KUALA LUMPUR: Financial integration in the Asean region will make the banking sectors more resilient to external shocks but do not expect the process to be entirely smooth warns Standard & Poor’s.
“This is because, as countries liberalise their banking industries, competition will intensify--trends that not all local players welcome," said credit analyst Chris Lee.
"Integration will also increase the risk of contagion and spillover effects within the region - when one system gets in trouble, it will affect other systems too,” he warned.
The varying pace of liberalisation and divergent regulatory frameworks among Asean countries complicate the industry's consolidation."
The formation of the Asean Economic Community (AEC) in 2015 will see the flow of goods, services, investment, capital, and skilled labour liberalised between the countries, and, this could spur the emergence of major banks that can compete with large banks outside the region.
In addition, better economies of scale would also make financial systems within the region more efficient as the financial infrastructure of each country improves and this would enable the banking sectors to be more resilient to external shocks.
Banks in Asean are mostly small by global standards and do not have the scale and footprint to compete effectively with global behemoth in particular, the fragmented banking systems in some countries, such as Philippines, Indonesia, and Vietnam.
"In our view, Asean's financial system still has a way to go to meet its goal of integration by 2020.”
The uneven pace of financial liberalisation in different countries, along with significant divergence in regulatory frameworks, could complicate cross-border mergers, added Lee.
One of the stumbling blocks to liberalisation and integration is acquisition costs.
“Characteristics that are specific to certain countries, such as strong family ownership of the banking sector in the Philippines and strong labour unions in Malaysia, also make industry consolidation more difficult.”
S&P’s described the financial performance and credit profile of banks in Asean, excluding Malaysia, remain stable”
"We believe asset quality will remain a major risk factor in ASEAN banks' credit profiles.
“Tighter monetary policy in the US and a subsequent increase of interest rates could trigger similar hikes in Asean markets,” he said, adding that households and companies with heavier debt-servicing burdens will be more vulnerable to such shocks.