Banking Asia’s global champions

Asia’s global champions – companies with their origins in the region that enjoy growing power across the globe – are fast becoming the world’s most coveted banking clients.

For banks, doing business with these new corporate titans is not simply a supplement to historically forged and lucrative alliances with western companies. It is about cementing a place at the top table for generations to come.

As the IBMs and GMs of this century emerge from across Asia Pacific, banks are forming bonds that they hope will ensure their own long-term survival.

Winning business from these companies is not easy. Competition is fierce not just from the usual array of international banks but from increasingly powerful Asian banks that enjoy a cultural alignment with the companies that it is difficult for international banks to replicate.

"There is a generation of companies that have built up alongside us and our network and expanded with their markets. You could look at the period we are now in as globalization 2.0. You have to really know the companies in this part of the world," says Michael Zink, head of Asean and chief executive officer for Singapore at Citi.

Stephen Bird, chief executive of Citi in Asia Pacific, says the drive to work with Asia’s global companies has elements of history repeating itself. "The reason we came out to Asia in 1902 was the expansion of American companies," he says. "Companies such as GE, Corning, IBM and later GM, Ford, Microsoft and Apple have driven our business in many ways. The story of which countries we chose was driven by what clients such as these wanted to do. They are still our clients today, and those flows are the reason that the global subsidiaries business is so powerful." Citi now banks Samsung in 64 countries. "Now we bank several companies in a number of markets, and our business has been built to be this network. This is the network effect in practice. The first fax machine was pretty boring until someone else got a fax machine," says Bird.

Truly global Asian companies are a relatively new phenomenon, and banking for them requires patience. There are customs to learn, relationships to be forged (or bought), products to be explained, regulatory hurdles to be negotiated and egos to massage.

"It is fair to say that from a macro perspective, many Asian corporates are very confident in their own future. Several are logical global leaders simply because of the scale of their home markets. The long-term potential is there for us to support emerging global leaders," says Johan Leven, head of corporate finance at Barclays.

There are obviously Asian companies, notably from Japan, that have been prospering overseas for decades. Whereas firms such as Tata, Vedanta and Lenovo, to name just three, have become large multinationals only in the past few years. This expanding group of Asian companies with global franchises is looking to satisfy a need for ever-more complex banking products across the world. Bankers are in agreement that doing business with this group is perhaps the most important part of building a healthy franchise in the region. Most Asian corporates tend to be more centralized than their equivalents headquartered in the west and, as a result, a deep relationship with the head office is vital. Without that, it is virtually impossible to forge a global relationship with Asian multinationals.

"You can’t speak of Asia as a homogeneous region," says Therese Esperdy, co-head of banking for Asia-Pacific at JPMorgan. "There is a greater reliance on relationships. Some companies are more hierarchical than others and there’s a differing reliance on relationships." Clients, she adds, can be quite demanding of attention even though, on a global scale, the fees are relatively small. So the coverage model is different.

Russell Julius, head of global banking for Asia Pacific at HSBC, points out that in many ways multinationals are leading the pack when it comes to more sophisticated banking products. As a result of Samsung’s development, for example, HSBC has developed a global umbrella facility for the firm, backed in Seoul, that allows it to be more flexible when it comes to the company’s banking needs. "As a bank, to do the best job for clients, you can’t try to work with too many. So we have to be clear about who we want to deal with – and what the wallet is – and try to maximize our touch points by providing the broadest possible solution. That keeps us pretty busy."

Farhan Faruqui, head of corporate and investment banking at Citi for Asia-Pacific, agrees that client-specific services are the key to success. "For the largest clients we have a more enhanced platform ranging from lending to managing exposure to capital markets both locally and internationally to strategic advisory. And we then are coordinating with their operations in the head offices to offer them the full power of our network."

Banks including HSBC and Citi are now setting up desks around the world aimed at helping Asian companies gain greater access to banking in countries with which they might be less familiar. "Asian champions are evolving, and sometimes their needs are as simple as being able to talk to a desk in another country. They sometimes need hand-holding, which our local expertise can help with, and we need to manage those requirements. So we have set up desks and staffed them with bankers who will be the client’s banker on the ground. It provides a seamless transfer to working with us and gives us a greater ability to understand their unique needs," says Faruqui.

Although competition is fierce, Leven notes that there remains room for banks and service providers with particular strengths in particular areas. But the largest companies are also generally looking for the full gamut of services – funding, cash management, payments, flow FX, rates, advisory, capital markets and execution. "It’s hard for one bank to do all of these well."

While trying to ensure that they stay ahead of their natural peers, international banks are also being forced to confront a new threat in the form of local banks with aspirations to become regional or even global powerhouses – using the growth of clients with which they have deeply entrenched relationships to drive their own development.

For local banks seeking to compete with international rivals the path is not necessarily smooth and there are many factors working against them. The barriers to entry remain high in the quest to be a truly global bank. Foremost among these are regulatory barriers.

