Banking & Finance 2011 Q&A
Asian Legal Business (ALB): Banking & Finance came back with a bang in 2010 with banks across the region reopening their loan books and capital again flowing freely across the region. What are the prospects for more of the same in 2011?
Loo Choon Chiaw (LCC): We can expect the banking & finance industry in Asia continue to be in the expansion mode in 2011. Many banks are expanding and growing their business and loan books in Asia markets as the economies will continue to outperform Western economies in the foreseeable future. DBS Bank, the largest bank in South-East Asia, for example, reported a 52 percent increase in profits from loans as well as investment banking and wealth management fees in 1Q2011. Foreign banks are also seeking to further expand their business operations and market share in the region. However, the turmoil in the Middle East and North Africa regions, the sovereign debt crisis affecting the PIGS and the spillovers effect from the earth-quake related tragedy in Japan, will continue to be the central issues in 2011 that may potentially disrupt the global economic growth, which in turn will affect the banking & finance industry in the region. In addition, the threat of inflation remains, which is a growing concern in the region, as many policy makers implement stricter regulations to cool down the economic growth in it’s jurisdiction.
ALB: A noticeable trend over the last 12 months has been the increasing involvement of domestic Asian banks in the international financial market. Do you think this a trend that is here to stay?
LCC: Indeed, Asian banks have increasingly loomed large in international finance. Asian banks are going farther into global corporate lending, bond issues, acquisition financing and financing large-scale energy projects. There is no indication that this trend will stop. Asian banks, including banks from the emerging markets in the Asia Pacific region, are well-capitalised, well-funded and big enough to compete directly against their western counterparts in the global marketplace. Global expansion is inevitable as the rest of the world, still recovering from the Global Financial Crisis (“GFC”), looks to Asia, with its well-funded coffers and structural soundness; for funding.
ALB: What factors have pushed Asian banks into centerstage in the international financial market?
LCC: Economies of emerging markets are growing on a macro-economic level and the growth is a long-term structural phenomenon. The GFC did not really hurt emerging market banks. The impact was largely psychological, with many emerging market banks using the crisis as an opportunity to study and rethink their economic goals, risk management policies and governance. Backed up by strong liquidity and high capital adequacy ratios, banks from emerging market are now in a much stronger position than their western counterparts, thereby, allowing them to diversify and expand their business.
Another factor is that the world has simply become, what some analysts called “multipolar” – having centres of power distributed among different regions, rather than being concentrated in the US and Europe. The loss in the U.S. and Europe have generally become a gain in Asia.
ALB: What are the challenges to Asian banks in this new world order?
LCC: As with all great changes, this structural shift from west to east will offer both opportunities and threats for the players in the regional banking & finance industry. As western banks undergo the necessary restructuring, deal with and dispose of toxic assets and – in the case of nationalised banks – prepare to re-enter the private sector, emerging market banks will be forced to look to each other for opportunities to expand their presence in the global marketplace. Another obstacle to Asian banks has been identified by industry experts and think tanks who have noted a very ironic situation.
Whilst Asian banks have grown in strength while their western counterparts have weakened, the West pretty much still call the shots. In the drafting of the latest round of regulations from the Basel Committee on Banking Supervision (Basel III), for example, the absence of the ‘Asian voice’ was very glaring. If anything, the GFC has shown that Asian banks and their western counterparts have very fundamental structural differences. One wonders whether the medicine intended to cure the western banks ought to be consumed by the Asian banks.
ALB: There has been a fair amount of regulatory changes in the financial services industry since the end of the GFC, one of which was, as you mentioned, Basel III. What impact does this have on Asia in general and your clients in particular?
LCC: Asian banks will, generally, not have a problem meeting the capital requirements under Basel III. In the Singapore front, for example, the Monetary Authority of Singapore has been imposing stricter capital requirements in comparison to international standards, which is why Singapore’s banks were already in compliance with Basel III requirements, even before their commencement. Even the Japanese banks, which have some of the lowest levels of capital in Asia, are just a little deficient of the 7 percent requirement, and will definitely not have any problem in complying with the requirement within the long phase-in period. A positive impact is that Asian Banks are now free to release their surplus capital for lending and funding purposes.
ALB: Any downside?
