Year: 2017

China continues shadow banking crackdown with Guangzhou raid

Posted on by Ashton Wenborn

The Chinese Government has continued its assault on the country’s shadow banking sector following the shutdown of an illegal operation on September 26 in Guangzhou. The organisation, which was operating out of a food market in the city, stands accused of funnelling $70m out of the country in the last month alone.

Local newspaper China Daily reports that more than 10 bank accounts were frozen to prevent further cross-border asset transfers. The area around Guangzhou has become something of a hotbed regarding illegal financial activity in 2017.

Three large underground banks have already been shut down in the south China province this year and more than 30 suspects have been detained.

The recent closures are also part of wider attempts to tackle the climate of shadow banking in the country. In 2016, the Chinese authorities closed 380 underground banks dealing with more than $135bn.

Three large underground banks have already been shut down in the south China province this year and more than 30 suspects have been detained

According to Reuters, the country is particularly keen to stem unofficial financial activity in order to “prevent and resolve risks from cross-border capital flows”.

Shadow banking was also cited as a major contributing factor to 2008’s global financial crisis, but recent claims by high-profile economists suggest that this threat has largely been resolved. However, developing economies such as China remain at risk, particularly as traditional forms of banking are often restricted.

As the government in Beijing attempts to keep a tight rein on new loans, difficulties in achieving credit may push borrowers towards unregulated sources. In fact, the People’s Bank of China reported that shadow banking contributed 15 percent towards all corporate financing at the end of 2016.

Financial institutions need to perform a delicate balancing act if they are to discourage the growth of shadow banking while maintaining economic control. The continued arrests in China indicate that work remains to be done on this front.

Airbus increases footprint in China with new aeroplane completion plant

Posted on by Ashton Wenborn

On September 20, European aircraft manufacturer Airbus opened a completion plant in China, with the aim of meeting surging demand in the world’s fastest-growing aviation market.

The opening comes at a time when increasing passenger numbers are boosting business. Looking ahead, China is expected to spend over $1trn on aeroplanes over the next two decades, Reuters reported.

With this projected growth in mind, Airbus is increasing its footprint in the country with hopes to turn favourable forecasts into profitable orders. Until now, Airbus’ presence in China has been limited to a final assembly line for A320 jets, operating since 2008 in Tianjin, in the north of the country.

The new plant, also located in Tianjin, will focus on the company’s A330, a profitable wide-body jet, the demand for which has slowed in recent years amid an upward trend for more agile planes. Now, Airbus estimates that airlines’ demand for large planes could reach 60 to 100 over the next five years.

Airbus is increasing its footprint in the country with hopes to turn favourable forecasts into profitable orders

The strategic move is a joint venture with two Chinese companies – the Aviation Industry Corporation of China and Tianjin Free Trade Zone Investment Company – and is the materialisation of an agreement first made in 2014, when President Xi Jinping visited France, home to Airbus’ headquarters.

As with operations worldwide, the European aerospace firm will also face competition from Boeing in China. The US rival plans to build a 737 completion plant to increase its presence in the China, in partnership with Commercial Aircraft Corp of China.

The market seems to have room for both. According to the International Air Transport Association, there will be a sharp growth in Chinese air travel in the next 20 years, with passenger numbers reaching a record 1.3 billion, from 817 million in 2016.

Tata Steel and ThyssenKrupp merger creates Europe’s second-largest steel producer

Posted on by Ashton Wenborn

German steel firm ThyssenKrupp and India’s Tata Steel announced a non-cash merger on September 20 as part of a 50/50 joint venture. The two companies’ joint European operation, which will trade under the name ThyssenKrupp Tata Steel, is expected to be operational by late 2018.

The merger has been in the offing some time now, but Tata’s £15bn ($20bn) pension scheme had proved a major stumbling block. However, a recent agreement with regulators and employees allowed negotiations to go ahead. The new company, which will become Europe’s second-largest steelmaker, is predicted to have an annual turnover of €15bn ($18bn) and consist of 48,000 members of staff spread across 34 locations.

The proposed merger is accompanied by some harsh economic realities. Although the two companies envision annual cost savings in the region of €600m ($721m), they will also be sharing approximately 4,000 job cuts, to be divided between administration and production teams. The merger comes at a time when difficult choices need to be made in pursuit of efficiency.

