, which Gupta likes to call his "beachhead" when looking to secure new territory. This has been the bank's approach in capturing new clients in China and India in particular.

"We can distinguish ourselves from the global banks because they don't really do that entire supply chain. I'm quite happy to do the warehousing, the receivable �nancing, the factoring, the discounting, the supplier �nance — one of my clients once told me that 'from the farm gate to the factory gate, you guys are part of that value chain'."

Couple that with a commodity risk man-agement overlay, and Gupta reckons he has the most complete trade �nance capability in the system today.

Senior bankers at global �rms in Asia o�en profess to care little for what even a �rm like DBS thinks about them, but even they will be pleased to note that Gupta feels the bank has traditionally struggled to catch up with them in cash management.

"The globals have all the cash manage-ment capabilities that we do, but if we do a lot of good trade �nance, the cash manage-

ment can come as an attendant piece." He cautions, however, that getting the most out of that is going to depend on being able to leapfrog competition in e-commerce and the digital o�ering more broadly.

It's the �rst mention of a focus that Gupta will return to, and is clearly playing on his mind at the moment. Although much of his discussion with Asiamoney concerns mainstream banking, challengers are dis-rupting his thoughts much as they disrupt his business.

New brands and platforms — whether Alipay, the online payment system that was set up to service transactions within Alibaba but has now spread its wings much more widely, or M-Pesa, the mobile telecom money transfer service that has transformed economic life in Kenya — are shaking up traditional banking as equiva-lent services are in other global industries.

Gupta reckons the correct response for an incumbent is to absorb what the challengers are doing and do it better, by integrating it with the unique skills that a traditional bank can o�er — chie�y in risk management.

Back in the traditional world, treasury services are another area that has been a work in progress for DBS for some time, but one that the bank thinks is now at par. It has been a long slog. DBS had a decent markets capability that predated Gupta's time at the �rm, but it was very internally focused, choosing mostly to direct its e�orts to prop trading and own balance sheet work. One of his priorities has been to make that skillset more available to customers in the region.

"We were already good at rates and currencies, so we added other asset classes like commodities. We think we can com-pete, and if I'm as good as the big guys I'll get my share of the business."

In debt capital markets, he thinks the bank's judgement to invest a couple of years ago has played out well. But he says there is much more to come, particularly with growing opportunities in renminbi, baht and rupiah, for example.

"It's an area where there is a tremendous opportunity because I think Asian debt capital markets are going to massively grow."

Gupta is also bullish on the wealth management opportunity in the region, and dismisses any suggestion that banks chasing business could be squeezed as they all scramble to service Asia's growing numbers of wealthy entrepreneurs. A hun-dred banks built a fairly decent business over 500 years in Switzerland, he argues, and while the dynamics have changed, he sees plenty of scope for 10 banks to make a great wealth management business in Asia.

At DBS, consumer banking and wealth management income rose 28% in the �rst half of 2015 to S$1.8bn, with pro�ts rising 56% to S$650m.

"Do I have to be number one? No. Can I be top 10 and still have a fantastic busi-ness? Yes."

Gupta says he has no aspirations to knock a leading franchise like UBS o� its perch. "But if I can build a really good number �ve or seven business which gives me a 20% CAGR and extraordinarily high ROE, what's wrong with that?"

BANKING THE MEGATRENDSGupta likes his megatrends. For Asia he boils these down to increasing domestic consumption, increasing infrastructure investment, increasing exports and increasing adoption of new technologies. These are so strong and long term that as long as an Asian banking player can put together a competitive o�ering and di�er-entiate itself in certain segments, then it can build a good business.

That's the proposition that underlies DBS's entire strategy, but it's one that relies heavily on those megatrends not

I can run my management team like a kitchen cabinet — the 20 of us can easily get on the phone together.




only playing out as predicted but also supplying plenty of business for the �rm in the process. Gupta has previously noted the length of time that people have been talking about Asean market integration, for example, with not much yet to show for it.

"The strategy is based on a view of Asia — that is correct. Our general view on Asia is that if you think 10, 15, 20 years ahead, the shi� of economic gravity to the region will continue. This is informed by the demographics, the infrastructure invest-ment needs, the integration of the private sector, the technical development.

"Could any of these drivers change? Yes, but in broad terms we think these are sensible premises to be basing the strategy on."

Within that overall approach, of course, the �rm has made speci�c bets. It made a call on renminbi internationalisation in 2009, building a capability in Hong Kong and better connecting its Singapore busi-ness to China.

"We got that right, and we made the right bet in 2013 that the Asian bond mar-kets would rapidly need to start building out. I think we've got good momentum on the back of that."

Some bets haven't worked. DBS has long been a cheerleader for small and medium sized enterprises, seeing the servicing of that segment as a proper part of the DNA of a �rm that wants to be a regional leader. But e�orts to step that up have not gone to plan.

"We made a bet that we would grow out the SME franchise in a much bigger way than we have been able to. It went o� because the macro environment didn't support it."

India has also seen the bank run into headwinds, and although Gupta is excited about customer growth in China — DBS had no large corporate customers there in 2010, now it has 600 — he remains cautious about the direction there.

This is where Gupta likes to have his hands on multiple levers. Diversi�cation brings a �exibility that allows him to cope with setbacks, he argues.

"If I have eight engines, and if this one is going slow then I can pull back on that and push the pedal down on another one.

"We've got so many engines going. There are quarters where a couple of them don't work but on balance the fact that we have now had 24 quarters of consistent year-

on-year quarterly growth tells you that we have enough of those engines �ring to be able to give us real growth."

That still needs work, though. Gupta wants to drive growth in China, Taiwan, Indonesia and India to balance out the geo-graphic mix of the business. Income away from Singapore and Hong Kong doubled to S$1.4bn from 2010 to 2014, but that only represented a shi� from 11% of overall group income to 15%.

In the �rst half of 2015, Singapore accounted for 67% of net pro�ts, slightly up from the �rst half of 2014, while Hong Kong was at 25%. The contribution from the rest of Greater China and south/south-east Asia fell from 14% to 8%.

CROSS-SELLINGSince the global �nancial crisis, big bank CEOs have regularly trotted out the mantra that the focus in a capital-constrained world must be on banking the clients they already have more deeply rather than scurrying around to �nd new ones. Cross-sell is the buzzword, and at some �rms it has required a wholesale clear-out of those sta� who were too wedded to the old style of product �efdoms.

DBS PROFITS BEFORE TAX, BY REGION

SOURCE: DBS ANNUAL REPORTS

2009 2010 2011 2012 2013 2014 1H 2015

Singapore Hong Kong5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

Rest of Greater China South/southeast AsiaS$m Rest of the world




DBS has gone through that transition too, although Gupta says that the bank's perfor-mance now is built on customer acquisition in certain areas alongside a concerted e�ort to cross-sell.

"[Before the crisis] we were a loan shop. We had massive balance sheet out and there were large positions in syndications that we had taken out where we didn't even know the client."

What Gupta set about changing will sound familiar to those at other formerly silo-driven �rms that now seek to be much more joined up in their approach to clients — not least his old shop, Citi.

"We had this tremendous opportunity because we were so far down the spec-trum in terms of cross-sell. The minute we changed the KPIs of our bankers to be more customer focused, we started getting tremendous cross-sell advantage."

That also meant a reorganisation. Trade �nance used to be all over the place, scat-tered throughout the bank's myriad areas. That was put into one single shop, cash management was built up, and treasury services were broadened from their previous prop focus.

So far, so familiar. Plenty of other �rms profess to have become much more integrated. HSBC is notable for regularly breaking out the revenue contribution made through what it calls "collaboration" between businesses.

All the collaboration in the world won't help if the individual product skills are missing, and Gupta agrees that a big part of getting the pitch right to clients was �lling in the gaps in the o�ering.

"You have to have competitive capabili-ties, so that you can say to a client that here are three more things you should be doing with us. Otherwise it’s a case of 'Hey, client, you're not giving me any cross-sell', and the client saying 'But you don't know how to do cash, you're terrible at trade, so what do I give you?'"

Gupta argues that the potential for DBS is particularly promising because of its size, which makes it big enough to matter but small enough to change quickly when needed.

"We have a Goldilocks size — big enough to have some clout, being a top 50 bank globally by balance sheet and market cap,

but small enough to be nimble, being focused on six or seven countries that really matter. I can run my management team like a kitchen cabinet — the 20 of us can easily get on the phone together."

One business that has bene�ted from this approach is private banking, where the connectivity with the retail bank and with investment banking has been stepped up. Gupta put in place what he calls a "wealth

continuum", with all the wealth-related businesses brought together with consumer banking. The cost income ratio is below 60%, compared to an average in Asia of closer to 80%.

Wealth management also consults with capital markets every day to consider how distribution into wealth clients can best be used to support transactions.

Customer acquisition still matters for Gupta — not in Singapore or Hong Kong necessarily, where he probably has all the customers he wants — but in markets like China, India and Indonesia.

"We have built out an industrial-scale machinery to acquire customers and there we are talking about thousands of cus-tomers. In wealth, for example, that is not only through feet on the street but through electronic channels as well. We are doing a lot of digital customer acquisition."

Regulation is making that process harder. Know-your-customer requirements are ever more onerous and banks around the world are having to deal with legacy issues that are costing them substantial sums. HSBC, for example, has been grappling with issues stemming from the acquisition of a Swiss

private banking business in 1999. A con-servative jurisdiction like Singapore makes reputational issues even more challenging.

"I turn away about 90% of the European money that comes my way because I can't establish the provenance of it. But I think the power of big data today means that you will be able to establish customer identity electronically with a high degree of con�-dence.

"What we can know about our customers today is mindboggling. Purely on someone's bank account or history of ATM use, for example, we can know where you work, where you shop, where you eat."

DBS has long been known for the sav-viness of its connectivity with consumers based on real-time analysis of transactions, sending local promotions to a customer who has just paid for a product in a shop using a DBS card, for example. David Gledhill joined DBS as head of group technology and operations from JP Morgan in 2008 with a mandate to make such analysis possible and pro�table.

Gupta cites another instance of where big data analysis is bearing fruit. "We got a li� of eight times in the success of a marketing campaign by targeting a restaurant where we thought it was highly likely customers would go to in the next month."

MAKING LIFE DIFFICULTLooming over all this development is the shadow of global banking regulation. In answer to whether regulators are making his job harder, Gupta is unequivocal: "Much harder, partly because they are rethinking the whole regulatory arti�ce again."

A�er 25 years of going down the route of Basel II and Basel III, regulators are now going back to where it all started, he says.

"Basel IV is e�ectively Basel I.5. No one wants to recognise that apart from Dan Turullo in the US, who has basically said that Basel is not working so let's go back."

Turullo, a US Federal Reserve governor, has argued for a rethink of how regulation is approached, and has criticised the freedom big banks have to use internal models.

"Everyone else is perfuming the pig. They all want to go back but don't want to say we wasted our time," says Gupta. The result of this denial is a mish-mash of supplemen-tary measures and �oors, he argues, that

I think we have too much capital, and it hits returns, but I don't have a choice because the uncertainty is so high.




will do little other than negate the Basel construct as it currently stands. Uncertainty reigns.

For DBS, that uncertainty produces a pretty straightforward impact — too much capital. DBS's core equity tier one stood at 13.4% at the end of the �rst half of 2015, and its total capital adequacy ratio was at 15.3%. "I think we have too much capital, and it hits returns, but I don't have a choice because the uncertainty is so high."

That's the high order impact, but there is another more immediate one for the bank and the industry as a whole — a lack of liquidity in the market. A letter to share-holders from JP Morgan CEO Jamie Dimon in April 2015 was one of the clearest elucida-tions of this regulatory consequence, but he is far from alone in identifying it.

Gupta argues that while this impact might have been most noticeable in the US, Asia has also been squeezed. He used to be com-fortable with the fact that he had large stocks of govvies, US and local, because he could repo it when needed. Today it's di�erent.

"I'm going to keep $5bn of cash — I would never have done that before. I would have

kept most in liquid assets, but today I'm not sure the liquidity exists for me to repo that out. I'm creating ine®ciency, but I'm willing to take that because I don't want to be caught short of cash."

Not much bad happens to banks without clients sharing the pain in some form, and cash sitting idle is no di�erent. "If I'm not making a return on it then I have to price up for a corporate client in order to make my returns," says Gupta.

That said, looking at the total return of a client relationship means that a bank can still price lending competitively if it can be sure of getting su®cient business elsewhere. Gupta returns to the theme of cross-selling, this time in reference to his previous tenure at Citi, where he began his career in 1982 and worked until he joined DBS in 2009.

The post-crisis Citi has been one of the most energetic banks for revamping the way in which it approaches the client relation-ship, analysing total return and share of wallet in meticulous detail. The result has been an extraordinary resurgence that has taken the �rm to the ranks of the very best

in Asia. But it was not always so, as Gupta recalls.

"When I was at Citi our whole focus was on ensuring ROE at transaction and product level. If that didn't work then we wouldn't do it. I used to �nd it very frustrating if a really good client of mine wanted to do an ECM deal or M&A and the global guys would not do it because they would say the returns were too low or the ticket was too small."

That mentality has changed, and few �rms could now a�ord to take such a com-partmentalised approach to business. For Gupta, the calculation is a fairly simple one. "It doesn't matter to me if you have done some business with the client at plus 2% or minus 2% if you can demonstrate to me the total return of the relationship is 20%. For me that's ok."

CHINA OPPORTUNITYIt helps when clients are willing to pay. "Of all the countries we operate in, the toughest market is India. Clients there hate having to pay for anything, and so it is the hardest market for cross-sell."

WATCH THIS SPACE:Gupta outlines the digital challenge at the 2015 DBS Asian Insights conference in Singapore




The Chinese market has been better, though, and is largely built on that beach-head of trade �nance. Last year the bank did two dozen capital markets deals for Chinese clients. All those relationships had started with trade �nance two or three years earlier.

Gupta might be cautious on China, but he sees a big opportunity for the bank in China's project to internationalise its markets and currency. "Our market share in Hong Kong is about 4%, but in o�shore RMB there it is about 8%-10% in total — bonds, trade �nance, options, swaps."

He notes that DBS is one of only seven foreign banks to have been granted direct access to the �rst phase of the incoming China International Payment System (CIPS), which promises to transform international clearing of RMB transactions. Gupta sees the chance to build a settle-ment and cash management capability into China on the back of it.

When it comes to renminbi internation-alisation, the o�shore RMB hubs that are proliferating around the world are not the big story, says Gupta. "The o�shore and onshore RMB are going to be one currency in 12 months, right? Arbitrage is disap-pearing, there will be one curve, so it will really be an RMB story."

