Multiple drivers are in place to help drive the performance of Asean banks over the medium term despite threats of new waves of Covid-19.

These include increasing digitalisation, growing wealth in the region, evolving talent requirements and stricter regulations regarding capital and liquidity.

That’s according to the research team of Maybank Kim Eng at its Invest Asean 2021 webinar Asean Financials: The Shape of Things to Come on June 10.

“The sector is emerging from the Covid-19 pandemic relatively unscathed but significant tail risks remain from renewed waves of infections and accompanying lockdowns and border closures. At the same time, new challengers in the form of digital banks are seeking market share in the high growth but under-banked markets in Asean,” says Thilan Wickramasinghe, regional head of financials, research at Maybank.

“All of this is taking place amid huge social shifts in the financial industry where operations are transforming to include more diversity, sustainability, hybrid work models as well rising requirements for new skills,” says Wickramasinghe.

“Asean banks are set to tap new opportunities with rising cross-border trade, higher digital adoption and rising wealth. To win, they will need to adopt technology and new work models and become closer to customers. But the path to growth needs to be tread carefully as tail risks from the pandemic remain,” he adds.

These factors are what Wickramasinghe believes will offer attractive paths for banks to grow. “A survey by our research team shows that the critical factors that could drive medium-term profitability is rising non-interest income contribution — particularly from wealth management as the region grows in affluence,” he adds.

Agreeing, Dean Tong, UOB’s managing director and head of group human resources, says, “There are niche areas in which artificial intelligence can work alongside humans to make us a lot more productive moving forward. It is how we look at those challenges as opportunities and use that to shape our strategy to take advantage of some of those changes in the market — like how we reshape the workforce to prepare for the challenges — so that they are not caught off guard when it happens.”

Tong says that for Singapore in particular, remote working has created a new way of how the bank staff works. Already, several banks including Standard Chartered, DBS Group Holdings and United Overseas Bank (UOB) have announced flexible working arrangements allowing staff to work from home for several days a week, joining a rising set of financial institutions offering hybrid work solutions amid lockdown measures imposed to curb the community spread of Covid-19.

“We have always been more careful in adopting new technology, especially since our business is a business of trust and we deal with sensitive information. The pandemic presented both an opportunity and challenge for us to innovate to allow as much work to be done from home. This has changed the way we work moving forward,” he adds.

Although digitalisation is a sure bet, progressing at different paces for different organisations. “There are banks that started the digitalisation journey earlier than the others, modernising their core infrastructure and are becoming much more customer-centric slightly earlier than the rest of the pack,” says Pranav Seth, chief digital officer for Techcombank Vietnam.

“For those that have not done that so far and are not aggressively doing it, I do believe that they are under threat. I don’t think it’s a threat that will play out in the next couple of years but perhaps over the next 10 years because I think banking is an ocean liner — it takes time to steer,” says Pranav, who was previously with Oversea-Chinese Banking Corp (OCBC).

Traditional branch banking is also vulnerable to disruption. As banks offer more online services and their convenience attracts both consumer and business customers, traditional branch banking may become less relevant in the future. In higher growth markets such as Indonesia, the Philippines and Vietnam, the number of physical branches has decreased. Banks such as DBS has announced they are cutting 20% of their floor space over the next few years while modifying their branches to offer more automated services.

The shifts in the regional banking industry are taking place amid expectations of a global economic recovery from the pandemic. While market observers expect the worst of Covid-19-linked downturns to be over, there is the growing risk of uneven recoveries across countries and industries which investors need to be mindful of.

In Asean, recovery from the pandemic-linked economic downturn has been uneven and punctuated with renewed lockdowns and fresh virus outbreaks. However, the increasing availability and administration of vaccines mean there is finally a light at the end of the tunnel for the region, albeit at a volatile rate.

“Countries that contain the Covid-19 spread — like Vietnam and Singapore — are experiencing faster economic recovery and return to normalcy compared to those struggling with high Covid-19 cases and extended lockdowns — including the Philippines, Thailand and Malaysia. Asean’s economic recovery has been powered by manufacturing and exports, with global demand bolstered by the recovery and reopening in the US, Europe and China,” say Suhaimi Ilias and Chua Hak Bin, Maybank’s regional co-heads, macro research.

According to Maybank, “notwithstanding setbacks, monetary and fiscal policies remain accommodative and expansionary, respectively. Coupled with 2021 forecast 30% growth y-o-y regional earnings recovery, we see double-digit upsides for most regional benchmark market indices, with Singapore and Vietnam maintaining their relative outperformance.”

According to Maybank, Singapore’s market turnover velocity (the value of stocks traded relative to the market cap) has reached levels last seen during the Global Financial Crisis (GFC). Furthermore, several parallels exist between then and now: The global economy was facing significant uncertainty while governments and central banks launched aggressive stimulus schemes.

Singapore’s actions to minimise the fallout accorded it a safe-haven status, says Maybank. To recap, after the GFC, market velocity tumbled and flat-lined for seven to eight years as interest and liquidity shifted to higher growth markets in Asean and North Asia.

Currently, Singapore’s handling of the pandemic is ranked second on the Bloomberg Covid-19 Resilience Index while the country’s strong stimulus measure equivalent to some 20% of 2020 GDP, has reaffirmed its safe-haven status.

“However, we believe the current boost to market activity is not just a derivative of flows to safety. It is structural. Higher retail investor participation in line with global trends is a contributor. With high levels of liquidity and traditional investments such as property impacted by cooling measures, equities are regaining interest with this group,” says Maybank.

Separately, the growth stocks in Singapore have outperformed their value counterparts by 66% year to date. “Rising inflation fears, relaxing Covid-19 restrictions and the MAS forecasting upbeat growth, we believe a rotation towards value stocks should gather pace. This should further support market momentum,” adds Maybank.

Overweight sectors in Singapore that Maybank has identified include financials, consumer staples, technology, industrial REITs, land transport and healthcare. Underweight sectors include industrials, gaming and hospitality REITs. On another note, several government-linked companies (GLC), including CapitaLand, Singtel, Keppel Corp as well as Hong Kong-based Jardine group of conglomerates, have announced restructuring exercises as a response to changes in operating conditions and the pandemic, and valuation discounts compared to peers listed elsewhere. Maybank believes that more such announcements are likely and could further drive interest in the market under a “restructuring” theme.

In addition, MSCI Singapore has recently included among its constituents New York-listed Sea, a Singapore-based Internet company with gaming, e-commerce and financial services. “Additional technology and new economy inclusions are possible, in our view,” says Maybank. This brings the composition of Singapore’s indexes closer to its newer economic drivers — infocomm, precision manufacturing, pharma and wealth management — compared to the “old world” corporates in banking, property and telcos that currently take up the larger slice of the index.

With this, Maybank believes that Singapore’s relevance from an Asean regional growth standpoint could increase, which should then drive more inbound liquidity, further supporting a higher market velocity — creating a virtuous cycle.

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Multiple drivers to support growth of Asean banks over medium term: Maybank Kim Eng

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