Asian banking in the time of coronavirus

Coronavirus had infected more than a million people by the time this magazine went to press, causing more than 63,000 deaths and spreading to 209 countries from Wuhan, China, where it first appeared. And the numbers will only be greater by the time you read this. There is no price on the human cost of the pandemic, but the economic costs can, at least, be measured.

Australia, Malaysia, Singapore and Thailand and others have warned of possible economic contraction this year. Hong Kong, which went into recession last year after widespread political protests, now looks even worse off.

The United Nations has predicted the global economy will shrink 1% in 2020.

Even the more optimistic estimates make for depressing reading in this typically vibrant part of the world. The Asian Development Bank expects the region to grow just 2.2% in 2020, compared to 5.2% in 2019 and 5.9% in 2018 – although it predicts a rebound next year, with expansion of 6.2%.

Stock markets have plummeted. The S&P500 plunged more than 25% in the six weeks before Asiamoney went to press, wiping out three years of gains. Singapore’s stock market has fallen 25% since the start of the year. Hong Kong and South Korea have dropped about 20%.

Central banks have been quick to respond.

The US Federal Reserve has made two emergency interest rate cuts, pushing the base rate down to between 0% and 0.25%, and announced $700 billion in asset purchases.

The European Central Bank unveiled an asset-buying programme worth an extra €870 billion on top of what it was already spending.

Hong Kong, Indonesia, Malaysia, Thailand, the Philippines, South Korea and Vietnam have all cut interest rates, while the Bank of Japan has contemplated a move further into negative interest rate territory.

Governments are increasing spending.

Singapore has promised to spend S$55 billion ($38.4 billion), giving monthly payments to all Singaporeans and agreeing to pay part of all workers’ wages, while Hong Kong has unveiled a HK$120 billion ($15.5 billion) spending plan.

Where does this leave the banks? After the global financial crisis, banks had to meet tighter capital requirements; that meant they entered the coronavirus crisis in good shape, allowing some regulators to loosen capital guidelines.

China, Hong Kong, Malaysia and the Philippines have all either lowered capital requirements or allowed banks to dip into their reserves, ensuring banks have plenty of firepower to endure the economic slowdown.

“The big difference for banks versus where we were during the global financial crisis is that you’ve removed quite a few of the big issues,” says Carsten Stoehr, CEO of Greater China at Credit Suisse. “You don’t have much leverage in the system. Banks have substantially restructured their business models. Capital requirements are much higher. Banks are in a stronger position to weather the storm.”

They may even be able to help.

Singapore has corralled banks and insurers into joining a widespread support plan for retail customers, small and medium-sized enterprises and large corporations that rely on the debt markets for funding.

That is more ambitious than other countries in Asia, but some attempt at providing support is common across the region’s banking systems.

Some international banks have come up with their own initiatives.

Citi has announced cash payments for some of its lower-paid staff, including a HK$8,000 payment to Hong Kong employees making HK$470,000 a year or less.

HSBC has announced a freeze on principal repayments on mortgages, among other things.

These measures should ensure that banks survive the coronavirus with their balance sheets and their reputations largely intact, provided further waves of infections do not prolong shutdowns and social distancing indefinitely across much of the world.

But banks are being forced to face up to the possibility of lasting changes as a result of the coronavirus.

Bankers across Asia’s financial systems are now working from home. Will they ever go back to business as usual?

Investment bankers may need to know the ins and outs of discounted cash-flow analysis and contingent capital and be familiar with half the Greek alphabet, but fundamentally their job is simple: they advise executives on the best ways to raise capital, help them to find acquisition targets and give them honest advice about restructuring. They cannot do all this without first building good relationships with their clients.

The usual way of building those contacts has been upended by the coronavirus. Face-to-face meetings are now off limits, business travel is suspended and long nights in restaurants and bars have been replaced by calls on Zoom, Skype or Microsoft Teams.

That may be fine with existing clients, but it is detrimental to winning new ones.

“If you already have a connection with a client, video works perfectly fine,” says Jan Metzger, head of Asia-Pacific banking, capital markets and advisory at Citi. “But it’s not very good for establishing a new relationship. I need three or four physical meetings before I can be on a video call with the client.”

This view was echoed by several bankers interviewed by Asiamoney. Although it is likely that some parts of banking will see long-term change because of the coronavirus – particularly those areas that can be more automated such as risk management – deal-making will rely on the personal touch for a long time yet.

“A lot of great ideas come over a cup of coffee or a glass of wine,” says Daniel Wu, president of Taiwan’s CTBC Financial Holding.

“Social interaction is important because it’s how you establish trust. It makes for a better relationship,” Wu adds. “Conference calls, even video calls, don’t allow you [to] read the temperature in the room. It’s harder to connect with people or to read their body language. The important thing in meetings is feeling, and it’s hard to get that without face-to-face conversations.”