Banks are already being permitted to repo onshore and take the money o�shore, and Gupta thinks that within six months it will be possible to do onshore unsecured borrowing and repatriate the proceeds. This is where the real action is happening.

"This whole thing about 'Am I a hub?', that isn't it. There will be some natural centres, in the same way that the US dollar has natural centres. Tokyo is one, Sydney, Hong Kong, Dubai, Zurich. And this is not because of some US dollar agenda — it is because they happen to be �nancial centres. And that is what will happen with the RMB."

But a few things still need to happen. For one, there need to be a lot more RMB assets available for international investors to own, says Gupta. That means deepening China's capital markets through allowing more international participation.

He also reckons that more value could be got out of the 30-odd swap lines the

People's Bank of China has in place with foreign central banks, and which have almost never been used. China itself fun-nelled about $3bn to Hong Kong in 2010, and South Korea activated a miniscule portion a few years later. Argentina is rumoured to have drawn several billion dollars from its line.

Gupta would like to see these lines used routinely to expand liquidity. "The way they are structured is that they are only contingency facilities. I recommended to

the Chinese and Singapore sides that they redo the agreement and make it a facility that could be used to pump liquidity on an ongoing basis, and that way you get RMB out into the system. You don't need to wait for a squeeze."

DEALING WITH DISRUPTIONIdentifying DBS's biggest challenge takes Gupta back to a favourite theme — digital. "The Street is getting completely dislocated by challengers, but you have to do what they are trying to do and add the strengths you have that they don't."

That comes down to two things above all others: risk management and clearing/settlement. Companies like Alibaba are taking a lot of money and placing it out all the way up the yield curve up to �ve years, for example.

"That's ok when markets are liquid but what happens in a down-cycle? These com-panies have algo-based systems that sound very sensible but which have never been put through stress."

Clearing and settlement is another unique strength of the banks. Apple Pay,

Alibaba and their ilk all come back to the banks for clearing and settlement, notes Gupta. "None of them have replicated all the pipes — the banks own that."

What banks don't have, though, is the �exibility of the challengers. Gupta doesn't see this as impossible to achieve, though, and likes the look of what China's Ping An is doing with Orange Bank, the youth-targeted internet-based direct bank that it set up in August 2014. By March 2015 it had half a million users.

"I think they're doing the right thing. You will see a lot more banks taking the strengths they have and building the digital piece.

"Banks that can get on with that will win."

Gupta sees the Goldilocks size of DBS as an advantage in this. But the danger remains that growing in size or scope makes a firm less nimble. Gupta says he worries about that all the time, although he also consoles himself with the knowl-edge that he can grow in existing areas without losing the ability to be flexible.

"It's about the breadth of presence that you have — I could double my size in Singapore but still be quite nimble. Doubling your balance sheet doesn't stretch you mechanically. It goes back to whether we want to be global. If I wanted to spread out and put one business into Europe and Africa, it would start to get much harder."

Shareholder pressure for returns and growth doesn't go away, but Gupta is con-�dent that the bank can deliver without being forced to spread itself thinly. "Think about where the growth is: when China slows down it grows at 6%, so the notion that I should expand into a 1% growth region is counterintuitive. Our return targets are 12%-13% and we are getting around 11.5%-12% at the moment."

Firms based in or venturing into more exotic markets than DBS has identi�ed will better satisfy investors looking for a di�erent risk/reward ratio. But Gupta is more than happy to cap the ambition.

"Our shareholder proposition is for you to participate in Asia's growth in a sensi-ble way, with double digit growth rates. We won't give you 20%-30% growth, but we will give you a sustainable return." ◼

Everyone else is perfuming the pig. They all want to go back but don't want to say we wasted our time.



Asean Integration

The Association of Southeast Asian Nations (Asean) combines some of the fastest-growing countries in the world with some of the slowest.

Thailand grew at just 0.7% in 2014, while the Philippines and Vietnam grew at 6%, accord-ing to the World Bank. Malaysia also posted 6%, although this year looks likely to be much tougher for the country, with the cur-rency plunging amid a political crisis, China's devaluation of the renminbi, persistent low oil prices and impending US rate increases.

The pace of growth is not the only point of di�erence between the 10 nations that make up the Asean region. Their varying levels of economic development (see box), their legal systems and their languages add to the mix, as do the troubled histories of some. Le Luong Minh, secretary general of the Asean, admit-ted as much in a speech in November 2014.

“In a region as diverse as Southeast Asia in terms of culture and history, the ... members of Asean could have succeeded this far only with the determination to come together with an ever-forward-looking approach to regional co-operation,” he said. But as much as the hurdles to the integration of the region were real, there has been some progress so far.

Asean countries have worked hard to break down trade barriers within the region, espe-cially in goods, including by signing up to the Asean Economic Community (AEC), which is scheduled to be �nalised in December. Trade within the region rose on average by 10.5% annually from 1993 to 2013, according to Asean, compared to 8.9% for trade with

countries outside the region. This growth has come on the back of falling tari�s, easier customs processes, and free trade agreements with countries including China and India.

These moves have inspired great hope not just among politicians but also among members of the banking community. Speak to senior bankers around the region and you will hear similar pronouncements. There is a palpable con�dence in the prospects for the countries in this region to grow together. The plans for economic integration between Asean countries have already come far, and are set to go even further at the end of the year, when the �nal terms of the AEC agree-ment should come into e�ect.

But although there have been impressive moves in the direction of economic integra-tion, there has been little progress when it comes to �nancial markets. Those market participants looking at markets across the region say that is no surprise. Change, they argue, needs to come individually before it can be achieved as a group.

DIFFERENT STROKESThe range of �nancial market development across the Asean region is startling. Cambo-dia, which has only two companies listed on its stock exchange, does not compare by any metric to Singapore, with its swathes of fund managers, its well-functioning capital mar-kets and its sophisticated banking system. The size of the bond markets, not to mention the knowledge of investors, is wildly di�erent across the region.

From the Philippines to Malaysia, from Vietnam to Thailand, analysts see vastly di�erent �nancial systems, o�en with dif-ferent legal codes that make real progress on integration especially di�cult. Given that the size of Malaysia's bond market is easily bigger than those in Indonesia, the Philippines and Vietnam combined, some analysts think it is unrealistic, at this stage, to even be talking about integrating Asean �nancial markets in any real sense.

“The markets in the Asean region will have to develop more nationally than regionally,” says a well-regarded economist with plenty of experience in the region. “The priority needs to be on the development of domestic bond markets. There is no point integrating markets unless the smaller markets are able to reap the bene�ts.”

There are signs that this development is already underway. The size of outstanding bonds in emerging East Asia, a region that includes China and Korea as well as Asean countries, grew to $8.3tr in the �rst quarter of 2015, a growth of 1.6% quarter-on-quarter, according to the Asian Development Bank.

That average contained big di�erences: Malaysia's market, for instance, contracted 2.7% compared to the previous quarter, thanks in large part to the central bank's decision not to roll over maturing bills; Indo-nesia's market, in contrast, grew by 6.5% over the last quarter, a result of the government's attempt to pre-fund some of its issuance.

The growth of the region's bond market looks even more positive on a year-on-

Big hurdles before the �nish lineThe integration project between countries in the Association of Southeast Nations has been a success when judged on the metric of economic links or sheer column inches in the region's newspapers. But the �nancial market integration that many hoped would follow has lagged behind. Matthew Thomas reports.

Asean Integration-r3.indd 34 21/8/15 5:52 pm


Asean Integration

year basis. Emerging East Asia's bond markets grew by 10% compared to the previous year, driven partly by 22.9% growth in Vietnam and 16.5% growth in Indonesia. But government bonds continue to dominate. Government issuance still represents almost 60% of overall bond sales in emerging East Asia, and is easily more than three quarters of the market in Indonesia, the Philippines, Thailand and Vietnam.

The dominance of government bonds points to a problem. The overall size of the bond market is only around 22.9% of gross domestic product in Vietnam, 36.5% in the Philippines, and a miserly 15.1% in Indonesia. Government bonds swallowing up much of the demand in markets with much larger debt markets is not a problem in itself. It does not appear to have hurt Malaysia, where government bonds represent 57% of issuance and the overall market is worth around 96% of GDP. But when bond markets are much smaller than the size of the econ-omy, the preponderance of government bond issuance means companies are less and less likely to reap the bene�ts of any increase in cross-border ¦ows.

That does not mean Asean policy makers have few options at their disposal when hoping to increase the �nancing options for corporations across the region. But it does mean that, rather than focusing entirely on the bond market, they need to take a close look at the banks.

BACK TO BASICSBank lending is the bread-and-butter of much corporate funding within the Asean region. In Indonesia, Malaysia, the Philippines, Singapore and Thailand, bank loans dwarf the bond market. This is o�en said by debt bankers to be one of the main hurdles to developing Asean bond markets — the more liquid banks are, the harder it is to break their hold on providing the bulk of �nancing for corporations. But the dominance of banks does provide opportunities for the region's integration project to move up a notch.

The Asean Banking Integration Framework (ABIF) is one attempt to make the most of the crucial role of bank �nancing across the region. But there are some doubts about how far the framework will go to integrate the banking system within the region.

The framework is pinned on the hope of "quali�ed Asean banks" being able to access banking markets across the region. But in reality, any progress will depend on bilat-eral agreements between countries to allow market access. The framework certainly looks like progress at �rst glance, but it is more accurate to see it as an invitation to make progress in the future.

“The framework probably doesn't mean much,” says one �nancial market executive. “But it does show they think [banking] inte-gration is important.”

There have been individual moves to allow more bank access. In the Philippines, for instance, the government has passed a law allowing foreign banks to fully own local institutions, as long as they do not own more than 40% of assets in the entire banking system (see separate story in this issue). But even this demonstrates the small progress being made on integrating banking markets in the region.

Five banks have already won permission to open branches in the country, or to buy small local institutions. But none of these are from the Asean region. Cathay United Bank and Yuanta Commercial Bank are from Taiwan. Industrial Bank of Korea and Shinhan Bank are from South Korea. Sumitomo Mitsui Banking Corporation is from Japan.

These banks are all entering the Philip-pines not because of any success from Asean

policymakers, but because they are trying to �nd ways to improve the tepid returns they can achieve in their domestic markets.

This does not mean that Asean banking integration is a non-starter. It would be foolhardy to judge the success of the project at such an early stage, or to bet against increasing trade links between Asean countries leading to more banking links. But so far, market participants see Asean banking integration as more of a nice idea than a practical plan. It is, they warn, going to be slow.

It may seem that the hurdles for �nan-cial market integration between Asean countries are, at this point, greater than the opportunities. But there is still hope that capital ¦ows within the region will become increasingly important over the next few years. The move towards more capital ¦ows between the region's markets may get its greatest results not from the pull of those markets but rather from the push away from more established o�shore markets.

THE FED EFFECTSenior bankers in the region have long complained that Asean investors, by and large, are more comfortable investing in established economies than in those markets that are closer to home. The high savings rates enjoyed by many Asean coun-tries could be a boon for the region. But, they complain, too much of those savings

MAKING A MOUNTAIN OUT OF A MOLEHILL?Bond issuance in Malaysian ringgit, Philippine pesos and Indonesian rupiah ($m equivalent)

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Asean Integration

goes towards helping the US Treasury meet its bond issuance targets.

The low interest rate environment enjoyed in US dollars for the last few years, on the other hand, has encouraged Asean issuers to meet more of their funding needs in the o�shore markets, attracted by a cap-tive investor base and a low absolute yield.

That part of the equation, at least, looks set to change, as US rates creep up over the next few years and sources of global volatil-ity — including the Greek crisis and China's devaluation of the yuan — make it harder for Asean companies to hit their funding targets in the dollar market.

There are two ways this could play out. Asean countries could chose to meet more of their funding targets in their domes-tic markets, or they could look for other foreign currency opportunities away from the US dollar market that could continue to o�er them cheap funding. Since moving to other Asean markets seems an obvious option for the latter point, it may not matter either way. Asean companies will either add to the domestic issuance in their own market, helping develop those markets to the point at which Asean integration becomes more realistic, or they will go to neighbouring markets, providing an immediate example for those attempting to bolster cross-border ¦ows within the Asean region.

“We have seen an increase in foreign currency issuance at the cost of domestic

issuance over the last few years, but now we are starting to see a slowdown,” says Thiam Hee Ng, senior economist in the o�ce of regional economic integration at the Asian Development Bank. “The dollar market still looks attractive to some issuers, but it is becoming less so. That is going to change the approach of Asean issuers to the bond markets.”

This may not shi� the needle drastically. The dollar bond market is still going to prove an attractive source of funding for many issuers, and rising rates are going to make it even harder to resist for investors in the region. But as the low rate envi-ronment from the US comes to an end, funding executives in the Asean region will increasingly examine their options. That could lead to a boost for the region's debt markets.

This would be a continuation of the project that some bankers, as well as guarantors like the Credit Guarantee and Investment Facility (CGIF), have been working on for a few years: creating examples of

cross-border deals within the region even if that cannot, on its own, lead to a deluge of cross-border issuance.

“It's obvious that the development stage of the bond markets are very di�erent,” says Kiyoshi Nishimura, chief executive of CGIF. “That means the hurdles to integrate these markets are large. But having said that, they can still look to increase the ¦ows of funds between markets.”

CGIF has already helped Indonesian issu-ers Astra Sedaya Finance and Protelindo tap the Singapore dollar market, among other deals. These issues may not fundamentally alter the economics for issuers considering overseas markets, especially those that are shying away from using guarantees. But they do represent real progress for a region in which cross-border issuance is still some-thing of a rarity.

It is clear that the road towards �nancial market integration is going to be a long one in this region. Few people expect other-wise. But with concerted e�ort from policy makers, bankers and guarantors —and a little help from overseas — it just might be achievable. ◼

Financial market integration in the Association of Southeast Nations (Asean) might be sputtering along at a slow speed, but economic links between the countries have been racing forward. This is, in part, due to the di�ering conditions for economic and �nancial market integration.

The vast di�erences in the economic development of the Asean region are perhaps best illustrated by looking at GDP per capita levels. Singaporeans can boast a GDP per capita of $55,182.50, according to �gures from Asean. Those in Brunei enjoy $39,678.70 per head. But in Cambodia, the number falls to $1,036.70. In Myanmar, it is just $887.80.

These vastly di�erent levels of development, and the corresponding levels of �nancial market maturity, might create a hurdle for �nancial integration. But they provide a boon for trade.

