Why the days of Western banks in Asia are clearly numbered

N. Balakrishnan says the rising might of Eastern rivals and their own eroded reputations indicate that Western lenders, often guilty of bad choices, may become just a historical footnote within a generation

PUBLISHED : Tuesday, 23 August, 2016, 4:02pm
UPDATED : Monday, 05 September, 2016, 11:30am

Many people already know that Chinese banks are some of the largest in the world. But I was astonished to learn recently that some banks in India have a market capitalisation greater than the mighty Deutsche Bank. One is the HDFC Bank, founded in 1977. Deutsche Bank was founded in 1870. Kotak Mahindra Bank, only formed in 1995, is another booming Indian lender. Set up by a group of friends with US$40,000 sourced from their cotton-trading business, it now has a net worth of some US$7.6 billion.

Yet, these are not even among the four largest banks in India. The behemoth is the government-owned State Bank of India. But even this has assets that are only about a tenth of the largest bank in China, the Industrial and Commercial Bank.

Meanwhile, large banks based in the developed world, such as HSBC, are buying back their shares, basically saying they have run out of investment ideas.

What can explain the mysterious sell-off in global banking shares?

As they say, history surprises only those who do not follow current trends. For example, in the early 20th century, the US economy was already larger than that of Britain or France, but it took another 50 years for it to lead the world. However, the trends favouring the US were there for anyone with an objective eye to see.

Similarly, how long will it be before a Chinese bank takes over Standard Chartered or HSBC? Such an idea may sound far-fetched or even unpleasant to some but, if current trends continue, it is inevitable.

How long will it be before a Chinese bank takes over Standard Chartered or HSBC ... if current trends continue, it is inevitable

That will be a major milestone in the economic history of Hong Kong, similar to how the takeover of Hutchison Whampoa by Li Ka-shing in 1978 marked the ascendancy of local Chinese capital over the colonial companies of Hong Kong. Standard Chartered is already part-owned by Singapore sovereign wealth fund Temasek Holdings, which bought it from Singaporean banker Khoo Teck Puat, who bought into Standard Chartered in 1986. So this bank is no stranger to “Asian” ownership despite being headquartered in London.

The mystery is why HSBC should continue to base its headquarters in London when the bank makes about two-thirds of its profits from Asia. The official line is that HSBC is committed to expanding into China but it could have done so earlier. In the 1990s, internal surveys indicated older mainland Chinese still had a good opinion of “Wayfoong”, as HSBC was known, and that would have been the time to expand into China.

HSBC could have bought its iconic old Shanghai headquarters for a fraction of the sum it would later lose through its US purchases, such as the acquisition of subprime mortgage financier Household International. Reports said the Shanghai government was asking too much for the building but it could not have been close to the US$12.1 billion HSBC paid for Household International in 2002, at a time when the US housing market was peaking and the bank had little experience of the US consumer loan business.

We Asians believed that the ‘white man’ ... was more honest when it came to financial dealings

That acquisition was a disaster. Cultural factors come into play in investment decisions more than most people would care to admit. Would HSBC top management executives sitting in Hong Kong rather than London have chosen to expand into the wobbling US rather than booming Asia?

For a long time, we Asians believed that while the “white man” may not have good food or social graces, he was more honest when it came to financial dealings. No less a person than Lee Kuan Yew, not an admirer of many “Western” values, remarked about the financial honesty when he was a student in England. He was astounded that piles of newspapers were left unattended in London and people just picked up a copy and left the correct change. It was on the basis of such honesty and hard work that the reputation of “British” banks were built. By contrast, “Western” banks now seem to be making the news more for rigging foreign exchange rates and money laundering.

Anyone who visits colonial graveyards in Asia will note that many of the early imperialists died young from cholera or the plague while trying to make their fortunes. They were not sitting pretty in their offices in London’s Canary Wharf.

In a generation, “Western” banks in Asia will be just a memory and a historical footnote. Those who don’t believe it must be the descendants of those who thought Toyotas could never replace Morris Minors.

N. Balakrishnan is a Hong Kong-based businessman