Delfin ‘Chito’ Gonzales, is chief financial officer at Ayala Corp, a powerful group within the Philippines, combining leading national businesses in real estate (Ayala Land), financial services (Bank of the Philippine Islands), telecommunications (Globe Telecom), utilities (Manila Water Company, among others), and various business process outsourcing, IT and automotive arms.

For Gonzales, who acts as CFO of the holding company for all these businesses, the emergence of local liquidity, and hence local banks, has been an important theme. "If we wanted to raise peso bonds and go to the local capital markets three to five years ago, the international banks would have a bit of an edge because they would be able to put things together," he says. "But in the last few years, so long as it’s a peso loan or bond, the international banks no longer have an advantage over the locals." Partly that’s because of international banks pulling back their own liquidity, he says, but also it’s about the market itself. "A lot of the peso liquidity that has grown over the last three years has basically gone to the local banks rather than the international banks."

Esperdy at JPMorgan accepts that such local competition is now a reality, but adds a note of caution for local banks seeking to compete with the largest international houses. "There are different layers of competition," she says. "Locals can undercut international banks on price but they can’t do the global business. That is not to say that some of them can’t become formidable competitors. But there are enormous headwinds for the industry – regulatory costs are huge. There are going to be fewer players able to sustain that financial commitment" she says.

The banking needs of Asia’s largest companies are multifarious and vary from company to company, according to Thomas Husted, finance director at Delta Dunia, the listed holding company of Bukit Mamkur Mandiri Utama (Buma), the second-largest coal-mining contractor in Indonesia. Delta Dunia is a regular fixture in the bond and loan markets, recently raising $600 million of debt financing, including a $315 million issue of senior secured notes subsequently refinanced through the loan markets. The nature of the company makes its banking needs quite distinct.

"We have more than 11,000 employees, and 10,000 of those are located in Kalimantan," explains Husted; Kalimantan is a vast Indonesian province covering most of the island of Borneo. "So cash disbursement and payroll is managed by local banks with branches in remote mining sites. We’re a bit different from other companies, which can solely rely on international banks. We end up having diversified banking relationships that match a bank’s strengths to our needs. We use international banks for offshore revenue collections, liquidity management, capital markets and loans, and local banks for cash management, payroll, loans and FX."

Local banks themselves are changing in several ways. As well as having larger balance sheets, there has also been a rise in sophistication, in the form of products and systems. Internet banking is now the norm with most local banks, which is particularly relevant for FX purposes, transfers and payroll administration.

"On the capital markets side there is greater savviness in how they do lending. They have much larger balance sheets, a lower cost of funds, and as Indonesia’s rating has come up, that cost of funds has gone down significantly," says Husted.

Like many commodity specialists, Buma is largely a dollar-based company with local operating expenses and salaries in rupiah – historically not the most stable of cross-rates. Here, too, the line between international and local standards has blurred. "With FX trades, we find the large local banks like Mandiri to be very competitive with any foreign bank. Pricing, systems and process are well delivered," Husted says.

For all their convergence with international competitors, as local banks grow and evolve variations do arise.

In processing credit, according to Husted, foreign and local banks follow a notably different process. "Local banks are smart in regards to what exposure they want, and are much more aggressive with the balance sheet, but are less concerned with legal drafting and there is not a local equivalent to the APLMA standardized process found offshore." Like many other treasurers, he reports the return of the Japanese banks as big lenders, as well as Singaporean homegrown names such as DBS. "If you want a big loan in this market, those are the core banks to go to along with key local banks." He reports that 18 months ago many European banks, traditionally strong in this market and particularly in project finance, stepped away, but they have returned in the past six months.

Country Garden, perhaps the leader among a cluster of Chinese real estate companies that have been frequent issuers in a range of currencies over the past 10 years, provides an interesting example of how international and local banks can work alongside each other to the good of the client. In terms of bank selection, recent Country Garden deals mix local and international names; a recent January 10-year had Goldman Sachs and JPMorgan as bookrunners alongside Bank of China and Industrial and Commercial Bank of China as joint leads.

"The biggest advantage of having the international banks is their experience and knowledge of international business and multinational corporations," says Estella Ng, Country Garden’s chief financial officer. "We need them for the execution. Local banks know the local culture because of the long history and extensive networks in the country. They can understand a local customer like us, and how regulators make decisions."

The distinction between the roles of international and local banks is arguably sharper in China than elsewhere, as to a large extent regulation stops overlap taking place between the two camps. "The distinction still exists. Local banks still cannot provide all services in other markets, to be frank," Ng says. "And local government and policy mean it is not easy for internationals to penetrate into the market."

This attitude has often led Chinese issuers to appoint a great many lead managers to a deal – eight or nine is not unheard of, and often on relatively small transactions, to the considerable annoyance of international banks. Country Garden has not tended to do this – four is a fairly frugal selection for a Chinese issuer on a $750 million deal – perhaps because deals with a multitude of bookrunners often tend to use some of them not as investment bankers but as unofficial cornerstone investors. Country Garden, having a wide investor following, hasn’t needed to take this route.