“In theory, trade prospers the most when you have big di�erences in economic development, because that's precisely where you accrue bene�ts,” says Joseph Incalcaterra, an economist at HSBC in Hong Kong. “When one country is labour abundant and another country is capital abundant, that creates the perfect conditions for trade.”

That is a key reason the region has been so successful despite some regulatory hurdles, says Incalcaterra. He provides a clear example from Singapore. In 1999, the country produced 70% of hard disks in the region. But ten years later, Thailand had taken much of that capacity, allowing Singaporean companies to move up the value chain towards more research and development.

There are still some hurdles to greater economic integration between countries in the region. Indonesia's legal system, derived from Dutch law, creates hurdles when seeking forms of integration with Malaysia and Singapore, with their British law-inspired systems. The wide spread of languages within the region means harmonising documentation can be costly, and laborious.

Corporations in some countries fear too much competition from their neighbours. But it is clear that there is progress being made — and room for plenty more in the future. ◼

THE PERFECT CONDITIONS FOR TRADE

THIAM HEE NGsenior economist in the oce of regional economic integration at the Asian Development Bank.



Australian Power Privatisations

On Thursday July 23, at the Mel-bourne annual general meeting of Victorian electricity company AusNet Services, shareholders

blocked an equity raising.That equity raising was to have funded a

possible bid for electricity assets being sold as part of the New South Wales Govern-ment’s A$20bn ($14.8bn) privatisation of three electricity businesses.

The shareholders also voted independent director Tony Iannello o� the AusNet board. Iannello had been publicly championing AusNet’s planned bid for NSW’s transmis-sion business, TransGrid, the �rst of the three assets to be sold.

The twist is that the combined vote of two companies – Singapore Power and China’s State Grid Corporation – triggered the sacking of Iannello and the blocking of the equity raising. Singapore Power owns 21% of AusNet and State Grid holds 20%.

The shareholder machinations came at a sensitive time: up to seven consortia had just lodged expressions of interest for TransGrid. Among those were State Grid Corporation, which is reportedly partnering with Australian investment bank Macquarie Group. Singapore Power was also believed to have looked at bidding alone or becom-ing part of a consortium.

There is no suggestion that Singapore Power or State Grid combined their votes to get rid of Iannello and block the raising, or that it was linked to the TransGrid priva-tisation. But AusNet will now struggle to bid; a competitor for TransGrid has been removed and the chances of a successful bid by State Grid, which analysts believe is favourite to win TransGrid, have increased further.

The corporate powerplays by Asian oper-ations highlight the global importance and attractiveness of Australia’s power assets.

The TransGrid sale is attracting global play-ers seeking strong assets in stable economic environment.

“They all see Australia as an attractive place to invest with lower sovereign risk than other places,” says Mark Coughlin, Australian utilities leader at Pricewater-houseCoopers, a consultancy. “They are good assets and there is a lot of interest in Australia from a risk-return point of view.”

A successful NSW electricity privatisation could also pave the way for energy priva-tisations in the state of Western Australia. And it could reignite the sale of Queens-land’s electricity assets that was rejected by voters earlier this year. Both Queensland and Western Australia’s governments are grappling with surging debt loads and a serious shortfall in infrastructure spending.

Back in the 1990s, the controversial Premier of the state of Victoria, Je� Ken-nett, sold o� the state’s electricity assets. The privatisation was lauded as one of Australia’s most successful. It let to a more e�cient electricity sector and helped boost the economy. The state of South Australia sold o� its electricity assets in 1998.

Then there was a pause. NSW, Queens-land and Western Australia held onto their power assets. But in recent years, state gov-ernment debts have surged. Queensland’s is forecast to surge to A$100bn by 2018/2019. At the same time, states face greater infra-structure spending requirements for things like roads.

So the spotlight has again turned to the prospect of selling multi-billion-dollar power assets.

Switching on: power sell-o s back on agendaMany years a�er the Australian states of Victoria and South Australia privatised their electricity assets, New South Wales, Queensland and Western Australia are �nally discussing similar moves. But the processes are fraught with political sensitivity and corporate machinations. Ben Power reports.

Keeping the Gold Coast’s lights on

Australia Power-r3.indd 37 21/8/15 5:54 pm



TALE OF TWO STATESIn 2013, Queensland’s then Premier, conservative Campbell Newman, appointed advisers to look at selling its electricity transmission and distribution sector, which is entirely government-owned. It was a pro-spective fee bonanza for investment banks, with the sale expected to reap A$40bn-A$48bn.

Meanwhile, NSW moved to o¡oad Trans-Grid, Ausgrid and Endeavour Energy as part of a A$20bn "poles and wires" privatisation.

But privatisation in Australia has been a political ¤ashpoint, and in state elections in 2015 both Newman and NSW's Mike Baird sought an electoral mandate to sell the assets. They were to have vastly di�erent outcomes.

Newman in particular took a powerful position to the election. In 2012 the former Lord Mayor of Queensland’s capital, Bris-bane, had demolished his rival Labor Party, reducing it to a rump of seven seats against the 78 of his Liberal National Party (LNP).

But when he took power Newman’s pop-ularity slumped. Many expected him to lose his own seat in the 2015 election. But most, particularly the bankers working on the energy privatisation and the bidders circling, expected the LNP to retain government with a reduced majority.

What happened on January 31 was a shock. Newman not only lost his own seat, but a massive swing to Labor resulted in a hung Parliament. Labor’s leader, Annasta-cia Palaszczuk, who opposed privatisation, formed a government with the help of an independent MP. The privatisation was dead.

Over in New South Wales, the story was a di�erent one. Baird won his election and received a mandate to privatise. Newman had been deemed too aggressive and dictato-rial, but 47-year-old Baird, the son of NSW’s former Olympics Minister, is seen as the nice guy of Australian politics. Until entering politics in 2007, he had worked in banking for 18 years, latterly as head of institutional banking for HSBC in Australia and New Zealand.

Baird had taken over as Premier in April 2014 when Barry O’Farrell became embroiled in an expenses scandal. He started his push for privatisation of NSW’s power assets, and he wanted approval from voters.

But just before this year’s March election his privatisation plan hit trouble. Global

investment banks Deutsche Bank and UBS had been hired to advise the government.

On March 17, just a fortnight before the election, two UBS analysts issued a report on the privatisation. It was titled "Bad for the budget, good for the state". The report said that lost revenue from the privatised elec-tricity assets would "likely have a negative impact on state �nances in the long run".

The report was shortly reissued with a new title that read simply "Good for the state" and had a more positive view on the sale.

The opponents of privatisation, including the opposition Labor Party, seized on the note as evidence that privatisation would damage the state’s �nances. They also accused the Baird government of pressuring UBS to alter the original report.

A NSW Parliamentary Inquiry is exam-ining the events. Australia’s �nancial regulator, The Australian Securities and Investments Commission, has also been looking into the situation.

Baird nonetheless stuck by UBS as his advisers, and the incident didn’t a�ect the outcome of the election. That nice-guy image seemed to so°en voters' view on asset priva-tisations and he was re-elected on March 28. The sale was on.

WHAT’S UP FOR GRABS?NSW is selling three businesses: a 100% lease of its transmission business, Trans-Grid; and 51% leases of two distribution operations, Ausgrid and Endeavour Energy.

According to Commonwealth Bank of Australia utilities analyst William Allott, listed Australian utility infrastructure stocks are currently trading on multiples of 1.3 to 1.4 times RAB (regulated asset base). That values TransGrid at A$9.6bn, Ausgrid at A$23.3bn and Endeavour at A$9bn at the upper end of multiples.

He says that suggests total proceeds for the NSW Government of A$18bn-A$21bn.

Allott says the assets are very attractive to a number of players, despite some recent tough regulatory decisions.

“Assets of this size and quality rarely come to market, and while there are question marks surrounding both the returns being achieved and the true value of the asset bases on which they are being achieved, we believe that international interest is likely to be very high.”

NSW decided to sell TransGrid �rst, followed by the other two assets. Because it was a 100%, the TransGrid sale “was more straightforward”, says one banker, who did not wish to be named but who is advising the NSW government on the privatisations.

No o�cial announcement has been made about who is bidding and the exact forma-tion of each consortium. But the investment banker advising the NSW government told Asiamoney that local media reports of the bidders were accurate.

The interested parties are divided into about seven consortia of large pension funds, Australian infrastructure players and a series of Asian players. Any foreign bidder will require approval for the purchase from Australia’s Foreign Investment Review Board.

“There has been strong global interest,” the banker said. “We’ve had strong global interest, including from Asia. I wouldn’t limit that just to China.”

One consortium includes: major pen-sion groups, such as Canada Pension Plan Investment Board, which has been investing in Australian infrastructure in recent years; global infrastructure investor Borealis, which is backed by one of Canada’s largest pension plans, OMERS; and AustralianSuper, the country’s largest superannuation fund.

Assets of this size and quality rarely come to market, and while there are question marks surrounding both the returns being achieved and the true value of the asset bases on which they are being achieved, we believe that international interest is likely to be very high.




A local Australian consortium is believed to combine Queensland Investment Corpo-ration with IFM Investors, an infrastructure investor owned by a number of Australian superannuation funds.

Another global consortium includes Hast-ings Funds Management, ASX-listed Spark Infrastructure Group, Quebec’s Caisse de Depot, Abu Dhabi Investment Authority and Wren House, the infrastructure arm of the Kuwait Investment Authority.

But perhaps the most interesting partic-ipants have been the Asian players, with billionaire Li Ka Shing’s Cheung Kong Infra-structure believed to be bidding.

One reported consortium includes China Southern Grid, China Investment Corp and Global Infrastructure Partners. China’s giant China State Grid is also believed to have teamed up with a unit of Australian invest-ment bank, Macquarie Group. Other bidders reportedly include Singapore Power.

One bidder that had been public about its intentions was ASX-listed AusNet Services, which operates three energy networks in Vic-toria. As mentioned, Singapore Power owns 21% of AusNet and State Grid holds 20%.

The NSW Government called for expres-sions of interest in TransGrid in late June. The banker advising the government said that in late July the NSW government and its advisers were informing those who had been shortlisted and were asking for initial bids to be lodged. He would not comment on who had been shortlisted or the price.

A few days later, however, Singapore Power and China State Grid blocked the AusNet equity raising and forced independent director and TransGrid bid champion Tony Iannello from the board. Reports suggest the AusNet bid is in tatters.

'UNIQUE' M&ANeither AusNet nor Singapore Power replied to Asiamoney. In a statement to the Austral-ian Financial Review, Singapore Power said: “There have been no arrangements for under-standings between Singapore Power and State Grid on any of the resolutions put forward at AusNet’s AGM.” It also said Singapore Power did not submit an expression of interest in TransGrid.

But there is no doubt that State Grid will bid, and from a position of greater strength if AusNet has indeed been removed from the fray. One analyst who did not wish to be

named said State Grid was favourite to secure TransGrid. “I’m not sure how you can expect them to miss out on an asset like this,” he said.

The analyst said State Grid wanted to deploy massive amounts of cash outside China. “They can also take a much longer time horizon in respect to turning a pro�t so they probably have an advantage over the listed guys."

Meanwhile, the consortia are busy talking to a range of banks, including global banks from North America, Asia and Europe, and the top four Australian banks, ANZ, CBA, NAB and Westpac.

One banker close to the possible raisings said that across the three NSW assets some A$20bn of debt will need to be raised. “These are very exciting times. There is a massive requirement of debt raising to be made across the three entities.”

The banker says it is a “unique M&A trans-action” because all of TransGrid, Ausgrid and Endeavour’s debt is funded through the NSW State Government. “There is no third-party private sector debt into those entities,” he says.

He says all bidders are looking at debt packages and forming bank syndicates. “The structure still has to be decided. There is de�nitely a lot of engagement between banks and bidders at the moment.”

The acquisition will be �nanced by bank debt �rst “then pretty soon a°er the acquisition, the bidders will go out and raise long-term debt in global debt markets.”

Most will be trying to structure invest-ment-grade �nancing, the banker says, given the volume of the debt and the future require-ment to access global debt markets.

The TransGrid sales should be completed

this calendar year, and the sale of Ausgrid and Endeavour would begin this year.

Despite the AusNet and UBS dramas, the outcome of the sales should be positive. Australia is an attractive place to do business with a stable economy. It is rare that three large electricity assets come on the market at the same time, which has allowed bidders to concentrate their resources in Australia.

A successful outcome in NSW is likely to add momentum to a privatisation of Western Australia’s energy assets. One banker said WA was already exploring privatisation.

“It’s pretty obvious,” he says. “They’re trying to work out what to do with their debt. There are probably not too many other solutions.”

It could also reignite interest in the Queensland privatisation down the track. In recent media reports the LNP’s new leader there, Lawrence Springborg, did not rule out a future privatisation if voters were comfort-able with it.

“I think it is also fair to say that everyone will be watching with interest what happens in NSW in the future,” he said. “But I don’t see this returning to the agenda unless Queenslanders are comfortable with it. So as far as we’re concerned, we’re not taking that particular proposal to the next state election.”

The banker noted that in �ve years' time Victoria’s assets will have been privatised for 20 years, and South Australia’s for 15 years. NSW will have been �nished and Western Australia is likely to have been done too. That will ratchet up the pressure on Queensland.

“They’ve got no option at the end of the day," said the investment banker close to the NSW process. "They’ll have to approach it di�erently with voters; but ultimately they’ll have to do it.” ◼

ASSET SUMMARY OF NEW SOUTH WALES AND QUEENSLAND ASSETS

Asset type

Asset location

Regulated Asset Base (RAB)

EnterpriseValue 1.3x RAB

1.5x RAB

SOURCE: CBA PRESENTATION BASED ON COMPANY DATA

Transmission

Throughout NSW

A$6.4bn

A$8.3bn

A$9.6bn

Distribution

Metropolitan areasto north & west of

Sydney

A$15.5bn

A$20.2bn

A$23.3bn

Distribution

Metropolitan areasto the south of

Sydney

A$6.0bn

A$7.8bn

A$9.0bn



ASEAN Bond Markets Issuer Roundtable

Asiamoney (AM): It would be help�l to start this discussion by getting a sense of the rate environment, and the credit environment, before we go into the details of the debt market here. What should investors and issu-ers be looking out for over the next year or so?

Nor Masliza Sulaiman, CIMB: It is no secret that rates are going to go up eventually. You can see that by the front-loading of issuers in the rupiah market. Around Rp46tr is expected to be issued in the �rst six months of this year; that is the same number we saw throughout all of last year. Issuers are trying to tap the market sooner rather than later, and we expect year-end volumes will end

up being around Rp60tr or Rp65tr. Issuers are trying to capture the best rates they can while the interest rate backdrop is still accommodative.