Although the two companies envision annual cost savings in the region of €600m ($721m), they will also be sharing approximately 4,000 job cuts, to be divided between administration and production teams

“We will not be putting any measures into effect in the joint venture that we would not have had to adopt on our own. On the contrary: by combining our steel activities, the burdens for each partner are lower than they would have been on a stand-alone basis,” explained Dr Heinrich Hiesinger, CEO of ThyssenKrupp.

In his statement, the CEO alluded to the current financial difficulties facing the European steel market. Cheap imports, predominantly from China, have depressed prices and dented profitability.

Although the merger could prove promising for some of Tata’s struggling steelworks, including the Port Talbot plant reported to be losing £1m ($1.36m) a day last year, more will need to be publicised regarding the new company’s business plan. Until then, the steel industry’s uncertain future looks set to continue.

Toys R Us files for bankruptcy in the US

Posted on by Ashton Wenborn

On September 18, Toys R Us, the largest toy retailer in the US, filed for bankruptcy for its operations in the country, overwhelmed by debt and hit by increasing competition from online retailers.

The toy store chain became the latest brick-and-mortar retailer affected by changing consumer habits in the digital era. Customers’ proclivity for online shopping has impacted other players like Danish toy maker Lego which, earlier this month, announced plans to cut 1,400 jobs from its global workforce after its first sales fall in 13 years.

Now, Toys R Us’ bankruptcy filing casts doubt on the security of its 64,000 jobs and 1,600 stores, although the company has not yet announced any closures. According to Reuters, in a statement, the company said its stores and e-commerce sites are open for business.

Michael Freitag, a spokesperson for Toys R Us, told Bloomberg: “Like any retailer, decisions about any future store closings – and openings – will continue to be made based on what makes the best sense for the business.”

Now, Toys R Us’ bankruptcy filing casts doubt on the security of its 64,000 jobs and 1,600 stores, although the company has not yet announced any closures

Meanwhile, the company made clear that the filing only includes operations in the US, meaning that licensed stores and partnerships outside the toy retailer’s home country are not part of the bankruptcy.

Once part of the Fortune 500 ranking, Toys R Us has now started legal proceedings in the US Bankruptcy Court in Richmond, Virginia. In the documents submitted, it declared debt and assets greater than $1bn each, Bloomberg reported.

Neil Saunders, managing director of market intelligence firm GlobalData Retail, said: “While today’s decision does not necessarily mean it is game over for Toys R Us, it brings to a close a turbulent chapter in the iconic company’s history.”

In addition to online competition, which has reduced the number of customers walking into stores in recent years, the company’s filing for bankruptcy was also attributed to a $6.6bn buyout in 2005 that increased Toys R Us’ debt.

Obligations in the near future include bonds, the prices of which collapsed during this month, that are due in 2018, Thomson Reuters data showed.

Country by country reporting: managing your tax reputation risk

Posted on by World Finance

The OECD’s BEPS initiative was a response to rising public anger at multinational corporations’ aggressive tax planning. The BEPS actions make companies’ transfer pricing arrangements more transparent to tax authorities – but there’s concern it will go further. This is the final part of a three video series with Vertex: if you haven’t already, watch Bernadette Pinamont discuss the main challenges adapting to country-by-country reporting, and Nanzo Manzano explain how businesses can update and future-proof their processes.

Bernadette Pinamont: Companies must assume – and be prepared for – the country-by-country report in particular to be made public, and/or potentially leaked. And they must be ready to defend themselves, and state their facts and circumstances in public, to defend how aggressive or conservative they may have been in tax planning.

Nancy Manzano: Tax reputational risk is not super brand-new. I mean, back when I was leading tax departments, you know: we didn’t want any bad tax news showing up as a headline. Nowadays that’s probably not good enough. There is so much media attention down to a very grassroots, social media level, around this issue of base erosion and profit shifting, and all of the things that companies are doing to avoid paying tax. That it’s very much something that on a daily basis companies need to be paying attention to.

We need to make sure that the tax story that the company has created for itself is something that they can explain to not just tax authorities, but to the general public as well. Because the public is really hungry for, you know, the kind of tax transparency that the country-by-country report is providing. The problem is, they just don’t know how to interpret it.