"We look at several factors when we select bankers," says Ng. "We look at service, size and financial strength. They have to be financially strong or face restrictions by the regulators. The fee must be competitive. Location is another; we try to find one with a branch locally, or close to a project location. And then there is the knowledge of the banker: one who can be a good sounding board, who can help with our strategy and objectives." The issuer tends to stick with favoured and familiar names: Goldman and JPMorgan have been on most key international deals over the years, sometimes joined by Deutsche Bank. For local joint leads, "a newcomer that joined the last transaction had a long-term relationship through construction loans," Ng says.

"Since the financial crisis we noticed international banks being less available for liquidity, because the way banks can do business has changed," she says. "Banks need more collateral and buffers than they did in the past."

As with its peers, there is more to Country Garden’s needs than just capital markets. "As we grow, we need more transactional banking services," Ng says. "The property business is capital intensive, so cash is very important. It can be the biggest factor limiting us, and overstretching can be fatal. We have a structure to pool cash and improve funding." Like Lenovo, the company has some expenses in dollars, while revenues are chiefly in renminbis, although as Country Garden has expanded into Malaysia the sources of revenue have begun to diversify. "We welcome the internationalization of the renminbi; a stronger currency will benefit us," Ng adds.

One could argue that Capitaland is a corporate equivalent of its Singapore counterpart, DBS Bank, which is perhaps no surprise given their common state part-ownership through Temasek.

And just like DBS, Capitaland is something of a flagship of the island nation and has sought to grow from domestic roots. Today Capitaland and DBS are similarly diversified: as of December 2012, Singapore accounts for only 33% of total assets and 44% of group ebit; China is 39% of assets, Australia 16%, Europe 3% and elsewhere in Asia 9%.

Along the way Capitaland has pioneered the Reit market in Singapore, considered the region’s most diversified and successful; it has six Reits around the region and $37.1 billion under management in them and other financial products.

This expansion has brought a need for more complex banking services. "We have become more sophisticated," says Capitaland, in written answers to Euromoney, noting that as it has grown it has tapped its network relationships with the banks in the regions where it has grown.

One might conclude that would favour international banks, but asked if locals have grown into international banking areas, Capitaland responds: "Yes, there is a growth of prominence for the local banks."

That appears to be more the case in transactional than capital markets needs, though. "In the debt and equity capital markets, the local banks continue to make inroads in some products, but the international banks continue to play a more significant role simply due to the breadth of their network and expertise."

In practice, Capitaland’s landmark deals, like many others, tend to mix locals (particularly DBS) and internationals known for a big local presence (both HSBC and Standard Chartered, for example, which accompanied DBS as joint leads on a landmark $645 million commercial-mortgage-backed securitization in June 2011, occupy iconic buildings on the Singapore waterfront and are big local employers). Capitaland’s most recent big IPO, of the CapitaMalls Asia shopping centre operator, combined DBS, JPMorgan, Credit Suisse and Deutsche.

Capitaland says it selects banks "based on the most optimal terms, advice, and track records of the banks" regardless of their origin.

Gonzales at Ayala singles out one particular recent deal as a good example of the banks that have best taken advantage of growing local liquidity. Ayala raised P10 billion ($245 million) in 15-year funds – the longest-ever maturity in the Philippines – last year, paying just 120 basis points over government bonds to do so.

Eight bookrunners were used, mixing five locals (BPI Capital, BDO Capital, First Metro Investment Corp, RCBC, SB Capital) with three internationals (HSBC, ING and Standard Chartered). "That was a benchmark deal, so we wanted to make sure we had the banks that could support it," Gonzales says. "But the international banks were ones that were already operating here, with good access to either high-net-worth individuals or local corporations and were able to add value to the process." Other deals have varied in their selection of bookrunners; a P6.45 billion block trade in July was sole led by Deutsche Bank "because they clearly had one of the strongest market shares in Philippine trades," while Ayala Land raised P13.6 billion in a primary share sale the same month with a mixture of local and international names.

Gonzales says he typically sends out a request for proposal and then takes into consideration "who can give us the best deal at any point in time", bearing in mind existing relationships, but generally concluding that "we would have to go with whoever gives us the best pricing". He says: "We need to work with banks with a fairly large balance sheet, but additionally are looking for banks that are innovative, creative and can offer us new solutions."

This comment sums up the competitive landscape across the region. Although balance-sheet heft is important, it is not the be all and end all. Intellectual capital is as important as ever; banks need to be loyal and useful partners to rapidly expanding Asian multinationals.

For international and local banks alike, the competition to bank the largest Asian companies is well and truly on. The winners will be those that recognize the needs of these clients early enough and well enough to ensure that they are on board for the ride as Asia’s champions plot their path to global dominance.