Most market participants are anticipating a potential US rate hike in September, but you need to factor in what is happening in Greece at the moment, and of course the performance of the US economy. The signals are actually quite mixed. You can also infer from the Fed Funds Futures market, where the general expectation is that rates will go up. A similiar market expectation is present with respect to the rupiah bond market: rates will increase and it’s simply a question of time.

We see the same situation in other mar-kets in the ASEAN region. Issuers are trying to front-load because they anticipate global and local rates will increase. ASEAN issuers are also becoming a lot more adventurous, looking to overseas markets like Singapore dollars, Thai baht and Malaysian ringgit other than the traditional USD funding. They are increasingly using synthetic funding solutions to tap the most optimal funding currency coupled with cross currency swaps to achieve the most cost e�cient �nancing and avoid currency mismatches.

Ari Soerono, Indonesia In�astructure Finance: We need to understand the best markets

Making the infrastructure leapIndonesia's debt issuers are spoiled for choice in the international markets. Many of these companies have tapped the dollar bond market already. There are also opportunities in euros, o�shore renminbi, Singapore dollars, and other Asian local currency markets. But in the domestic bond market, they are still coming up against a reasonably limited investor base, as well as strong competition from bank lenders. They have been able to pick-and-choose the best markets for their funding needs so far, but the country's immense infrastructure funding needs means that all investors and lenders should be asked to play a role in the future. Asiamoney sat down with a panel of leading market participants in Jakarta to discuss exactly how issuers are going to help fund the anticipated boom in infrastructure spending in the country, and what hurdles they need to overcome before the eye-popping opportunities in the market can be realised.

Panelists:

Ahyanizzaman, �nance director, Semen Indonesia PerseroAdam Gifari, president director, Profesional Telekomunikasi Indonesia (Protelindo)Ari Soerono, chief �nancial o�cer, Indonesia In�astructure Finance Nor Masliza Sulaiman, global head, capital markets, CIMB

Brian Grieser, senior analyst, corporate �nance group, Moody’s Investors ServiceKiyoshi Nishimura, chief executive o�cer, Credit Guarantee Investment Facility (CGIF) Moderator: Matthew Thomas, contributing editor, Asiamoney

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CIMB-Bond-Market-RT-r1.indd 40 21/8/15 5:55 pm



where investors will accept our target rates and give us the best cost of funding. At the moment, when we look at the Indonesian rupiah market, it looks a little too expensive. I agree with what Liza said. We can be more adventurous in this market. We have looked into issuing an o�shore renminbi, or CNH, bond and swapping the proceeds of that deal into US dollars or Indonesian rupiah. But unfortunately, the swap market is not working so well at the moment.

AM: What about the credit outlook? How strong is the credit environment right now for corpora-tions operating in Indonesia?

Brian Grieser, Moody's: The increasing rate environment is obviously going to have a negative impact on the credit sector. We are stable right now for Indonesia. When you look at GDP growth of 5% in 2015, low unem-ployment and the emerging market, there are clear factors that will support the corporate credits that we cover. We tend to focus on infrastructure compa-nies, or companies that have exposure to that sector, including construction and shipping companies. We expect these companies to be relatively strong for 2015. The downside is that there are a signi�cant amount of commodity exports coming from Indonesia and those companies will be under pressure. We have to balance these two factors, so all in all we expect the corporate sector to be stable for 2015.

AM: What are the most attractive o�shore mar-kets for Indonesian borrowers at the moment?

Ahyanizzaman, Semen Indonesia: A�er we were upgraded [by Moody's from Ba1 to Baa last year], we got a lot of attention. Everybody came to my o�ce with an attractive proposal. We also managed to re�nance debt at one of our subsidiaries without a corporate guaran-tee. We think we have a good chance to get the loans we need for our company. We do not really need a lot of �nancing right now, but next year we will start to see our funding rise. The upgrade is certainly going to help us explore more options.

We are still studying what kind of funding matches best with our capital expenditure. When we look at green�eld projects, the best place to fund is the bank loan market. But

when we consider re�nancing these loans, then we start to look at the bond market. We have gotten funding from export credit agencies last year, but the prices have gone up now. We secured a loan in rupiah at 6% last year, but that same loan would cost us 11% now.

International investors are still waiting for us to issue a bond. We have done non-deal roadshows, and investors tell us they are hopeful we will come to the o�shore market. That is something we are certainly consider-ing, but it will likely happen next year.

Adam Gifari, Protelindo: We have looked at various options, and we will certainly revisit arbitrage opportunities when we are ready to issue o�shore. But at the moment, we are waiting for infrastructure spending to increase. We provide infrastructure for telecoms companies, and those companies provide telecoms to new areas, in houses, hospitals, and so on. But this chain is dependent on greater infrastructure spending by the government. We are at the end of this process of infrastructure spending growth.

We are working on slowly �xing our capital structure. It used to be based entirely on ¡oating rates, but we are moving towards �xed rates as much as possible. We turn to the funding markets every 18-24 months, and we expect to fund more in the next few years. But right now is a very interesting moment for corporations to issue. If the US hikes rates, there is only going to be one direction for Indonesian interest rates to go.

AM: In�astructure growth is clearly a hot topic in Indonesia. It is something that comes up time and time again in meetings in Jakarta, as well as in discussions with foreign investors and corporations considering the country. How large are the in�astructure needs in the country at the moment — and what is the best way to address them?

Soerono, Indonesia In�astructure Finance: The government estimates that the country needs around $433bn in the next �ve years to �nance its infrastructure needs. The central and regional governments can only �nance around 40% of that, so around $217bn has to be �nanced by state-owned enterprises, as well as private sector investors. The banking sector alone would not be able to bear that

burden. The capital market needs to be brought in to help.

The bond market is quite attractive for infrastructure companies because pension funds and life insurance companies need long-dated assets, whereas infrastructure companies need long-dated liabilities. That is a good match, but the problem is to get there.

We are trying to help one of our clients to issue a project bond. We are looking at guar-antees from institutions like the CGIF and the Indonesia Infrastructure Guarantee Fund, so that the risks can be reduced and the rating agencies can give a good rating to encourage investors.

Another area where we are trying to help support the growth of funding from the bond market is to securitise some of our assets. These are projects that are already operating, and that have existing cash ¡ows. This is not going to happen now; we want to wait a few years to season our assets. But this is de�-nitely another area where we see growth.

We predict that 65% of our portfolio is going to be denominated in US dollars, because that is the operating currency for a lot of the infrastructure companies. Electric-ity companies, for example, represent about 30% of the projected infrastructure spend over the next �ve years. There is a big oppor-tunity for foreign investors to help �nance infrastructure projects in this market.

AM: What is the best way for CGIF to help �nd in�astructure projects in this market, as Pak Ari mentioned?

Kiyoshi Nishimura, CGIF: One of the major reasons our contributing governments established CGIF was the recognition that ASEAN countries need highly-developed capital markets to �nance local investment needs, especially in the infrastructure sector. At the moment, you do not really see project bonds anywhere outside of Malaysia. We are working on several concrete cases, including deals in the Philippines and Thailand.

There are many ways to design project bonds, but when you look at the reasons why Malaysia has been so successful in this area a key factor is the important role of institu-tional investors in that market. Our role is to give comfort to institutional investors in other markets, because they may not have invested in project �nance bonds before.




They need to become more familiar with these types of bonds before they can help drive the market forward.

The structure that we are talking about in the Philippines, and most likely in Thai-land, is a partial guarantee. There will be one tranche guaranteed by an institution like us, and one tranche that is not guaran-teed. That allows bond investors to decide what sort of exposure they want to get. That is going to help them analyse both guaranteed and unguaranteed risk, and give them incentive to put the processes in place to buy these bonds in the future.

Gifari, Protelindo: It has been a pleas-ure working with CGIF [on Protelindo's CGIF-guaranteed S$180m 10 year bond in November 2014]. They are highly profes-sional. They work very hard. They work weekends. Even our lawyers were surprised at how much they kept up with the pace. It was very e�ective for us to go out on the world stage with a guarantee by CGIF that helped leapfrog our rating to single-A territory.

There has been a lot of discussion among policy makers about �nancial inclusion, but it is institutions like CGIF that are really making that happen. There are a lot of corporates that cannot tap the bond investor base simply because of rating hur-dles. This is a very helpful development.

Nishimura, CGIF: I'm sure that Protelindo could have issued a bond without CGIF's help. But the bene�t of guarantees is that they open up issuers to even those inves-tors that have a very high rating hurdle for what they can add to their portfolio.

Indonesian companies are the most active borrowers in the ASEAN region when it comes to tapping o�shore investors, but still a lot of these borrowers face the rating hurdle. The sovereign rating is borderline investment grade which constrains the international rating of a lot of corporations. That makes it very di�cult to tap institu-tional investors, not just in Indonesia but in a lot of markets in the ASEAN region.

AM: Is �nancing the main hurdle that needs to be cleared right now to increase in�astruc-ture spending in this country, or are there other issues that still need to be overcome?

Grieser, Moody's: We think that the infra-structure market is a great investment at this point in time. The projects tend to get very good ratings because of the long-term nature and the predictability of cash ¡ows that are associated with them. The funding is the main question mark, including how much of a role the capital markets play and what kind of help the government can give.

Sulaiman, CIMB: I'd like to share some background on why private sector pro-ject funding is so successful in Malaysia. Private sector companies are typically awarded long-term concessions and with that you have long-term cash ¡ows. Given the sanctity of those concessions/contracts, the cash ¡ows can be easily modeled by investors and they can assess the �nancial viability of these projects. That makes it easier for investors to invest in project �nance debt for as long as 20 to 25 years.

AM: How does the pricing available in the bond market at the moment compare to what in�a-structure companies can get �om bank lenders?

Gifari, Protelindo: We get around two-thirds of our capital from bank lenders at the moment, with the rest coming from the bond market. One of the reasons is that interest rates in Indonesia are stubbornly high. That is one of the reasons that we tread very carefully when it comes to long-dated �nancing. The longest duration debt we have in rupiah at the moment is around three years, and at that end of the curve, bank lenders o�er the best pricing.

The next step for us is raising �ve or seven year debt. This is something I'm looking at closely now. I've been quite surprised to see where recent Indonesian bonds have priced, but there are not too many private sector companies like us. If we were to issue a 10 year bond right now, the yield would be easily around 11%.

AM: How do you see your debt issuance evolving over the next few years?

Ahyanizzaman, Semen Indonesia: We still have a big debt capacity right now: our debt-to-Ebitda is only 1.5x and we can stay at that level without impacting our rating, according to Moody's. We have around

Rp8tr of Ebitda, which gives us around Rp12tr of debt capacity in the market. We can build a new plant for around Rp4tr, so we can build several new plants with the debt capacity available to us.

There is still a lot of room for us to expand, which is a must in this country. We still have opportunity to grow. There are a lot of young businesses that still need cement. Our consumption of cement per capita is only 200kg, whereas in Vietnam it is double. We hope that Moody's can give us further room with regards to debt-to-Ebitda to expand our business in the future!

Grieser, Moody's: Semen Indonesia is the �rst high yield issuer in Indonesia to be upgraded to investment grade, and a big part of the reason is the conservative way in which they manage their business growth. That has been consistent for 10 years. The company manages its margins at very high levels, and maintains a lever-age pro�le that is relatively small. Semen Indonesia is currently positioned very well to bene�t from infrastructure growth in the country.

AM: Bank Indonesia has changed the rules on foreign exchange exposure for local corpora-tions, forcing them to hedge at least 20% of their net foreign currency risk. But perhaps more importantly, the central bank has told companies rated below BB that they will not be allowed to issue debt in the o�shore dollar market. Is this a sensible move?

Sulaiman, CIMB: It makes sense and it’s prudent for the authorities to ensure that Indonesian corporates are managing their forex exposure diligently. The guidelines state that companies do need to have a min-imum rating and they also allow scope for natural hedging. Both are good to heighten �nancial discipline and transparency. Corporates with a natural source of foreign currency revenue and assets will �nd it easier to procure their foreign currency liabilities because of the natural hedge.

At the moment, around 40% to 50% of Indonesian debt is raised o�shore. It is pru-dent in that context to take a careful look at how these companies are raising money, and making sure they are not exposing themselves to undue risks.




Nishimura, CGIF: We certainly want to support Indonesian companies going to the o�shore markets, but I must say that we support this move. In fact, when we provide support to companies going across borders, our requirements are much stricter than OJK's. We ask issuers to be fully hedged, through either natural hedging or �nancial hedging. The volatility in the international markets is a real risk factor for issuers, and they really need to be aware of the risk they take on board when they turn overseas for funding and leave their exposure unhedged.

My understanding is that the intention here is to require more companies to be rated, actually, rather than to discourage companies from going into the o�shore markets.

Sulaiman, CIMB: It is worth pointing out that this is a good move for local investors as well. A lot of Indonesian issuers are tapping both the o�shore and onshore mar-kets concurrently. High volatility in forex exposure can hurt issuers' �nancials, and impact their credit pro�les as a result. This

is a good way to make sure local investors are not indirectly exposed to open forex volatility.

Grieser, Moody's: Foreign currency bor-rowing is very signi�cant in this country. We recently did a study on all the Indo-nesian companies that have dollar bonds outstanding, based only on those that we rate, of course. A large portion of the US dollar issuers are commodities companies that have a signi�cant amount of US dollar sales.

Those who use �nancial hedges at this point are typically property developers that mainly have rupiah revenues. We have not seen a lot of issuers putting in place �nancial hedging, partly because they don't have a need for that at the moment. But they are making sure that they are in a position, if the Indonesian rupiah falls, that they can put those hedges in place.

AM: Is it too optimistic at this point to hope that ASEAN issuers can increasingly start to meet their in�astructure �nding needs by turning to other bond markets within the

region, or by encouraging foreign investors to come in to the local market?

Soerono, Indonesia In�astructure Finance: My feeling is that there is enough interest from ASEAN investors to invest in Indone-sian infrastructure, so there is a chance for this source of demand to grow. We are certainly looking at doing that, and I know a couple of our clients are looking at it, too. But it all depends on the volatility of the swap market. It is still a long way to go, but perhaps in one or two years there will be big demand for people to explore this option.

