Drivers of Supra-regional expansion in Asia

Written by Zennon Kapron || November 21 2013

To a large extent, Asian banks are in a somewhat enviable position. China is certainly the economic giant of the region, and if China’s economy slows, it does have knock-on effects, yet, the economies of individual countries in Asia, while interdependent, often expand and contract quite independently. This can mean a bank facing slower growth in Indonesia, might look to the Philippines or Malaysia for expansion. 

In addition to ‘escaping’ a slowing domestic economy, many banks are facing increasing domestic competition that is also driving the banks to expand across national borders.

These moves are often supported by domestic policies for international expansion that are key enablers for banks looking to enter a new country. For instance, China’s Go-Out Strategy encourages domestic enterprises including banks to invest directly in foreign countries. People’s Bank of China encourages domestic qualified banks to “go out” with a relatively low capital adequacy ratio, and asset balance to make domestic Chinese banks’ expansion easier.  

Nevertheless, banks themselves have to be in a healthy financial position. In the past decade, Chinese commercial banks have appeared highly profitable with a fixed interest rate spread that gave essentially guaranteed profits. With many years of operations in such conditions, the major “Big Five” state-owned banks already in a strong financial position to enable their expansion.

The question is if the Chinese banks can continue their rapid expansion as interest rates in China continue to reform and liberalize. Similarly in Indonesia, where growth has slowed rapidly – will a deteriorating domestic environment stymie plans for international expansion?