ASEAN is a key strategic market for Korean financial companies, as it represents a promising new source of sustained growth for an industry that is reaching the limits of growth in a saturated domestic market. For Korean companies to compete effectively with local financial compnies in ASEAN member states, it is crucial to have a deep understanding of ASEAN's financial industry, and furthermore to be aware of its current competitive landscape.
Recently ASEAN has begun earnestly to promote ASEAN financial integration with a view to enhancing the region's financial infrastructure and financial competitiveness. According to a commonly used concept of financial integration, a financial market is considered integrated if all market participants face a single set of rules, have equal access to the market, and are treated equally when engaged in it. More broadly, it indicates a state or a condition whereby connectivity among disparate financial markets increase beyond national borders. Thus, financial integration in ASEAN, literally, means integration of financial markets among the ASEAN member states, to stimulate economic growth and accelerate the process of forming an integrated community in the long run, through enhanced intra-regional investment (capital) and trade (goods and services).
Due to considerable differences in market size and the stage of financial development among the member states, establishing a single financial market in ASEAN might be an overly ambitious goal. However, the sustained economic growth of the region, and domestic financial companies’ vigorous efforts to expand overseas business and generate new sources of profits, makes ASEAN a highly strategic region. Thus we need to pay closer attention to the development of economies and financial markets in ASEAN.
The main objective of this study is to investigate current conditions and characteristics of ASEAN financial markets and the financial industry, particularly those of Singapore, Malaysia, Indonesia, and Thailand, and project future changes that may occur during the course of financial integration in ASEAN. These would help financial companies from Korea establish strategies to enter the Southeast Asian market. Since ASEAN is a strategic market for Korean financial companies with respect to continued growth and profit generation-especially when it is hard to find new opportunities within Korea-an understanding of financial markets of major ASEAN countries, including the current landscape of market competition, is critical for Korean companies to compete effectively in the region.
To this end, we must examine the historical and geographical characteristics of major ASEAN countries, as well as the current state of their economy, financial markets and financial industry. This article is structured as follows. Section II looks at ASEAN member states’ internal economic conditions (e.g. GDP, per capita GDP, economic growth, industrial structure) and external factors (e.g. trade volume and characteristics). Major macroeconomic indicators including exchange rates, policy rates, inflation, and unemployment rates are also examined. The analysis focuses on Singapore, Malaysia, Thailand, and Indonesia, and discrepancies among these countries are discussed. Additionally, the characteristics of the financial industry—specifically the banking sector and financial investment&# 8212;are examined. Also, given the significant importance of “Islamic finance” in the region, the topic is discussed separately in the Appendix.
Section III examines the current state of financial integration in ASEAN and draws implications for Korean companies. Different features of financial integration between ASEAN and the EU are highlighted, as well as impediments in ASEAN financial integration. Also discussed is the question of how the process of ASEAN financial integration affects regional financial markets and industries. Most ASEAN member states have bank-based financial markets, and have relatively less developed capital markets. Meanwhile, ASEAN-based banks are small in asset size compared to their European counterparts. In addition to this gap with advanced countries, there is a wide discrepancy across ASEAN as well. And there is diversity and divergence among policy measures adopted by individual ASEAN member states to strengthen their banking industry: Some emphasize overseas forays to pursue more M&A deals (e.g. Malaysia, Singapore, Thailand), while others focus on strengthening the domestic banking sector (e.g. Indonesia, the Philippines).
Meanwhile, the gap is even wider among capital markets than banks across the ASEAN region. Singapore has become a financial hub of Asia with a highly advanced financial sector, and Malaysia and Thailand have nurtured well-developed capital markets over the years. Capital markets in Indonesia and the Philippines are growing steadily, while those in the BCLMV (Brunei, Cambodia, Laos, Myanmar, and Vietnam) are still in an embryonic stage, with acute needs to build financial infrastructure and regulatory frameworks.
In this regard, a two-step approach has been made for ASEAN financial integration. The first is a “Two Speed” strategy to achieve partial integration first among the ASEAN 5 countries, and then gradually close the gap with the BCLMV, to eventually achieve full integration. The second is a “Two Track” strategy to allow QABs (Qualified ASEAN Bank) free entry into the ASEAN market, and later examine whether to grant the same privilege to non-QABs. At this point, ASEAN envisions a partial financial integration—unlike the EU—in the banking sector by the year 2020. As this endeavor moves forward, ASEAN member states will lower entry barriers in financial markets, and financial companies from many countries would continue to enter the market, thus strengthening their competitiveness and diversifying sources of profit.
From the current condition of the ASEAN financial industry, we can draw several implications for domestic financial institutions, especially as they are making great efforts to penetrate overseas markets, faced with deteriorating profitability within the country.