Sulaiman, CIMB: In terms of infrastructure funding, it is important to have a base of pre-existing onshore liquidity to get o�shore investors to be more comfortable with the local project risks. O�shore inves-tors will draw comfort from local investors’ familiarity with the local project sponsors, projects, contracts, and the local regulatory framework which governs the local pro-jects. This will encourage foreign investor participation in cross border infrastructure �nancing. ◼

The participants (le� to right): Brian Grieser, Moody’s Investors Service; Kiyoshi Nishimura, CGIF; Nor Masliza Sulaiman, CIMB; Matthew Thomas, Asiamoney; Ari Soerono, Indonesia Infrastructure Finance; Ahyanizzaman, Semen Indonesia Persero; Adam Gifari, Profesional Telekomunikasi Indonesia (Protelindo)



ASEAN Bond Markets Investor Roundtable

Asiamoney (AM): The Republic of Indonesia is one of the best regarded emerging market sovereigns in the international �nding markets. What can o�shore investors expect �om the country in the next few years?

Suminto Sastrosuwito, Ministry of Finance: The current issuance strategy is built around

our commitment to a front-loading approach to funding. That means 63% of our issuance is expected to be complete in the �rst semes-ter. We are on track with that target, and as of this week, the current issuance percentage is around 54%. We expect the remaining 9% to be �lled partly by an auction later this month, but also by euro bonds.

In terms of medium-term strategy, we expect to gradually reduce the level of budg-etary de�cit as well as debt to GDP ratio. We want to make sure we can guarantee �scal sustainability in the future, so we are aiming to achieve a debt level of around 22-23% of GDP, compared to the 26% that we are seeing now. Despite the fact that we will decrease

Indonesia has long been a source of both excitement and dashed hopes for debt bankers and bond investors. The sovereign is highly-regarded in the international bond market, and Indonesian corporations are a strong source of dollar bond supply across the credit curve. But the country's domestic debt market is still small, and although foreign investors have proven hungry for rupiah exposure in the past, the opportunities have not been large enough for banks or corporations inside the country. There are signs, however, that investors in both markets, inside and outside the country, may have some exciting times to come in the next few years. The Islamic bond market, although still nascent, is an obvious source of growth for the future. The country's huge infrastructure need will create hurdles, but it will also create rich opportunities for those able to overcome them. These twin sources of future growth dominate conversation among bankers, issuers and investors in the country at the moment. It is little surprise they did the same when Asiamoney sat down with some of the most prominent �gures in Indonesia's capital markets for a discussion of the issues impacting the country's investor base now — and how high those investors' hopes are for the future.

Twin hopes for rupiah bonds

Panelists:

Soufat Hartawan, head of �xed income, Schroder Investment Management IndonesiaFadlul Imansyah, group head, investment, BPJS KesehatanSimon Imanto, chief �nancial o�cer, Panin Dai-Ichi LifeSuminto Sastrosuwito, director of Islamic �nancing, debt management o�ce, Ministry of Finance of the Republic of IndonesiaJohn Simon, treasury & capital market director, CIMB Niaga

Atsi Sheth, senior vice president, sovereign risk group, Moody's Investors ServiceNor Masliza Sulaiman, global head, capital markets, CIMBKiyoshi Nishimura, chief executive o�cer, Credit Guarantee Investment Facility Moderator: Matthew Thomas, contributing editor, Asiamoney

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our debt to GDP ratio in the medium term, the gross issuance is likely remain at around the current level. In addition, we would still maintain our presence in foreign currency markets.

We have long been a frequent issuer in the dollar market, and at the moment we are talk-ing to investors about a euro-denominated transaction. These markets are important to us, and we will certainly continue to be a reg-ular issuer for foreign investors in the future.

AM: How strong is Indonesia �om a credit point of view at the moment? Should investors antici-pate a ratings upgrade in the near-term?

Atsi Sheth, Moody’s Investors Service: We look at the Indonesian credit story in a global context, because a�er all that is how foreign investors are going to be looking at this coun-try. It is important to make that point from the outset: we primarily compare Indonesia to other countries in credit terms, rather than to itself �ve years ago or even longer ago. We compare it to countries like Turkey or India, which are also rated Baa3, or to Brazil and South Africa, which are both rated a notch higher.

These countries are o�en grouped together as 'the fragile �ve', but we don't think they're fragile and, for the most part, the market doesn't think they're fragile either. All of these countries have gone through a pretty serious situation in terms of capital ¡ow volatility. But there are two major factors that have played in Indonesia's favour relative to its peers, especially this year.

A clear change has been the election of a new administration. That has buoyed the market, because of the expectation that struc-tural reform will build growth in Indonesia's economy. But the second part that really makes Indonesia stand out relative to its peers is a history of very good �scal perfor-mance. Since the Asian �nancial crisis, very few other countries have maintained primary surpluses and low budget de�cits like Indone-sia has. That has brought its debt-to-GDP level down from over 80% to around 25% today. That is really positive.

There is one key factor that constrains Indonesia's rating, however. If you compare Indonesia's budget de�cit or debt level to India, which has the worst �scal pro�le of the �ve countries I mentioned, it looks incredibly

strong. But only 5% of India's debt is �nanced in foreign currency or externally. For Indone-sia, that number is between 40% and 50%. Indonesia cannot fund itself domestically. The domestic market is relatively shallow, and our stance is that even if you have a very strong �scal policy, and a very strong credit pro�le compared to your peers, you can still be held back by a shallow domestic market.

AM: Indonesia has long been regarded as having immense potential when it comes to Islamic �nance — partly, of course, because of the large Muslim population, but also because of the eye-catching growth in the economy. But by and large, sukuk issuance remains a rarity in the country. What does the government need to do to encourage more sukuk issuance, particu-larly in the corporate sector — and when do you see this happening?

Suminto, Ministry of Finance: The government needs to focus on increasing supply in the market, but of course we closely look at the demand-side too. The sukuk market cannot develop in a vacuum. For instance, we need more participation from Islamic institutions. At the moment, Islamic investors only repre-sent about 7% of demand for the sukuk bonds that have been issued here. The rest is being sold to conventional investors.

It is expected that sukuk issuance will be around 23% of our total issuance this year. This could increase gradually in the future, but the main consideration of course is going to be on the demand side. The government's commitment to increase the size of sukuk in the market still has to consider the demand side that could a�ect the pricing. If the increase of sukuk issuance is not in line with the increase in demand, clearly we should continue to have to o�er an additional spread on sukuk compared to our conventional bonds. That clearly limits the extent of quite how much we can shi� our funding from conventional to sukuk bonds.

John Simon, CIMB: The government's shari-ah-compliant bonds are gaining traction with bond investors. We saw the demand from investors for the recent 10-year bond and it was clearly much stronger. But there are, of course, still things we can improve. It is important to create a sense of a level playing �eld for issuers in this market.

The dominant �nancial accounting policy does not allow us to hold shariah bonds under the AFS [available for sale] portfolio at the moment. We have to put them under HTM [hold-to-maturity]. I've heard this is going to be revised, and from January, we will be able to hold shariah bonds under AFS. This is something that would help attract investors to the market.

If shariah-compliant bonds can go into the AFS portfolio, there is the chance of capital gain. But in HTM, we don't have that oppor-tunity. That simple change could make a big di�erence to the willingness of investors to participate in this market.

Masliza Sulaiman, CIMB: We have de�nitely been passionately supporting the sukuk market with issuer and investor education and e�orts to improve sukuk liquidity and we will continue to do so. It is important to encourage higher participation of investors in sukuk. Here, there are two main issues. For borrowers, there is a lack of clarity in terms of tax neutrality. That clarity should be encouraged so there is no ambiguity for issuers considering the sukuk market. For investors, there is still an issue on demand which a�ects secondary liquidity. Investors should be agnostic when it comes to sukuk versus conventional bonds but the majority of investors are still not really committing to this market. We are working hard to encour-age investors that this market is going to be important to them in the years to come.

Kiyoshi Nishimura, CGIF: We should be able to provide a guarantee to a sukuk instrument. We have not done that yet, but our under-standing is that as long as the underlying assets are shariah-compliant, there is no need for the guarantor to be shariah-compli-ant. This is an area we could expand into in the future.

AM: What are the major problems that investors feel are holding them back �om greater invest-ment in shariah-compliant bonds? Are there still major hurdles you need to clear before you can dedicate more capital to this market?

Soufat Hartawan, Schroder Investment Management: We have been observing the sukuk market in this country for the last few years. The trend seems to be that the market




is developing very slowly, and it is true that a lot of investors are still not committing to this market. But part of the problem is also that the investable universe is not very large.

That said, the performance of our sukuk fund has been good over the last few years, and in some cases better than our conven-tional funds. We are steadily promoting our sukuk funds to our clients, although the nominal amounts are still small compared to our conventional funds.

Fadlul Imansyah, BPJS Kesehatan: Our port-folio operates on an absolute return basis. It does not matter to us whether it is conven-tional or sukuk. It needs to hit our absolute return targets in order for us to consider it. But the major challenge is the small size of the market. I agree with Pak Soufat on this point. Indonesian investors are talking about this market a lot, but given how small it is, it is hard for them to dedicate signi�-cant resources to it.

Simon, CIMB: There are certainly positive signs. Indonesia's debt management o�ce used to like issuing bonds in new series, in both the conventional and the Islamic bond market. But one change that has been quite positive is that the government has begun to commit more to reopening existing series. That will start to help liquidity in the sukuk market.

Simon Imanto, Panin Dai-Ichi Life: This would help. The sukuk market needs more liquidity. There really needs to be more issuances to create a deeper market before investors like us will start to seriously consider buying more sukuk. It is natural for investors to compare sukuk directly with conventional bonds, and when the conven-tional bond market is much deeper and o�ers a lot more diversity, it is clearly going to be more attractive.

Simon, CIMB: The conventional market is, of course, much more developed than the sha-riah-compliant market. There is always this question of: what's in it for me if I turn to the sukuk market? There needs to be something that entices investors to go in to this market. There is no choice but for issuers, including the government, to provide this sweetener in the market. This is something that is going to

stay for a while. Tax breaks would help, too, but for now, we need to be able to provide a yield boost to attract investors.

Imansyah, BPJS Kesehatan: There certainly needs to be something to draw investors to the market. I would like to see us go in the direction of Malaysia and o�er a tax relief for sukuk investors, as Pak John mentioned. This is something that could apply to the infra-structure market, too. It is an easy way to give investors in the bond market an incentive to invest in sukuk and infrastructure bonds, both areas that the government is hoping to boost in the next few years.

Sulaiman, CIMB: I agree that there needs to be work done on both the investor and issuer markets. An increase in sukuk supply will de�nitely help to deepen the local sukuk market and enhance investor familiarity in investing in sukuk. It can be confusing to the corporates here that the sukuk law that was passed in 2008 only applies to the government. It would help if the law included state-owned enterprises and other corporates, removing the ambiguity on structures that would otherwise incur additional taxes.

AM: We talked in the last panel about the need to increase in�astructure spending, and the huge opportunities in that sector. But where do investors stand with regards to increasing maturities, which is a key requirement of increasing greater in�astructure spending? And, more generally, are you optimistic that there is enough demand here to ensure the development of an in�astructure bond market?

Hartawan, Schroder Investment Management: Over the last 10 years, the Indonesian bond market has become one of the most volatile domestic debt markets. This is partly because foreign investors make up around 40% of the investor base in the rupiah market. But while volatility is not always welcomed, it does pro-vide opportunities for local investors to time the market. Indonesian investors are quite familiar with managing volatility, which is one of the factors to consider when buying long-term bonds.

Indonesia's credit market is far from ideal in terms of diversi�cation. Around 70% of local bonds are issued by consumer �nance companies and banks. We need to

see the universe of issuers here become more balanced, and an increase in infrastructure spending is one key way that we are �lling the gap. I'm optimistic that infrastructure projects will get good demand in this market, as long as they come with strong credits and sensible plans.

We have seen a lot of initiatives by the government in terms of establishing infra-structure funds that specialise in �nancing this area. We would like to see such institu-tions become more active, and issue bonds to investors more frequently. It makes more sense to let these infrastructure institutions �nance the projects and bond investors have exposure to these institutions. That means we do not have to go through the complex study of infrastructure projects. It will make investors much more comfortable.

Imansyah, BPJS Kesehatan: We have an absolute yield target for our fund, but we also have some risk bu�ers. We need to have at least a rating of A-minus for any corporate bonds we are going to invest in. We also need to compare whether the yield the bonds o�er is better than the deposit rate we have from banks. That is very challenging at the moment, because market volatility has made deposit rates in some cases more attractive than bond yields.

We are going to require more yield to invest in long-term bonds. But the reality is that most of the infrastructure companies that are hoping to turn to the bond market will prob-ably give lower relative yields to shorter-term bonds, when you make an allowance for the di�erence in maturities. These companies are well-rated. They will not want to give generous yields to investors, so there are going to be a lot of deals that institutions like us will avoid. We do not mind whether deals are long-term or short-term, but the yield has to be there.

Atsi Sheth, Moody’s Investors Service: We look at infrastructure development in a lot of countries and one of the things that comes up time and time again is the gap between what kind of �nancing rate is viable for the direct investor and what kind of �nancing cost is viable for the risk investor, who is o�en lend-ing for long maturity pro�les. One of the ways to mitigate that risk, which Liza mentioned earlier, is having contracts with a high degree




of sanctity. Malaysia has done that very well, but in Indonesia that is still quite nascent.

The role that is played by multilateral institutions to mitigate that risk by o�ering guarantees is very important, too, but we should not overlook the role of the sovereign. There is o�en a spending plan that doesn't actually get activated. That is a risk in Indo-nesia, and is something we have seen in the Philippines as well.

Imanto, Panin Dai-Ichi Life: We manage two major portfolios, which we call a unit-linked fund and a traditional fund. They are quite di�erent from one another. Our unit-linked fund of course depends on the policyholder choices relating to asset type, in particular �xed income. From 52 companies that we see, there are 12 that are managing the bond investments themselves. The rest are just investing in mutual funds. That means there is a lot of potential for the bond market to grow further.

The objective of these unit-linked funds is very return-focused. But it is quite unique and complex to manage: we have to match the currency, of course; we have to manage

the return; but ultimately, we have to manage the assets and liabilities as well. Right now, the liabilities are longer than the assets.

There is a mismatch for investors like us when it comes to duration. We need more issuances in the long-term because this is a situation any fund manager would be aiming to avoid. Life insurance companies will certainly bene�t from more long term bonds, and infrastructure projects could help �ll the gap here. There is a natural �t.

Nishimura, CGIF: This gap of long-term fund-ing required for infrastructure �nancing in Indonesia is quite an interesting topic to con-sider. The comparisons with Malaysia have already been discussed, but one of the things to note is that in Malaysia around one-third of bond investors are pension funds. Pension funds are only around 5% of the bond inves-tor base here. That is one limitation that this market faces, but with the rapidly growing insurance sector here we should see another obvious source of long-term funding coming into the market. We would certainly like to use our guarantee to help create more long-term investment in this country.