LCC: On the downside, however, some of the provision in Basel III could potentially hurt the region. Firstly, and as an estimate, Basel III’s call for more capital requirement on trade finance may adversely affect global trade finance capacity by as much as 6 percent. Secondly, the Basel III requirements are expected to drive up costs for financial services, which banks will, in turn, simply pass on to their customers. Thirdly, Basel III may increase barriers to entry for foreign banks, increasing regulators’ concerns over the risks of systemically-important financial institutions, and potentially decreasing
cross-border flows and the ability of Asia’s capital markets to circulate liquidity throughout the region. Fourthly, the liquidity rules imposed by Basel III, in particular the liquidity coverage ratio, or the requirement for banks to hold high quality liquid assets including but not limited to cash and government debt that will allow them to meet all their net outflows over a 30-day time period at a time of acute stress in the market, may pose difficulties for Asia Pacific banks as these types of assets, in particular, sovereign debt, are scarce in the region.
ALB: Last year we talked about the rise of Islamic finance in Singapore. Have you seen an increase in the amount of Shariah-compliant work in the market? What are the prospects for the further development of the market in the year ahead?
LCC: Singapore is certainly on the right track and can potentially rival Malaysia to become a global Islamic financial hub. It is reported that Syariah-compliant products now account for about 10 percent of the debt issues in Singapore. Debt issuance in Singapore totalled SGD25 billion in 2010, compared with $94 billion worth of sukuks sold in Malaysia in 2010.
In 2010, we saw the first listing of Sabana Syariah compliant REIT on the Singapore’s stock exchange which is also the world’s largest listed Shariah compliant REIT by total assets. We may expect more Islamic bonds and Islamic REIT products in Singapore in 2011 due to our sophisticated capital market and supportive regulatory and taxation frameworks. The Singapore regulator has provided incentives such as reduced taxes for Islamic transactions, waiving of stamp duties for real estate financing and 5% concessionary tax rate for Islamic financing.
Another potential growth in Singapore this year is the Islamic wealth management. Last year, Singapore’s Keppel T&T and AEP Investment Management, a joint venture company with Saudi Arabia’s Al Rajhi Holding Group, announced an agreement to establish an asset management company to manage the world’s first Shariah compliant data centre fund - Securus Data Property Fund. The fund’s initial closing was achieved in June 2010 at $100 million with institutional investors from the Middle East and Asia.
One of the major challenges is the lack of awareness about Islamic finance in Singapore. Nevertheless, Singapore is working towards raising the level of awareness and support platforms for practitioners and investors to raise their knowledge and understanding of Islamic finance.
ALB: As a leading boutique legal practise in the Region, what new type of work are keeping you busy at the moment?
LCC: We are boringly consistent, focusing principally on banking, corporate and commercial work as was the case when we were founded in 1985. We advise our banking clients over legal and regulatory issues almost as a daily routine. Our banking colleagues have been kept very busy in the last few weeks: supporting a Taiwanese shipping conglomerate in the negotiation of its club loan facilities in respect of its purchase of a fleet of vessels; assisting one of our investment banking clients in the structuring of a funding facilities in connection with of the take-over bid of a Hong Kong listed company; advising a Singapore-based regional mining group regarding the funding exercise in support of its intended acquisition of a $350 million coal terminal facility in Russia; and advising a PRC energy group regarding the funding of its intended building and construction on a BOT basis of a $320 million power and heat plant in Russia.
ALB: You run a thriving legal practice and keep an impossible travelling schedule. How do you achieve that?
LCC: The late President Ronald Reagan provided the answer. “Surround yourself with the best people you can find, delegate authority and don’t interfere”. I have been blessed with a team of competent, loyal, caring and supportive colleagues. With Blackberry, iPhone and iPad, I am literally only a phone call or an email away. When I am e-mailing or having a telephone conference with our clients or my colleagues, it really does not matter whether I am physically located in the Raffles Hotel of Singapore, the Burj Al Arab in Dubai, the Peninsula in Hong Kong, or the Four Seasons in New York! With a good team in the office holding the fort, travelling is never a problem for me.
Loo & Partners LLP
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Loo & Partners LLP (Registration No. LL0800566K), registered with liability in Singapore under the Limited Liability Partnerships Act (Chapter 163A), was converted from the firm “Loo & Partners” to a limited liability partnership with effect from 28 May 2008