Section IV investigates how the progress of ASEAN financial integration and subsequent changes in the financial market environment have affected business strategies of financial companies in the region. Based on this analysis, we try to seek an effective strategy for domestic financial companies operating in the region. Specifically, we analyze the strengths of major ASEAN-based financial companies and their peculiar business practices in the ASEAN region. Then we look at business operations of Korean financial companies in ASEAN, including notable characteristics and obstacles.
By analyzing some of the leading Southeast Asian financial companies&# 8212;CIMB (Malaysia), Maybank (Malaysia), DBS (Singapore), OCBC (Singapore), and Mandiri (Indonesia)—we draw implications for penetration of overseas markets. It is observed that only a handful of financial companies from advanced ASEAN countries like Singapore and Malaysia have a wide presence in the region, and their presence is heavily biased in major ASEAN states including Malaysia, Indonesia, and Thailand, while level of penetration in the BCLMV markets remains weak.
Financial industry in ASEAN shows several salient features. First, ASEAN-based banks are more competent than non-ASEAN-based banks in the region, while global companies are more competent when it comes to securities and asset management. It is because development of capital markets has been slower than banking markets in ASEAN. As a result, financial market growth has been driven by commercial banks, and many of the financial companies with operating in ASEAN are commercial banks that focus on retail banking. Second, Singaporean and Malaysian banks, with their large asset sizes and competitive edge, are focusing on penetrating overseas markets to diversify profit sources, and in the meantime, global financial companies have been increasing their presence and competing in these countries. Third, financial companies in ASEAN are shifting their strategy, from specialization in a particular business to diversifying business areas.
Meanwhile, several characteristics have been observed regarding Korean financial industry’s forays into ASEAN markets. First, the number of overseas branches has been growing since the global financial crisis. Second, these overseas branches saw their current net income improve in recent years, as well as localization indicators. Third, cases of M&A deals with ASEAN banks or equity acquisition have been increasing. KEB Hana Bank acquired PT Bank Bintang Manunggal in 2007 to conduct retail banking in Indonesia, and Woori Bank acquired Bank Saudara— which specializes in retail banking—to expand the business network throughout Indonesia.
As for Korean financial companies’ efforts to achieve greater penetration of the ASEAN market, several observations were made. First, they have been biased toward the BCLMV states, with many companies concentrated in similar business areas, thereby intensifying competition. Second, Korean business activities in ASEAN are heavily dependent on Korean companies and Koreans in the region. Third, overseas branches are mostly small in size, and lastly, due to limited information on local financial markets, Korean financial companies in ASEAN are exposed to uncertainty surrounding economic and financial fundamentals of ASEAN member states.
In light of these findings, we would like to propose several strategies for forays made by Korean financial companies into the ASEAN market. First, a strategy of localization would be suitable for banks, while investment companies need to focus on establishing a “global link,” given that banks try to expand overseas business operations to attract new consumers and enhance profitability, while investment companies need to strengthen global networks to secure funding and manage assets more efficiently. Second, Singapore would be an ideal location to foster wholesale banking, while other member states are more suitable for retail banking. In retail banking, localization is key to increasing market share, and thus, acquiring good-sized local banks e would be essential. In comparison, in wholesale banking, the key is location where sufficient funds can be secured at low costs. Thus, overseas branches need to be established in financial hubs like Hong Kong and Singapore, or places where Korean companies are doing brisk business. Focusing on wholesale banking could be even more effective through partnership with investment companies.
The development of financial markets and financial industry in ASEAN member states shows that while stock and bond markets are developed to an extent in Malaysia and Indonesia, money markets and derivatives markets are at a nascent stage. In other countries, these markets are mostly absent. Under these circumstances, financial companies in Malaysia and Indonesia are capable of providing brokerage services and playing the role of market maker in traditional stock and bond markets, but their capacity for prop trading or hedge fund investment is quite limited. Also, market-making is difficult in corporate bonds market due to its negligible volume. However, the market for corporate financing and principal investment could be tapped into, as transfer of ownership claims is established for corporations and securities, and depository and lending institutions (e.g. banks) are relatively well-developed. Asset management may be done for stocks and bonds, and possibly for real estates as well, as transfer of property ownership is permitted. However, investment needs remain weak in Indonesia and the BCLMV due to high deposit rates and relatively high level of price instability, and thus, it will be difficult to sell funds or other financial instruments in these regions. The BCLMV countries have weak financial infrastructure, which makes conducting brokerage services, market making, or prop trading difficult challenges. However, as progress is made in ASEAN financial integration, financial infrastructure in the region would continue to improve; and with a basic legal framework put in place that governs corporate financing, and transfer of company or property ownership, there would be more room for expansion of corporate financing and asset management in the region.
Lastly, other suggestions to reap more benefits from deepening financial integration in ASEAN would be to operate an educational program to train local financial experts, train and recruit ASEAN students studying in Korea, provision of greater government support for domestic financial companies to strengthen their networks in ASEAN, establishment of an early warning system to detect risks in ASEAN, and provision of timely information regarding changes in laws and regulations of the ASEAN member states.