Sulaiman, CIMB: Long-term investment in Malaysia is driven by mutual fund managers as well as pension and insurance funds. The key reason is liquidity. They do not neces-sarily want long-term exposure, but when liquidity is present, they can be con�dent that they can turn-over their bonds when they need to. This is one of the reasons why there should also be more focus on increas-ing liquidity in Indonesia, it naturally helps make investors more comfortable in partici-pating in longer dated maturities.

Suminto, Ministry of Finance: The govern-ment can certainly help create, and bene�t, more long-term investors. This year we issued conventional bonds with a maturity of 2044, and sukuk with a maturity of 2043. We are allowing investors to push out their investments a bit. But what we have seen, at this point, is that only a few funds can absorb that sort of long-term issuance. The development of pension and insurance funds is very important to create longer-term sources of investment, not just for corporations but for the government as well. ◼

The participants (le� to right): Atsi Sheth, Moody’s Investors Service; Kiyoshi Nishimura, CGIF; Nor Masliza Sulaiman, CIMB; John Simon, CIMB Niaga; Matthew Thomas, Asiamoney; Suminto Sastrosuwito, Ministry of Finance of the Republic of Indonesia; Simon Imanto, Panin Dai-Ichi Life; Soufat Hartawan, Schroder Investment Management Indonesia; Fadlul Imansyah, BPJS Kesehatan



Frontier Market Focus: Sri Lanka

The ending of Sri Lanka's civil war in 2009 kicked o� an economic transformation for the country. GDP growth that came in at just

3.5% that year rose to an average of 7.5% over the �ve years that followed, according to Moody's.

The change in the fortunes of the B1/BB-/B+ rated nation not only represents a big improvement from the past, but also stacks up impressively against other countries. Growth rates of other double B and single B rated countries over the same �ve year period averaged only 3.9% and 4.4%, respectively.

“Sri Lanka has developed by leaps and bounds since the end of the civil war, be it in the area of infrastructure development, tourism, or GDP growth,” says Aaron Russell-Davison, head of debt capital markets at Standard Chartered.

The country has always bene�ted from strong remittance in�ows, which contributed roughly 30% ($7bn) of its total external receipts last year. But now that it has been able to enjoy a prolonged period of stability, Sri Lanka is able to better channel the money into the economy. Private consumption constitutes 65% of the country’s GDP, with a big

part of that supported by remittances.

Anushka Shah, a sovereign analyst at Moody's, says the country’s growth has been robust but that the key to longer term economic development lies in another area — infrastructure investment, which has ticked up over the last �ve years, partly as a result of post-war reconstruction e�orts. It now stands at around 30% of GDP.

So far this e�ort has been led by the public sector, with the government embarking on large-scale investments in power, roads, ports and aviation. Examples include the Colombo South Harbor project, the Hambantota Port development project,

the Norochcholai coal power plant and the Southern Expressway linking the southern city of Matara to Colombo.

Shah notes that projects in the maritime sector in particular can add to Sri Lanka’s competitive advantages as a port destination, given its proximity to various international shipping routes and its competitive tari� structure.

The direct bene�ts of these projects have been well documented, but a bigger boost comes from the knock-on e�ect that such projects have on the broader economy, says one Singapore based economist. An army of workers is needed for the projects themselves, but plenty more to service those workers — and the completed projects. Unemployment stood at 5.9% in 2009; this year it might fall to 4%.

“You obviously need a lot of construction workers, but these projects will also require extra input from the utility, logistics, commodities and resources sectors to name a few, and also the local communities,” says the economist.

RELIANCE ON FOREIGN FINANCINGThe problem is how to fund it all. A disconnect between domestic savings and the country's investment needs raises concerns about the government's ability to provide the required support, says the economist. Domestic savings have risen from 19.3% of GDP in 2010 to 21.1% in 2014. But that still pales in comparison to the country’s gross investments, which also rose from 27.6% to 29.7% of GDP over the same period of time.

Searching for stabilitySri Lanka’s growth over the past couple of years has been nothing short of exceptional, following the end of an almost three decades-long civil war. But the positivity has faded somewhat this year. Market participants say the country must now clear up its political troubles if it is to truly ful�l its potential, Rev Hui reports.

AARON RUSSELL-DAVISONhead of debt capital markets at Standard Chartered.

Sri Lanka-r3.indd 48 21/8/15 5:56 pm



Unable to fully fund itself domestically, therefore, the sovereign has been plugging the gap by relying on the international market. The dollar bond market, in particular, has been the weapon of choice thanks to the currency’s consistently low yields. The sovereign has raised a combined $5.15bn from six internationally marketed transactions since 2010, according to Dealogic.

“Sri Lanka has been a keen student of the international capital markets for a long time, but the biggest catalyst for me was really the end of the civil war," says StanChart's Russell-Davison. "Above all else, bond investors require a degree of stability to be comfortable and deploy funds."

Sri Lanka ended a 27 year civil war in 2009 when government forces reclaimed the north of the country from the Liberation Tigers of Tamil Elam, a separatist group. The government had regained control of the east of the island three years earlier.

The country’s improved stability and impressive growth story meant international investors have been more than happy to put their money into its bonds since the ending of the civil war. Issuance has also neatly coincided with a reduction in the number of international bonds from the likes of South Korea and the Philippines, notes Russell-Davison.

POLITICAL INSTABILITYSri Lanka's honeymoon period with international bond investors could soon face a sti� test, however, with the US set to raise interest rates as soon as September. That would have an impact on the cost and availability of international

�nancing, according to Sagarika Chandra, an analyst at Fitch, although other factors are also starting to peel away Sri Lanka’s attractiveness.

Top of the list is the uncertain political climate that the country is once again facing this year. Sri Lanka experienced a change in leadership in January when Maithripala Sirisena surprisingly defeated incumbent president Mahinda Rajapaksa in January, despite the latter still commanding a lot of support in the country. The two sides have been locked in a political struggle since and the economy has shown signs of su�ering. GDP growth slowed to 6.4% in the �rst quarter of 2015, down from 7.6% in Q1 2014.

The sovereign's most recent bond issue, a $650m 6.125% due 2025 that was priced in May 2015, had been delayed from the �rst quarter as a result of the jitters. That deal was more than three times subscribed, but previous deals had been much more popular. A $500m 5.125% �ve year in April 2014 attracted more than $4.25bn of orders.

And it is not just bonds that have been a�ected by political instability. Equity trading volumes on the Colombo Stock Exchange have fallen drastically this year. Average daily trading in the �rst three months of 2015 was Rp1.18bn, down 30.7% from the same period in 2014.

More disruption came in the form of parliamentary elections on August 17.

“The country’s growth story is actually pretty good although two elections in seven months appears to have weighed on business con�dence, investment plans, and overall growth prospect,” says Kyran Curry, a S&P credit analyst in Singapore. “Growth is expected to weaken and I think the 7.5% target set out by the government by 2017 appears slightly ambitious.”

DEBT-LADENCurry now expects the Sri Lankan economy to continue to slow down, with GDP growth to come in at around 6%.

“It’s hard to make any conclusions since we’re in an election process, which poses risks to Sri Lanka's institutional and governance e�ectiveness,” says Curry. “The best scenario we can hope for out of this is that a government with a clear mandate for policy continuity will prevail following the parliamentary election.”

As of August 19, that seemed likely to happen, with �nal results of the elections revealing that the United National Party (UNP) had won 106 out of 225 seats. Former president Rajapaksa’s United

SRI LANKA ECONOMIC SNAPSHOT 2009 2010 2011 2012 2013 2014 2015F Real GDP (% change) 3.5 8.0 8.2 6.3 7.3 7.4 6.8 In�ation (CPI, % change) 5.0 6.8 4.9 9.2 4.7 2.1 3.0 Current Account Balance / GDP (%) -0.5 -2.8 -7.8 -6.7 -3.8 -2.7 -2.0 General Government Debt / GDP (%) 75.2 71.6 71.1 68.7 70.8 71.8 71.7 Gross Domestic Savings / GDP (%) 23.8 25.6 22.8 24.7 26.0 27.1 28.7 Gross Investment / GDP (%) 24.2 27.6 29.9 30.6 29.5 29.7 30.1 Unemployment Rate / GDP (%) 5.9 4.9 4.2 4.0 4.4 4.3 4.0

SOURCE: MOODY'S, S&P

REGULAR VISITORSri Lanka sovereign dollar bond issuance Pricing date Issue size Tenor (years) Coupon Order book 27-Sep-10 $1bn 10 6.25% $6.5bn 20-Jul-11 $1bn 10 6.25% n/a 17-Jul-12 $1bn 10 5.88% $10.5bn 6-Jan-14 $1bn 5 6% $3.2bn 7-Apr-14 $500m 5 5.125% $4.25bn 28-May-15 $650m 10 6.13% $2bn

SOURCE: GLOBALCAPITAL ASIA




People’s Freedom Alliance took 95 seats. While the UNP is still seven seats short of a majority government, observers say it has more than enough allies in the parliament to make up the shortfall.

Even if that were to happen, Curry is worried that the UNP might not address some of the country’s most urgent needs. None of the political parties that competed in the August election mentioned ways to improve the government’s revenue performance, he notes. This is especially important for a country such as Sri Lanka, which enjoys the unwanted tag of having one of the highest debt to GDP ratio among its peers.

That ratio stood at 71.8% in 2014, even higher than the 70.8% recorded the year before. In neighbouring Vietnam, it is just 45%.

More than 40% of Sri Lankan government debt is owed in foreign currency, which exposes the government to a higher repayment burden in the event of currency depreciation. A reliance on foreign currency debt also exposes it to international market volatility during periods when foreign �nancing is scarce. A US interest rate hike is likely to put pressure on both fronts.

The situation looks even more daunting once government-guaranteed debt is taken into account, which poses additional contingent liabilities on the government’s balance sheet. The January 2015 budget statement estimated the amount of government-guaranteed debt to be equivalent of 14.5% of GDP.

“It’s hard to say whether any of the political parties have the commitment to push through the necessary reforms to improve the country’s economic and �scal performance or they are simply more interested in shorter-term populist policies,” says Curry.

“When it comes to situations like this it’s probably more important to keep track of what they do rather than what they say,” he adds.

NOT ALL BADDespite the country’s internal woes, one Singapore based fund manager is convinced the country will bounce back once the political situation subsides.

He agrees the country’s debt situation is concerning, but points out that unlike many of its similarly rated peers, Sri Lanka has never yet defaulted. The central bank has on more than occasion made it clear that it intends to do its utmost to preserve that unblemished record.

In addition, even though he concedes that more could be done to rein in the country’s debt ratios, he notes that Sri Lanka has been making progress in other areas, such as reducing its �scal de�cit as well as in�ation.

Sri Lanka has long been su�ering from a current account de�cit, although that has been tightening over the past few years. In 2011 the de�cit stood at 7.2% of GDP, but fell to just 2.6% in 2014. It is expected to break through 2% by the end of this year.

“The accumulation of debt is an inevitable part of economic growth. You can’t run away from that,” says the fund manager. “The key for us investors is to see if a country is reckless with its expansion plans or is doing things in a controlled manner.”

What is more impressive in his eyes is the progress the country has been able to make when it comes to controlling in�ation. Having peaked at 18.7% in 2007, it had fallen to just 2.4% by the end of 2014.

Lower commodity prices helped, but a large part of the reduction was attributable to prudent monetary policies and structural changes to address supply side constraints.

The fund manager is particularly happy with the work done by the central bank over the past few years. He sees April's 50bp reduction in policy rates as a re�ection of the bank's increasing savviness and �exibility.

“Reining in in�ation has given it more room to continue easing to spur economic growth and support economic activity," he says. "It’s all one big co-ordinated e�ort."

This co-ordination is one of the things that he likes most about Sri Lanka. Many emerging market government bodies typically do not work well with one another. The worst, he says, do not communicate at all.

“At the end of the day, this is a country that’s just came out of 27 years of civil war, so political stability is de�nitely a factor in our investment decisions,” he says. “What is important is what comes out of the instability and whether there will be any continuity.” ◼

KYRAN CURRYcredit analyst, S&P, Singapore.

The accumulation of debt is an inevitable part of economic growth. You can’t run away from that.


Summer AwardsDinner 2015

Asiamoney invites you to celebrate your achievement at our annual Summer Awards Dinner 2015 at the JW Marriott, Hong Kong on Wednesday, 16 September 2015. Winners �om Asiamoney’s 2015 O�shore RMB Poll, Asia Islamic Bank Awards, Private Banking Poll, Best Domestic Bank Awards, Cash Management Poll, Best Managed Companies and FX Poll across Asia are invited to participate in this evening.

Agenda for the night:

19:00 – 20:00 Registration and Pre-dinner Cocktail Reception

20:00 – 20:05 Welcome �om Mark Baker, Managing Editor, Asia, GlobalCapital/Asiamoney

20:05 – 21:15 Dinner

21:15 – 22:15 Awards Presentation and Photo Session – Mee Ling Lee, Publisher, Asiamoney

22:30 End of the event

Please reserve your table(s) in advance due to the limited seats available. The cost of taking a table for 10 guests is US$8,500

To con�rm your booking, please contact Connie Ng on +852 2912 8081 or email: [email protected]

Summer Awards ad-r1.indd 39 6/8/15 3:42 pm


Frontier Market Focus: Vietnam

Among the sandy beaches and picturesque pagodas of Vietnam, a massive transition is under way. Since the 1986 launch of Doi Moi,

the country's programme of political and economic reforms, Vietnam has taken big steps to liberalise its economy to trade and investment.

It joined the Association of Southeast Asian Nations (Asean) as a full member in 1995, following that up by becoming part of the Asean Free Trade Area (A�a) in 2005 and the World Trade Organization in 2007, while simultaneously signing a host of bilateral trade agreements.

Money has since �ooded in, with exports jumping from $5bn in 1995 to a whopping $150bn in 2014, according to data from CEIC. Exports expanded by 12% year-on-year in the second quarter of 2015, and the purchasing managers index (PMI) for July showed solid growth momentum.

Taking heart from the recent evolution, the government and the central bank have been trying to give the country’s capital markets a big — and much-needed — make-over. And one of their big areas of focus has been its equities market. In early 2014, the government started to push state-owned enterprises (SOEs) to list on the Ho Chi Minh or Hanoi stock exchanges.