Bernadette Pinamont: Many companies will say the CbCr report is only nine elements; it is not the whole story, it is not the whole value prop for transfer pricing, it only tells you a certain slice of the picture.

Nancy Manzano: So, giving them that access to that information, without some defensible and understandable language would be really risky. I think some education around the full economic picture of the base erosion and profit shifting initiative, and the changes that it could bring about, could be really helpful for people to understand.

World Finance: So how do tax professionals need to adapt to this new age of tax transparency?

Nancy Manzano:  I think tax people in general kind of have this tendency to hold back, just a little bit, until they know that something’s really real. Until they have all the information around that something. But I think the pace at which things are coming at tax departments nowadays – they don’t really have that luxury anymore, to kind of wait.

Bernadette Pinamont: The tax department of today has to be even more agile and quicker. They are always challenged with new administrative filing requirements, new legislative changes, new audits, whether it’s aggressiveness by a local state or municipality, or it’s the countries. And they’re forced with looking at some pretty quick turnaround times to be able to inform their CFO or CEO what does that legislation mean that I just read this morning? And that will be their future.

Nancy Manzano: We’re shifting to a world where doing things using manual processes time after time is becoming even more risky, with each new initiative, with each new public disclosure requirement. So you’ve got to find systems and processes that can help you get through that, and you’ve got to have the right technology, and you’ve got to have the right people to run that technology in the tax department.

Finally – and I think most importantly – we’ve really already entered into a world where tax shaming is commonplace. Now tax departments really in earnest have to be able to stay away from the prying eyes and ears of the tax paparazzi.

So, I would say: be ready. To answer the questions from whomever they come. Whether they be internally or externally. Be ready.

Country by country reporting: future-proofing your processes

Posted on by World Finance

Tax departments in multinational corporations are preparing to meet the OECD’s country-by-country reporting standards. Not only do they need to be ready for year one, but they need to future-proof their processes to be equipped for further changes. This is the second part of a three video series with Vertex: if you haven’t already, watch Bernadette Pinamont explain the challenges in country-by-country reporting, and then watch Nancy and Bernadette discuss tax reputation risk.

Nancy Manzano: Multinationals should be asking themselves a number of questions to assess their readiness for the upcoming country-by-country reporting requirements.

Where’s my data going to come from? What kind of systems does it reside in? And can those systems provide the data in the right format? For example, in legal entity format, as opposed to maybe, management reporting format.

Do they have control over the data that they’re going to be asking for? A lot of times they’re not even done in the same financial systems that maybe the corporate headquarters uses to produce the financial statements.

Next, they should be asking, well, do I need to invoke any new processes or implement any new technology to help me perform the tasks that I need to, in order to complete the country-by-country reporting?

And then, once the data is collected, all those sources are identified, can I easily reconcile that data back to other supporting documents.

World Finance: Deploying the right technology at the right points in the workflow will help tax departments be more efficient in collating, reporting, and reconciling all the information that they need.

Nancy Manzano: Multinationals are going to need to be able to address the inherent data management issues around the collection and the conversion and the aggregation of the data by country. The goal here is to create this repeatable, accurate, efficient process that they can use year after year to be able to do their country-by-country report.

The technology that they choose is going to need to be able to handle the multiple sources of data in the multiple formats that it may reside. It’s going to need to be able to identify errors – hopefully earlier in the process, as opposed to later in the process. It’s going to need to help them minimise the manual work that they have to perform on the data, because we all know that the more manual manipulation you have to do to your data, the riskier it becomes. And they’re going to need to reconcile that data back to those other financial filings: local country tax returns, worldwide consolidated financial statements, transfer pricing documentation and the like.

World Finance: And aside from adding to tax departments’ day to day, the country-by-country report presents some higher level challenges for MNCs.

Nancy Manzano:  The OECD has already said they intend to revisit the data that is presented on the country-by-country form in 2020, to see if there are additional data elements that they want to add.

Some of the other challenges are around, perhaps a lack of clarity around some of the definitions. Having enough resources to do the initial implementation, and all of the research, and delving into data sources that that’s going to require. As well as doing it on an annual basis, because this is going to happen year after year. And then also dealing with all the new audit activity around transfer pricing.