This means the day job of senior investment bankers will probably not be changed dramatically after the coronavirus abates. Their relationships – and their ability to build new ones – will still rely on physical meetings and plenty of business travel.

But other parts of banking operations are riper for change.

The most obvious is contingency planning. All large banks have a disaster recovery site, a key plank of their approach to non-financial risks. These sites allow banks to resume operations in the event of a terror attack, a natural disaster or any unforeseen event that makes their main office unusable.

But in a world where just one infected employee can bring down a whole team, splitting thousands of employees into large groups offers no solution.

Many banks have responded by telling staff to work from home. Others are continuing to split staff between separate sites or have told members of the same team to work on different floors. These plans are changing quickly as banks attempt to figure out in real-time how best to respond to a crisis that keeps evolving.

The adjustment to working from home has created inevitable headaches for large banks, stemming in part from regulations.

Phone calls on debt and equity syndicate desks need to be recorded, in line with Mifid II regulations. That means most banks need to have at least one person on these desks in the office at all times, although some are attempting to re-route calls to allow all staff to work from home.

That is only part of the equation. It is likely that banks will start considering their day-to-day operations much more conscientiously after the coronavirus.

Risk committees will become more important, warning not just about financial risks but wider issues that could hurt banks the next time something big hits.

“Some things will change overnight,” says Stoehr.

“People will become more aware of hygiene standards and the amount they travel,” he adds. “There are also changes the coronavirus is just going to accelerate, particularly the greater use of technology.

“You shouldn’t need swathes of people doing things manually. Not just in trade processing but in other areas such as client on-boarding and risk management, to name a few. How can you be more efficient? The impact of the coronavirus shows that the more efficient you become, the more resilient you will be.”

There are more urgent considerations for banks than changes in working patterns. Primary among them is how the crisis impacts their own clients and, as a result, their ability to generate revenue.

The region’s capital markets slowed dramatically in March, with bond and equity deals largely put on hold. About $8.4 billion was raised in Asia’s G3 bond market over the course of the month, but most of that was from private, club-style deals that did not go through the proper book-building process.

It was, in any case, a big drop from the $28.3 billion raised in March 2019, according to Dealogic.

But the slowdown could be temporary. Asia’s capital markets were showing some sparks of life when Asiamoney went to press at the beginning of April.

Insurance group AIA and Chinese search engine owner Baidu both sold dollar bonds, reopening a public bond market that had been shut for three weeks.

The coronavirus will almost certainly lead to a tough few quarters for banks in Asia, but few expect an existential crisis.

“The economic impact could be devastating,” says Citi’s Metzger. “There could be a gargantuan recession.

“But even in that situation, the services we offer our clients will be needed more than ever,” he adds. “Markets will do OK to well. Episodic deal flow is likely to be lower for a while, but that might not last for long. One of the busiest periods of my career was the November after the Lehman Brothers bankruptcy. When the markets re-opened, there was huge pent-up demand.”

Bankers can draw some degree of hope from the fact that China – by far the largest source of deals in the region – started to get the virus under control in the middle of March, posting several days in a row with no new domestic cases – although the return of travellers in late March led to another spike in cases.

Bankers also point to the fact that China, Hong Kong and other places in Asia have been through something similar before: the Sars epidemic between 2003 and 2004.

China’s response to the coronavirus has been much faster than it was during the Sars crisis, says Augusto King, head of the capital markets group at MUFG Securities Asia.

“China’s leadership appreciates the logic around needing to do things differently, make quick decisions and move very fast,” he says.

“And I think they know they need to be a lot more open,” King adds. “I hope they learn from this unprecedented situation and come out even stronger. We also need to be prepared that when China rebounds – and it most certainly will – it will rebound very, very quickly – and as an organization, we cannot be slow to react.”

There are longer-term risks that banks need to consider. The huge monetary stimulus by global central banks has brought the global financial markets back to a period of zero interest rates just as banks were beginning to see their net interest margins start to return to health.

“I worry most about zero interest rates,” says CTBC’s Wu. “That will affect the net interest margins of banks and the reinvestment yield for insurance companies, but we don’t know how long it will last. How do we survive through zero rates? For sure, we’ll need to cut costs. At the moment, we haven’t frozen hiring, but if our revenue gets hurt badly, we will.”

But while the response of global central banks has been dramatic, it also appears necessary. Monetary policy will not be enough to counter the economic fall-out of the crisis, which is going to require further fiscal stimulus. But it has sent an important signal to financial markets.

“There is still a chance of a ‘white-swan’ event: a vaccine or perhaps a hot summer that tames the virus,” says Metzger. “But given the level of uncertainty, no one is going to look back at this crisis and regret what central banks have done.”

Additional reporting by Addison Gong