Southeast Asian banks thrive in competitive differences, digitalisation

Maybank’s Thilan Wickramasinghe reveals contrasting strategies employed by banks in the region and the impact of technological trends on the sector.

To understand the dynamic world of banking in Southeast Asia, one must take a closer look to recognize a compelling dichotomy between the large regional banks and the smaller players.

In a recent interview with Asian Banking & Finance, Thilan Wickramasinghe, regional head of financials at Maybank, revealed contrasting strategies in the competitive landscape of the banking sector and discussed the impact of digitalisation trends on the industry.

“The competition at the larger level is a little bit more rational; at the mid to smaller bank level, there is slightly higher intensity of competition,” Wickramasinghe said.

Among the smaller and medium-sized players, there is a new wave of digital challengers seeking to make their mark in Southeast Asia. These newcomers, however, have struggled to make a dent on established banking systems.

Meanwhile, larger banks revel in the advantages bestowed upon them, enjoying substantial deposit franchises, particularly fortified by recent global financial crises.

“If you actually look at the larger banks across Southeast Asia, there's actually quite a bit of similarities,” said Wickramasinghe, noting that many of these banks are “either state-owned or large family-owned” and primarily focused on “wholesale or corporate banking” with robust wealth management divisions.

But he pointed out that subtle yet significant differences come to light when comparing Singaporean and Malaysian banks to their counterparts in other Southeast Asian countries.

“They tend to focus more on large corporate accounts and MNCs. They’re also focusing a lot more on building their wealth management businesses, their private banking businesses,” Wickramasinghe said. Moreover, these banks exhibit a distinct inclination toward collateral-based consumer businesses, such as mortgages, he added.

On the other hand, in rapidly growing nations like Thailand, Vietnam, and Indonesia, the banking landscape takes on a different shape.

Wickramasinghe said the banks in these countries prioritise consumer banking enterprises, particularly collateralized lending and financing for two-wheelers and motor vehicles. The focus on meeting the evolving needs of the burgeoning middle class propels these banks' growth.

However, in comparison to developed ASEAN markets, their fee income businesses are still in the early stages of development.

Additionally, Wickramasinghe shed light on the importance of technology in the banking sector. “The first [major change] is on the technology side, we’ve seen fairly rapid digitalization across Southeast Asia,” he said.

With around 50% of the population in Southeast Asia being underbanked, Wickramasinghe stressed that the shift towards digitalization is crucial for increasing banking penetration and building scale at lower costs.

Another key development highlighted was the shift in North-South supply chain flows. Wickramasinghe noted that the banking sector has capitalized on opportunities emerging from the shift of manufacturing from China and North Asia to Southeast Asia.

Southeast Asian banks are also starting to explore fee-generating activities as they look to diversify beyond traditional banking. “You’re starting to see more sophistication in terms of fee-generating activities, whether it's wealth management, fund management, or Transaction Banking,” Wickramasinghe said.

Regarding economic indicators and their impact on the banking sector, Wickramasinghe emphasized the cyclical nature of banking operations.

As interest rates ascend, especially during the early stages of the cycle, net interest margins for banks surge rapidly. However, this surge encounters an offsetting effect as loan growth falters. With loans becoming costlier, clients and companies curb their borrowing, dampening loan growth, explained Wickramasinghe.

Furthermore, when coupled with inflation, which burdens input costs for many businesses unable to pass the burden onto customers, margins suffer further, impeding growth.

Consequently, GDP and economic growth decelerate, setting off a chain reaction. As economic growth slows and borrowing costs mount, companies face mounting pressure, potentially impacting asset quality as defaults become a reality, he said.

Southeast Asia finds itself on the cusp of this phase, where vigilance towards asset quality issues becomes imperative amid the deceleration of economic growth.

Wickramasinghe cited Singapore as a recent example of how shifts in interest rates influence the banking industry.

He mentioned that net interest margins for banks in Singapore have increased significantly due to the rapid increase in interest rates by the Federal Reserve.

In conclusion, Wickramasinghe highlighted that the banking sector in Southeast Asia continues to evolve and that traditional banks are adapting their strategies in response to emerging competition and technological advances.