On top of all that – perhaps the most concerning challenge – is that we’ve got a whole new risk being introduced to the tax department, and that is what we call tax reputation risk. Really a new concept for the tax department to manage.

Country by country reporting: is your business ready?

Posted on by World Finance

After years of political pressure around corporate tax avoidance and transfer pricing, the OECD announced a plan to address base erosion and profit shifting. Its recommendations – 15 actions – are now being adopted by its member countries. Tax automation experts Vertex are helping multinational corporations prepare – and they’re finding businesses are particularly concerned about action 13, and the country-by-country report. This is the first part of a three video series with Vertex: watch Nancy Manzano explain how to update your tax processes, and then watch Nancy and Bernadette discuss tax reputation risk.

Bernadette Pinamont: Action 13 has three components: it has the master file, the local file, and the country-by-country report. And certainly the country-by-country report is grabbing all of the headlines.

Some global multinationals are worried about filing the country-by-country report. Some are worried that it will be leaked, and it will be in the press for all to see, and they will need to step up to defend what is on the country-by-country report.

Some are worried about the expected increased audits. Large global multinationals are already seeing their audits change; and by change I mean, the aggressiveness of the audit is changing. So many companies are more focused on reviewing their transfer pricing methodologies and looking at their contracts and their substance.

World Finance: This is further complicated because countries are adopting and adapting the OECD’s recommendations in three different ways.

Bernadette Pinamont: The first is that there are many countries who are following exactly the OECD guidelines – the form itself, the timeline for adoption and filing: following exactly the guidelines as prescribed.

There’s a second group of countries – the US, for example – where we did not adopt action 13 in full. We did not adopt the master file and local file, and the reason for that is that the US has always had documentation compliance for transfer pricing, and it covers the majority of what the OECD guidelines for master file and local file prescribe, and there was no need for the US to adopt those.

And there’s a third group of countries like Mexico, which are adopting action 13 in full, but then with respect to the country-by-country report, adding to the requirements of what needs to be disclosed. For example, details around intercompany royalty transactions. So they’re expanding the requirements and the details on the report.

World Finance: They also need to prepare for the existing requirements to change. The OECD has already announced a review of its actions for 2020.

Bernadette Pinamont: Multinationals need to keep an eye on a lot of information and detail on their intercompany transactions with related parties, because I do believe that that’s where some of the expansion is going to be.

I think the potential for the audit creates another challenge for companies to think about. And that is even though the OECD guidelines don’t ask for any reconciliation of the country-by-country report to other documents, if you’re faced with an audit and it’s a transfer pricing audit, they need to be ready to reconcile the country-by-country report to existing transfer pricing documentation, to other forms that they filed with intercompany transactions detailed, and they have to be ready to reconcile that to financial statements, both local, statutory financials, and audited worldwide financials.

Central banks look to launch own cryptocurrencies

Posted on by Ashton Wenborn

While cryptocurrencies like bitcoin and Ether enjoy an enormous surge in interest, several central banks have been quietly exploring the idea of creating their own digital currencies.

A publically available digital currency issued by a central bank would be totally unchartered territory, but would do away with the inherent volatility of traditional cryptocurrencies while retaining their anonymity and peer-to-peer capabilities. And yet, as the Bank for International Settlements outlined it its recent special feature report, they would also have far-reaching economic implications, such as potential bank runs and changes to monetary policy.

A publically available digital currency issued by a central bank would be totally unchartered territory, but would do away with the inherent volatility of traditional cryptocurrencies

The report outlined the theoretical example of ‘Fedcoin’: “Unlike bitcoin, only the Federal Reserve would be able to create Fedcoins and there would be one-for-one convertibility with cash and reserves. Fedcoins would only be created (destroyed) if an equivalent amount of cash or reserves were destroyed (created) at the same time. Like cash, Fedcoin would be decentralised in transaction and centralised in supply.”

As the report notes, the introduction of digital cash could cause consumers to forgo commercial bank deposits and instead opt to bank directly with the central bank. This could render banks less able to perform “essential economic functions”, like monitoring borrowers. Another danger is that bank runs could occur more quickly if people were able to easily convert their bank deposits into risk-free central bank liabilities.