“Privatisation talks started in 2011 but a�er that Vietnam saw some terrible times for its economy so the process was stopped until 2013,” said Tuan Le Anh, head of research at Vietnam-focused fund manager Dragon Capital. “And then last year the government realised it was key for their

reforms so decided to speed things up, and this is very positive.”

Some 280 companies were put on the list to equitise, but while the government’s intentions were solid, it ended up biting o¤ more than it could chew.

OVERHANG FEAR Progress on IPOs has been slower than slow, with just a handful of companies trickling out to the market since the government decided to pep things up. This year the state ¥nalised the names of the entities it wants to privatise, and the size of the stakes it wants to sell. This is the ¥rst time the list has been made public, and the aim is to help woo foreign investors.

It set up a special working group to mon-itor the work too, but that hasn't helped the

government hit its targets. Vietnam raised a small $51.3m in 2014 by selling shares in Vietnam Airlines Corp, in a deal that failed to attract a single foreign investor. Sources blame the lack of any English language pro-spectus or roadshow, and the fact that just a tiny 3.5% of the company was sold.

Thomas Hugger, chief executive o¦cer of Asia Frontier Capital, says that a lack of clarity on IPO processes in general in Vietnam is a big reason for the no-show from international accounts, and that the stakes are o�en too small to be a meaning-ful investment for foreigners.

“All this talk about share sales has also created an overhang in some stocks because there is fear of liquidity being sucked out of the market,” he reckons. “There is some pressure, which is one of the reasons why the performance of the market has disap-pointed recently.”

The Ho Chi Minh index had a good start to the year before slipping in April and May, but regained some composure in July. Despite the slowdown, it has still outper-formed some of its southeast Asian peers. While the benchmark stock index has recorded year to date gains of 13.45% (at the time of writing in early August), Indo-nesia has negative returns of around 7%, Malaysia negative 3% and the Thai index negative 2.57%.

“The fundamentals of [Vietnam] have always been there and remain attractive, but how much investors can nurture and exploit such potential is a challenge,” says Seck Yee Chung, a partner at Baker & McKenzie in Vietnam. “But businesses are

No tiger yetVietnam is working fervently to open its markets, turning things up a notch in August by signing a landmark free trade agreement with the European Union. The country’s transformation from a nation ravaged by war to one of Asia’s biggest success stories is impressive, but more reforms are critical if it wants to have a real chance at becoming the next tiger economy. Rashmi Kumar reports.

THOMAS HUGGERCEO of Asia Frontier Capital.

Vietnam-r2.indd 52 21/8/15 9:32 pm



more con�dent now and with a stable macro environment, things look back on track.”

SEALS OF APPROVALThis stability had been in short supply in the past. Surging in�ation, repeated devaluation in the Vietnamese dong, a slump in the government’s trade balance and rising interest rates had constantly undermined investor con�dence.

But the last few years have told a di�er-ent story, as the country started to emerge from the doldrums. A seal of approval came from ratings agency Moody’s in July last year, when it upgraded Vietnam’s rating by one notch to B1 from B2. It cited three driv-ers for the change: an emerging track record of macroeconomic stability, strengthening balance of payments, and easing in the con-tingent risks from the banking sector. Fitch followed suit, li�ing its rating to BB- from B+ in November.

Vietnam has been eager to capitalise on that improved sentiment. And although the country has so far failed to stick to its ambi-tious targets of SOE sales, there may yet be a ray of light in the horizon thanks to changes to rules on foreign ownership of stocks in listed entities.

Until now, foreigners could only own 49% of public companies. But in June, the prime minister signed a decree abolishing that restriction, with the new 100% ownership rules coming into e�ect on September 1.

The restrictions have been a big barrier to developing Vietnam’s capital markets, as room for more foreign investment was always limited. There are 31 companies whose foreign ownership has already hit the 49% limit, and another 10 �rms are nearing the cap.

These �rms, accounting for roughly 30% of the market capitalisation of the Vietnam exchange, are considered the crème de la crème — making them highly sought a�er by the international community, but hard to get hold of.

Sources now hope the easing of limits will help stimulate the IPO process by incenti-vising more companies to list. Of course, investors will still not be able to get their hands on all listed stocks, as ownership limits will apply to the �nancial sector (30%) and to �rms in sensitive industries including defence and telecommunications.

“It’s a big move and it's complicated, but

it’s clearly positive for the stock market of Vietnam,” said Michel Tosto, head of equi-ties and �xed income at local brokerage Viet Capital Securities. “It opens the door to for-eign companies operating in Vietnam to list locally without having to give up control, as they had to do in the past.

“For example, Unilever could decide to list one of its units here, sell a 20% stake and keep control on the company. So even if implementation is slow and complicated, it's a major move.”

It may look positive on paper, but Tosto reckons the Vietnamese government’s primary objective with pushing IPOs is not selling shares or making money. He thinks the purpose is to try to improve, if only a little, corporate governance and transpar-ency in SOEs.

State-backed entities themselves o�en resist listings, as it would force them to hire established auditors to dissect their �nancials.

“It’s typical Vietnam,” said Hugger. “They want to do it right, but only ever do things half right. It’s still very bureaucratic, and together with the political environment it is hard to deal with.”

LIMELIGHT ON BANKSThere are some pockets of hope emerging, particularly in banking. The State Bank of Vietnam (SBV) has been on a consolidation drive a�er announcing this year that it planned to shrink the number of banks in the country to 15-17 by 2017, from around

40. Many of the banks are small and under-capitalised and the central bank thinks reducing the number of weak banks would reduce the system’s elevated contagion risk.

It also passed a new law in February that restricted banks’ cross-ownership to 5% or less in a maximum of two other �nancial institutions.

The moves have already started to shake things up, with the mergers of Saigon Thuong Tin Commercial JSB (or Sacom-bank) with Southern Commercial JSB and Vietnam Maritime Commercial JSB with Mekong Development JSB both receiving initial approvals from the central bank. They are expected to be completed this year, and a total of six to eight mergers are tentatively slated for 2015, say sources.

At the same time, the SBV has taken over troubled lenders Global Petro Bank, Vietnam Construction Bank and Dai Duong (Ocean) Commercial Bank this year because they failed to restructure their bad debts.

Eugene Tarzimanov, vice-president and senior credit o¦cer in the �nancial insti-tutions group at Moody’s, thinks the SBV wants to make its domestic banks bigger and better through consolidation and restricting cross-ownership.

“It was done to have more soundness within banks,” he said. “If one bank is in trouble, it can have a domino e�ect on the banks it owns stakes in, and the SBV wants to avoid that. Moreover, market partici-pants believe that some cross-ownership transactions in the past did not create new capital and were ‘circular’ in nature, and the SBV apparently wants to close that loophole.”

Another concern has also been the mys-tery surrounding ownership of banks, as one entity can own a bank through another company or a shell company, but are getting away with it as there is little infor-mation available on the structure. “So the SBV wants to introduce market discipline,” added Tarzimanov.

Too many players in the market created an overbanked system, which hit credit growth in recent years. On top of that, there were many legacy stressed assets created between 2005 and 2011, which added to a desperate need to clean up the industry.

But that is now seeing a shi�. Every year, the central bank sets growth targets

MICHEL TOSTOhead of equities and �xed income, Viet Capital Securities.




for banks that they need to achieve but typically can’t exceed. For 2015, the sys-tem-wide target has increased to 15%-17% from 10%-13% in the previous year, and could reach 20% next year.

“Some midsize banks are already grow-ing at 20%-30%,” reckons Tarzimanov. “This tells us there is con�dence returning to the market and banks are more comfort-able about resuming growth.”

To help improve its banking system, the SBV in 2013 set up the Vietnam Asset Management Company (VAMC) which buys non-performing loans (NPLs) from local �nancial institutions before selling them to investors.

But this too has been causing a headache, as the VAMC has only managed to sell about 5% of the approximately VND158tn ($7.1bn) of NPLs it has purchased. And if history is to be believed, every time Vietnamese banks see rapid credit growth, it has come hand-in-hand with imbalances in the economy.

“Establishment of the VAMC has helped banks to report lower NPLs, spread out their provisioning requirements, and limit the immediate impact on their capitalisa-tion,” said Amit Pandey, a credit analyst at Standard & Poor’s. “However, actual resolu-tion of NPLs by the VAMC has been slow.”

CAPITAL MARKETS AFLUTTER The government’s umpteen measures to help revive its capital markets and entice foreign investors are certainly welcome, even if they are yet to have a full-blown e�ect. But momentum is certainly building.

Vietnam made a rare appearance in the international bond market in November last year, a�er a four year gap. It sold $1bn 10 year notes through a simultaneous tender and exchange o�er, which was a massive hit with investors and allowed the sovereign to dramatically cut costs.

Syndicated loans bankers are also keep-ing busy, thanks to a �urry of borrowers coming out for o�shore loans to take advantage of liquidity and an improving macroeconomic outlook.

Joint Stock Commercial Bank for Invest-ment and Development of Vietnam (BIDV), which has tapped lenders twice this year already, and Vietnam Investment Group (VIG) led the action, successfully shaving costs as banks warmed up to the country’s credits.

And although a lot of attention has been given to the country’s ECM market, no deals have priced this year so far, according to Dealogic.

“When I meet investors who come to Vietnam thinking they’ll make money on IPOs, I tell them not to bet on it,” said Tosto of Viet Capital Securities. “The reality is that they’ll go home unable to �nd any good opportunities. So while Vietnam has taken the �rst step in the right direction, it’s a slow step. We always tell investors to focus on the good and cheap companies already listed.”

Among the sectors most liked by foreign investors include consumer products, �nancials and real estate, say market par-ticipants. The challenge with investing in the banking sector is the foreign ownership limit of 30%. Whether this is likely to rise anytime soon is still up for debate, but a surprising new sector is popping up on investors’ radar.

“One of the big growth industries has been HR,” said Baker & McKenzie’s Chung. “Demand for workforce is expected to grow but people need training and everyone is on the hunt for the right talent. So it’s an attractive market to invest in.”

Vietnam also tweaked rules for mergers and acquisitions in July, meaning foreign investors now no longer need to undergo lengthy procedures to obtain an investment certi�cate when buying stakes in �rms. This eases the way for foreigners to acquire chunky positions in companies, and when

combined with the relaxation of ownership limits, gives businesses the opportunity to acquire 100% stakes in certain names.

But Chung warns that the work is never over even if an acquisition goes smoothly.

“Post-acquisition integration is impor-tant for companies,” he said. “It’s the di�erence between dating and getting married, because while it’s good to pop the champagne, the reality is that there’s a lot of work to do a�er closing the deal in order to truly achieve integration.”

FLYING HIGH Vietnam is well on its way for an economic li�-o�. According to a PricewaterhouseCoopers report from February 2015, Vietnam has the potential to become one of the world’s fastest-growing economies over the period to 2050. It’s already gaining clout as the next big manufacturing hub, with HSBC predicting in an August note that Vietnam is poised to continue to take more global manufacturing market share.

Signing a Free Trade Agreement with South Korea has helped, as will the fact that it is working on an agreement with the US through the Trans Paci�c Partnership (TPP) – which if sealed could work wonders.

“The signing of the TPP will change the landscape for the country dramatically,” said Oliver Massmann, a partner at law �rm Duane Morris. “If Vietnam is able to stick to the points in the agreement and actually walk the talk, that will bring about real change.”

But there is one big roadblock for growth — and that comes from the country’s ailing and o�en troubled state-controlled �rms.

“Vietnam's economy has one cancer,” added Massmann, who is also a member of the supervisory board of PetroVietnam Insurance Corp, the country’s largest industrial insurer. “It’s not incurable, but its cancer is its current system of state-owned enterprises. They have huge NPLs and while they play an important role in the economy, they are holding back the productive development of the economy.

“And changing that is nearly mission impossible, except one solution and that would be allowing full privatisation with majority control option for foreign inves-tors. If that will be done, Vietnam will be the Asian tiger for decades to come.” ◼

EUGENE TARZIMANOVvice-president and senior credit o�cer, Moody's.


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The move marked the largest single day depreciation on record, with the previous largest being just 0.36%. It also followed the release

of more disappointing economic data. Over the previous weekend a report showed that exports fell 8.3% year-on-year in July, while imports fell by 8.6%.

"On a broader level, the devaluation signals PBoC's eagerness to join the global currency wars," wrote Valentin Marinov, head of G10 FX Strategy at Credit Agricole. "With the competitive devaluation gaining momentum but global trade slowing, the latest CNY devaluation could be seen as likely to force other central banks to con-sider similar measures before long."

AXA Investment Managers (AXA IM) said that although a sluggish economy justi�ed a depreciation, the manner of PBoC's inter-vention had been unexpected.

"Although the move – to weaken the RMB – is justi�ed by the sluggish economy and diverging policies between the PBoC and the Fed, we are surprised by the timing and form of the depreciation," said Aidan Yao, senior emerging markets economists at AXA IM. "Perhaps an even bigger surprise was that the PBoC is changing the RMB daily-�x-ing mechanism that now takes into account market views."

The PBoC announced on Tuesday August 11 that, from now on, market-makers' pre-open quotes submitted to the China Foreign

Exchange Trade System (CFETS) should take into consideration the previous day's interbank foreign exchange market closing prices, the supply and demand dynamics in the market and global market develop-ments — the aim being to make the PBoC's daily �xing more market-ori-ented.

UOB analyst Suan Teck Kin said that the move "was likely in response to the impending US Fed rate hike and spurred by [the] IMF's latest policy payer on SDR to establish measures to improve market-deter-mined mechanism".

Alicia Garcia Herrero, economist at Natixis, believed the depreciation was unlikely to be too rapid or too aggres-sive. "The PBoC needs to show it is in control," said Herrero in a report. "The

stock market collapse has already taken a toll on China’s image. CSRC has lost its credibility with the margin �nancing issue and the PBoC has become the key factor behind the scenes in the stock market support."

She added that despite the PBoC pledge for a more hands-o£ approach, the timing was not right for that to take place, particu-larly in light of pressure on the currency due to increasing capital out¤ows.

"Showing control is de�nitively a better option by leading the market towards how much depreciation the PBoC thinks is needed," said Herrero.

Standard Chartered agreed that PBoC was likely to keep trying to reduce any sharp ¤uctuations, but added that volatility in the �xing was likely.

"We expect markets to remain jittery on concerns that this is a renewed push to weaken the CNY near-term," StanChart said in a report.

Should volatility in the �xing become a trend, it could delay the expected widening

More quotes, less black box: new PBoC �xing system brings RMB closer to market

GlobalRMB (www.globalcapital.com/rmb) is an online publication dedicated to all aspects of renminbi internationalisation and a sister publication to GlobalCapital. Here we present a selection of recent articles, covering the landmark devaluation of the currency as well as the possibility of a Green Panda bond. And we set the record straight on the IMF's review of its Special Drawing Rights basket.