“In making this decision, central banks will have to consider not only consumer preferences for privacy and possible efficiency gains – in terms of payments, clearing and settlement – but also the risks it may entail for the financial system and the wider economy, as well as any implications for monetary policy,” the report concludes.

BMO’s new digital services help businesses bank from home

Posted on by World Finance

As businesses embark on their digital transformation journey, they’re investing in making their activities more automated, more efficient, and ultimately, easier for staff and customers alike. This extends to their finances too: BMO’s commercial clients simply want to focus on managing their business, with their banking as easy and convenient as possible. BMO’s head of business banking Andrew Irvine explains how the bank is acheiving this for its clients. He discusses the latest innovations they’ve introduced, and the fintech pipeline they’ve created to foster collaboration with fresh graduates and entrepreneurs.

Andrew Irvine: So how has business banking in Canada evolved this year? I’d say, first and foremost, client expectations regarding simplicity, ease of banking, and particularly the ability to leverage digital channels, is ever-increasing. And we’re seeing that in our branch environment. If we look on a year-over-year basis, in-branch transactions are down double digits. And clients are essentially interacting with us digitally ever more.

That being said, one thing that hasn’t changed is our client’s desire for good, trusted advice. And that’s something that we continue to see in the marketplace as a differentiator for us.

World Finance: Talk me through the digital journey that your clients are going on.

Andrew Irvine: Clients want to manage their business, and wherever possible they want banking to be easy.

So from a digital standpoint, the more we can accommodate their service interactions at their own place of work, the better.

In Canada, cheques are still quite popular as a payment method. Particularly among businesses. And so we’ve created a capability that we’re the market leader on, where clients can scan cheques at their place of work through one of our scanners, and deposit those moneys right into their bank account, without ever having to walk into a branch. And they love it.

So it’s all about making their lives easier, and allowing them to go about running their business, versus thinking about their banking.

World Finance: Talk me through the workflow of those innovations – starting from the conversations with your clients, finding out that there’s a need you could fulfil; through to actually forming partnerships with the technological innovators.

Andrew Irvine: The first thing we do is, we spend a lot of time listening to our clients. Monthly surveying our customers; we also have regular advisory councils. Clients speak with us about areas where we are providing terrific service, and areas where we can improve our capabilities.

We also spend a lot of time working with accelerators and emerging companies to ensure that we’re leveraging the newest ideas that are coming out. So we have a relationship here in Toronto with a world-class accelerator called the DMZ – part of the Ryerson University. We’re inviting early-stage companies to apply to be part of the accelerator. We’ll choose to work with six of these companies, and we’ll mentor them over the course of four months, with the opportunity to actually do a proof of concept with them.

We did this programme last year, and we actually have one company, a company called FormHero, live on our website today. And we’ve seen improvement in the uptake of our credit card offering as a great example through the FormHero solution.

So really it’s about, first of all, listening to our clients; and then second of all, participating in the new fintech ecosystem, so that if there are ideas and opportunities that we like, we can bring them onto our platform.

World Finance: What challenges and what opportunities are you seeing for commercial banks today?

Andrew Irvine: We’re seeing a lot of new and interesting companies move in to the banking space. What we know to be true is that incumbent institutions like ours do a number of things very well.

First, we’re highly trusted. BMO’s celebrating its 200 year anniversary this year, so we’ve been in the banking business a long time. And that means that we have strong elements of trust, we have effective regulatory know-how, we know how to protect our clients’ data, and we have distribution. Those are very strong capabilities.

What we need to do is improve the capabilities we have so that payments are easier, more intuitive. One I might touch on is bulk email money transfer. This is the ability to send money to a client or customer of yours by just knowing their email address.

We need to be faster. When clients are coming to us about opportunities to grow their business, and potentially provide financing for them to do just that, they want us to be providing answers much more quickly.

We’re actually working on capabilities as we speak to simplify the adjudication of smaller loans – around half a million dollars and under – to be able to do that within 10, 20, 30 minutes.

World Finance: What else is next for BMO?

Andrew Irvine: I think it’s continuing to evolve our capabilities. The world doesn’t stand still, and the pace of change is ever-increasing.

What we know first and foremost is that client-centricity is critical. So we need to listen to our clients, to be a trusted advisor to them, and to build capabilities that they feel are relevant to them in making banking easier.

World Finance: Andrew, thank you very much.

Andrew Irvine: Thank you.

UOBAM (Thailand): navigating Thailand’s transforming investment market

Posted on by Max Tomlin

Over the past five years, the asset management industry in Thailand has changed considerably. Specifically, investment trends have now shifted away from a fixed-income-driven core. Investors are exploring more opportunities in the market – including investment solutions from foreign fund houses – to tap into the benefits of diversification.

Notably, a deregulation measure from Thailand’s Securities and Exchange Commission has also allowed accredited investors to invest in all securities. This means they can now buy funds that are invested into repurchasing agreements, hedge funds, securities lending and borrowing.

Capturing the growing opportunities of this rapidly developing market is UOB Asset Management (UOBAM). As one of the first asset managers in Thailand to introduce diversified investments and real estate subsectors globally, the firm continues to develop new funds across different market cycles, while also investing in new technology and providing responsive customer service.

From peer competition in Thailand to staying nimble in the face of technological changes, the firm is ahead of the curve when it comes to managing investments for clients. World Finance spoke to Vana Bulbon, CEO of UOBAM (Thailand), to get a better understanding of the company’s progress over the past year.

What progress has UOBAM made over the past 12 months?
For the year 2016, the company recorded historically high assets under management (AUM) of THB 306bn ($8.6bn) – this encompasses the full range of investment management services, including mutual funds, private funds and pension funds.

Amid the uncertainty in the investment climate, UOBAM (Thailand) has expanded the offering of products that can deliver sustainable returns during different market cycles. For example, we recently launched two foreign fixed income funds, a global asset allocation fund and a global real estate fund.

The company recommends the United Small and Mid Cap Fund (UTSME), which mainly invests in Thai small and mid-cap stocks outside the SET50 index. In 2016, UTSME generated a 35.5 percent return, compared with its benchmark at 19.79 percent. Consequently, UTSME has been ranked the top year-to-date performing fund among 571 Thai equity funds.

Are there any specific funds the company has developed recently?
A variety of funds have been established for customer demand. These include the Foreign Investment Funds, which were launched to capture income trends and investment opportunities – the end result is the creation of solid business fundamentals and highly attractive valuations. UOBAM (Thailand) also launched the United Income Daily Plus Fund and United Platinum Income Plus Fund, which invest in both local and foreign companies.

UOBAM (Thailand) has also stayed ahead of the market by exploring new products for distribution channels and investment innovation

It is worth noting that the United Income Focus Fund was created in order to provide regular income to investors with an all-round strategy, as it adopts a disciplined and multilayered risk management approach to mitigate risk and volatility. In addition, there is the United Flexible Income Fund, which has been structured as a global real estate fund with a flexible portfolio management strategy.

For the company’s private wealth investment arm, UOBAM (Thailand) has harnessed an in-depth understanding of its individual investors. This has enabled the firm to provide customised products and advisory services that cater to the changing investment needs of clients. As a result, AUM in 2016 increased 18.8 percent to THB 81.6bn ($2.3bn) from THB 68.7bn ($1.9bn) the previous year [see Fig 1].

What has made UOBAM (Thailand) so successful?
Throughout its 20 years of investment experience in Thailand, the company has continued to place a very strong emphasis on customer satisfaction. Indeed, customer service remains the bedrock, long-term business strategy, as well as in day-to-day operations. UOBAM (Thailand) has also stayed ahead of the market by exploring new products for distribution channels and investment innovation. This also includes being responsive to customers’ needs, as well as their changing requirements and expectations.

What are some of the products the company has introduced?
Our Foreign Investment Funds were launched in order to capture income trends and investment opportunities in the areas in which we had witnessed solid business fundamentals and attractive valuations. Leveraging on the collaboration within the UOBAM group – which has been named the Best Fixed Income Fund House by Morningstar – we recently launched the United Platinum Income Plus Fund. This fund invests in instruments that encompass Thai domestic and foreign fixed income investments, foreign deposits, Asian high-yield fixed income and contingent capital securities.

How is the company placed within the region?
One of the company’s strengths is its advantage as a regional fund house, which connects investment managers across the region and selects the best performing funds from them.