There was widespread surprise on August 11 at the People's Bank of China (PBoC) move not only to weaken the onshore RMB (CNY) xing by nearly 2% overnight, but also introduce a new system to establish the daily central parity rate, writes Paolo Danese.

OFF A CLIFFRenminbi daily central parity rate vs US dollar

SOURCE: CHINA FOREIGN EXCHANGE TRADE SYSTEM

The PBoC needs to show it is in control. The stock market collapse has already taken a toll on China’s image.

GlobalRMB-r2.indd 56 21/8/15 5:57 pm


Renminbi

The central bank is also to extend the trading hours for the onshore FX market, with the result that it should better connect with the

London FX market, and even New York, said Yi Gang, deputy governor of the PBoC, in a press conference in Beijing.

In order to facilitate trade business, investment and the use of FX market, more FX products should also be developed, Yi added.

The Chinese central bank held the press conference on the back of a third consecu-tive day of RMB devaluation. The PBoC set Thursday's daily USD/CNY �x at 6.4010, weaker than Wednesday's close of 6.3870 and 1.1% down from that day's o©cial �xing of 6.3306. The daily �x fell 1.86% on Tuesday and a further 1.62% on Wednes-day.

The drops followed a change in the methodology for generating the daily USD/CNY �xing, which the PBoC announced on Tuesday. From now on, market makers submitting quotes ahead of the �xing must

take into consideration the previous day's close in the FX market.

Until now, although many foreign institu-tions' onshore incorporated branches have had onshore trading licences, o£shore RMB clearing banks were the only o£shore entities allowed into the onshore FX market.

The Chinese authorities have been opening up the country's domestic capital markets at a faster pace this year. In mid July, the PBoC increased the access that foreign central banks, supranationals and sovereign wealth funds have to China’s interbank bond market.

“It’s good for market diversi�cation, which is exactly what the onshore market needs at any level, I would say,” said a senior FX trader in the onshore market. “The FX demand from a pure o£shore entity will be di£erent from onshore peers, and this could therefore bring in more of the pricing from the CNH side, as well as some competition, which I think is good for such a big onshore market.”

Meanwhile, the central bank reiterated during the press conference that the central

bank was capable of stabilising the RMB FX rate and the 3% gap that had existed between the daily benchmark �x and the real market price had been almost corrected a®er this week’s devaluation.

The PBoC also noted that “there is no basis for further RMB devaluation”, given that China has deep foreign exchange reserves, a sound �scal position, a stable �nancial system and an increasing demand in RMB investment seen from the o£shore entities.

Yi also pointed out that the August 11 reform in the daily �x methodology would have limited impact on RMB international-isation, but would be positive in promoting con�dence in the RMB globally.

“Whoever really cares about the long-term development of the [RMB] market would care about the consistency of it," he said. "An in¤exible and �xed rate doesn’t suit China well and is not sustainable. A ¤exible price mechanism is good for long term economic development, as it serves as a stabiliser." ◼

No let-up in China FX reform as PBoC allows foreign entities into onshore marketThe People’s Bank of China (PBoC) said on August 13 that it would allow qualied foreign entities to participate in the onshore foreign exchange market in a move that is aimed at helping encourage the convergence of the onshore and o�shore renminbi FX rates, writes Carrie Hong.

of the trading band from the current 2%, according to Barclays.

"While there has been no announcement regarding a band widening, today’s move may alleviate some of the near-term pres-sure to widen," the bank said in its report. "USDCNY �xing is now close to the USDCNY spot rate, rather than closer to the top of the current band, which in theory gives more scope to widen and we continue to see a band widening taking place ahead of the SDR review in October/November.

"That said, a band widening would be less meaningful, given that the market is now set to play a greater role in determining moves in the currency."

The upgraded �xing builds on a ten year old system that saw PBoC decide the rate against a basket of currencies.

"The de facto peg to the USD ended on 21 July 2005, when China announced a 2.1% re-valuation of the RMB and o©cially adopted a managed ¤oat exchange rate regime," HSBC economists wrote in a July report. "China said it would set its USD-CNY reference rate based on considerations with regards to a basket of currencies that included the majors: the USD, the EUR and the JPY, as well as several other Asian (e.g., the KRW and the SGD) and commodity-re-lated currencies (e.g., the AUD, the MYR and the CAD)."

The new �xing will see PBoC decide the parity rate more transparently by basing it on market makers' closing quotes from the day before, making the �xing more market driven.

UOB's Suan explained that the PBoC had previously never explicitly told marketmak-ers the basis on which they should make their pre-open submissions each day, and "merely speci�ed removing the highest and lowest contributions be eliminated from the calculations and taking an average of the remaining contributions to form the day's central parity, with the weights based on the marketmakers' trading volumes, among other measures." ◼



Renminbi

The Panda bond guidelines are focusing on expanding the existing quali�ed issuer base — by including �nancial institutions

— and clarifying requirements for issuers such as accounting standards, tax pay-ments and the use of proceeds. The green bond guidelines, meanwhile, are being dra®ed from scratch but are making great progress, according to the above sources.

“These are two di£erent things, but it is very likely they will be announced in the same period later this year as part of China’s onshore �nance reform, and a deal that combines the Panda with green is possible and makes sense,” said a banker familiar with the matter.

Chinese policymakers have never said that they are pushing for a green Panda, but the sources GlobalRMB has spoken to say it would be logical that a proposal to use Panda bond proceeds on green and sustainable projects in China would please top o©cials and might secure faster approval.

“Personally, I think it is a wise combina-tion, but it won’t mean a requirement to say all Panda bonds have to be green in the future," said a second banker. "However, given that the green theme is generating great momentum from China’s top policy-makers, to have the two in one deal would be a double win."

They also note that the previous supranational Panda bond issuers (Asian Development Bank and International Finance Corporation) and the soon-to-be included �nancial institutions are pioneers in the global green bond market, and would therefore be well positioned to bring their green experience to China.

GlobalRMB �rst reported in June that the People’s Bank of China (PBoC) planned to relax Panda bond rules in September. The central bank later mentioned in its �rst RMB international-isation report that China would support international entities wanting to issue Panda bonds.

In mid July, GlobalRMB learned that the PBoC was planning to allow o£shore commercial �nancial institutions to issue Panda bonds and the sources mentioned above further con�rmed the expansion with updates.

“The new expansion of Panda bonds — which the regulators prefer to call �nancial bonds/notes — will be supervised by the National Association of Financial Market Institutional Investors (NAFMII) and be issued in the interbank bond market,” said the second banker.

In mid September 2014, NAFMII signed an agreement with the International Capi-tal Markets Association (ICMA) to create a working group that covers areas including the opening up of the panda bond market, upgrading the safety and transparency of the Chinese municipal bond market, and paving the way for Chinese green bond issuance.

China has already seen its debut green bond, a $300m issue from Xinjiang Goldwind Science & Technology on July

16, although this deal was structured in accordance with green bond standards as certi�ed by DNV GL, a Norwegian-German appraiser. The sources estimated that the �rst RMB-denominated green bond, be it Panda or not, could be expected within two months.

Industrial Bank has previously been mooted to be lining up to be the �rst �nan-cial institution to issue a Chinese green bond, with the big �ve domestic banks also thought to be in the queue. But corporates are also expected to play a part.

In 2005, the PBoC, the Ministry of Finance, the National Development and Reform Commission and the China Secu-rities Regulatory Commission drew up the rules for Panda bonds, limiting them to multilateral institutions. This was relaxed in 2010 to allow issuance from bilateral or regional developmental �nancial institu-tions. ◼

Green Panda on the cards as China preps next bond innovationChina's authorities are moving quickly on two sets of new guidelines, on Panda bonds and green bonds, and could be in a position to release them as early as September. A green Panda bond could follow, GlobalRMB has learned from several sources close to Chinese decision-makers, writes Carrie Hong.

Going green, in black and white



Renminbi

The RMB and SDR: It's the report, stupidThe International Monetary Fund (IMF) has not announced any delay to its decision on whether to include the renminbi in its Special Drawing Rights (SDR) facility. That should be clear to everyone, writes Mark Baker.

Trawling through the ¤urry of headlines and analyst reports on August 5 proclaiming that the IMF was delaying its decision

on renminbi inclusion in the SDR, you might have been tempted to conclude that the IMF had just announced it was delaying its decision on renminbi inclusion in the SDR.

It hadn't.You'd be forgiven for thinking so, of

course, given lines like "IMF policy paper proposes the delay of this year's Special Drawing Rights assessment to Sep 2016", which led the summary of one bank's analysis.

It is an indication of just how closely followed the SDR issue is right now that there has been such a bizarre collective leap to the wrong conclusion. It is also perhaps a telling reminder of how information circulates in �nancial markets: all too o®en there is a striking lack of consultation of �rst-hand material in favour of chat.

Given the confusion, a quick outline of what the report actually said is called for. The IMF said that there was lots and lots more work to be done before it could reach a decision on whether to include the RMB in the SDR. And it detailed some of its thinking around areas like de�nitions of "free usability" and the potential di©culties that SDR users might have in hedging positions if the RMB was part of the basket backing the facility.

And now onto timing. It also said that it was proposing a nine-month extension of the current basket until September 30 2016. This was because SDR users had

told the IMF that, in the event that the decision was taken to include the RMB in the SDR, it would be di©cult to adjust their positions quickly and easily over the New Year period. In fact "many have indicated that a lead time of six to nine months would be desirable in such a case", said the IMF.

That's a "lead time" designed to help people adjust to an announced decision. Given the market feedback on how long an adjustment would take, the extension of the existing basket composition creates the conditions that would allow the IMF to announce a positive outcome for the RMB before the end of 2015.

What it is not is a delaying of that decision to September 2016.

In case that wasn't clear enough, the IMF went further. "This proposal […] does not prejudge the timing and outcome of the review."

And there was even more help given by Siddharth Tiwari, director of the IMF's Strategy, Policy and Review Department, in a Q&A that was published by the IMF alongside the report on August 4.

"The Executive Board will formally discuss the review toward the end of the year." "An extension of nine months would […] allow users to adjust to a potential changed basket composition should the Executive Board decide to include the RMB." "The review is well underway. Further work still needs to be undertaken in a number of areas to inform the Executive Board's decision. Sta£ continues its technical work, including on addressing data gaps and operational issues, while liaising closely with the Chinese authorities and other

members ahead of the formal Board meeting expected later in 2015."

The IMF could, of course, not get around to announcing its verdict on the RMB until some time in 2016. But that would be slightly odd: it would not match precedent for its previous reviews, and it would also screw up the "lead time". That would presumably have to be fur-ther extended in the event of a positive decision during 2016, since the Fund has speci�cally said that the length of that extension is a function of how long SDR users think it will take to adjust to a new currency being included.

That kind of delay could still happen. As one IMF o©cial said on a conference call discussing the issue on August 4, "the Board decides when the Board decides". The current Board position is that a decision must be reached by the end of the year, but changing that would simply require another Board decision. However, the call also made clear that the current expectation is indeed for an SDR decision before the end of the year. The Board is scheduled to meet in November to discuss the review.

Finally, the IMF could, of course, announce in 2015 (or 2016) that it was not going to include the RMB at this time. Nothing that was announced on August 4 changes that. As discussed, the basket extension simply makes a positive out-come easier for markets to manage.

And so back to the original misun-derstanding of the report. Is it possible that the IMF ends up not announcing its decision on RMB inclusion until 2016? Yes, it's possible, but it didn't say that this month. Read the report. ◼



HK Stars Index

The Hang Seng indices have almost fallen to December 2010 levels, but the M&E BDO Asiamoney Hong Kong Stars Index is more than 20% above where it started in December 2010. In fact, between June and July 2015, the

Stars Index only lost two percentage points. Why?The explanation is that the M&E Stars Index method quanti�es

the management quality of an Index component and weights it accordingly. Well managed companies are relatively higher weighted in the Index. And rational investors are less likely to discard quality equity, even in down times.

Well-run companies are more transparent and put more into investor relations than their less well-run counterparts. They have more good news to report on, and better �nancials. Investors, in turn, can make more well-founded decisions and will also appreciate these companies' resilience in crashes.

The accompanying chart comparing the M&E Stars Index with its Hang Seng benchmarks clearly reveals a less steep downward curve. Yet the M&E Stars Index includes only 22 components, which should in theory make it more volatile than indices with more components. Most �nancial specialists preach that a larger number of components reduces idiosyncratic risk.

Moreover, the chart also shows that the Stars Index has never looked back once it began signi�cantly outperforming its benchmarks. "Typically, indices outperform and underperform each other over longer periods of time," says Patrick Rozario, partner at BDO, which conducts the research for the Stars Index in Hong Kong.

Looking into the Stars Index's numbers, the reasons for the Index's resilience become clearer. Its heavyweight, China Mobile

(35.7% weighting), actually grew its market cap, while AIA (11%) hardly dropped in the same period. Other insurance companies in the Index, including Manulife and Prudential remained equally stable. ◼

Dr William Cox is CEO of Management & Excellence (M&E), which is partnered with BDO Financial for Hong Kong & Asia. M&E/BDO Hong Kong specialise in calculating and raising the ROI of governance and other management processes.

Medicine against market crashesThe M&E Stars method stays ahead of the Hang Seng index, especially in extreme bear markets. William Cox of Management & Excellence, which created the methodology for the M&E BDO Asiamoney Hong Kong Sustainable Stars Index, explains why.

M&E BDO ASIAMONEY HONG KONG STARS INDEX vs HANG SENG INDEX AND HANG SENG COMPOSITE INDEX140

130

120

110

100

90

80

70

SOURCE: M&E; BDO

M&E BDO AM Stars IndexHang Seng IndexHang Seng Composite Index

Dec-

10Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov-

11Ja

n-12

Mar

-12

May

-12

Jul-1

2Se

p-12

Nov-

12Ja

n-13

Feb-

13M

ar-1

3Ap

r-13

May

-13

Jun-

13Ju

l-13

Aug-

13Se

p-13

Oct

-13

Nov-

13De

c-13

Jan-

14Fe

b-14

Mar

-14

Apr-

14M

ay-1

4Ju

n-14

Jul-1

4Au

g-14

Sep-

14O

ct-1

4No

v-14

Dec-

14Ja

n-15

Feb-

15M

ar-1

5Ap

r-15

May

-15

Jun-

15Ju

l-15

HK Stars Index-r2.indd 60 21/8/15 9:30 pm

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