UOBAM is headquartered in Singapore and has an extensive presence throughout Asia, with regional business and investment offices in Malaysia, Thailand, Brunei, Japan and Taiwan. It has two joint ventures: Ping An-UOB Fund Management Company in China, and UOB-Sumitomo Mitsui Asset Management in Singapore. In addition, the company has forged strategic alliances with UTI International in India and Wellington Management in Singapore.

As a result of this extensive reach, the company has secured a wide array of investment opportunities through numerous regional and strategic partners, thus creating a distinct advantage over other local houses. Essentially, it is our regional network and presence that enables us to provide such an exciting variety of investment products, which in turn distinguishes us from our competitors.

How does the company analyse and manage risk?
We achieve success through an astute process of managing risk, conducting fundamental research and internal control. To achieve this, all of our stakeholders are given a clear understanding about the levels of risk involved at any given point, which is supported by our highly experienced risk officers, monitoring tools and review processes.

What are UOBAM (Thailand)’s plans for the coming year?
The company’s investment approach aims to provide a wide range of products for investors, thereby assisting them with finding suitable investment solutions and achieving their long-term objectives.

With this core objective in mind, UOBAM (Thailand)’s retail business strategy for later this year and next is to continue expanding the business and explore new ways to meet customers’ investment goals. With our foreign investment expertise and network of strategic partnerships, we are confident in achieving further growth and finding new opportunities for our customers. The company is also developing and upgrading its technology platforms at present, which involves revamping online trading platforms to enhance user experience, as more clients are now trading on the go. Finally, a mobile app should be available by Q3 2017.

What does the future look like for the company?
As a company, UOBAM (Thailand) is deeply committed to its customers, and we are grateful to be recognised across the industry. Looking forward, we will continue to provide a wide range of innovative investment products and services that will enable our customers to meet their investment goals – even with the changing economic market cycle. With this strategy in place, we will continue to drive the growth for the business.

By the end of 2017, the company expects to increase total AUM by 15 percent to more than THB 350bn ($10bn), from THB 306.2bn ($8.98bn) in 2016.
To do so, a two-pronged strategy will grow both the retail and institutional businesses. For the retail business, UOBAM (Thailand) will expand its distribution network, both through existing distributors and new distributors, in order to broaden our client base.

Moreover, we plan to increase the number of new agents that are fully equipped with the knowledge necessary to serve our client base. We are also making sizeable investments to upgrade our technology platforms. For example, we are using enriched data to help us better understand our clients’ needs, resulting in more strategised solutions. We also recently revamped the UOBAM (Thailand) website to enhance user experience for customers.

In the institutional business, the company will approach growth in two ways. For private funds, collaboration will be deepened with our parent company UOB (Thailand) to offer innovative investment solutions to our customer base. For provident funds, the firm is working with UOB’s personal financial services branch to develop a bundled banking and investment solution for retail banking customers.

Hiding in the shadows: the truth behind China’s controversial shadow banking sector

Posted on by Max Tomlin

In 2013, Bank of England Governor Mark Carney asserted: “The last financial crisis in the advanced countries is finished. The greatest risk is the parallel banking sector in the big developing countries.” Following Carney’s remarks, analysts were quick to point out that he was likely alluding to the fast-materialising Chinese shadow finance sector.

In the years since, aggressive growth in China’s non-bank financial institutions – from securities firms to trust and asset management companies – has led commentators to stress the threat of a Chinese shadow banking crisis, often warning that such an event could have global implications.

Such concerns were once again brought into focus in late April, when a regulatory crackdown in China triggered a dramatic exodus of funds from wealth management products known as ‘entrusted investments’. As the funds unwound, $315bn in stock market value was erased over the course of just six days.

It was against this backdrop that the Chairman of China’s Banking Regulatory Commission, Guo Shuqing, quipped the state of the Chinese financial landscape amounted to “chaos”. This incident confirmed the anxieties of many onlookers, who believed the Chinese shadow sector had become too large and unruly for authorities to control.

Shedding light on China
Though one could be forgiven for assuming the Chinese shadow banking sector was on the verge of collapse, this concern may be overhyped. While on the surface the sector appears to be growing at an alarming rate, this fact masks some of the more critical details regarding the nature of Chinese shadow banking.

Risks of shadow banking:

$34trn

Total assets at risk from shadow banking in 2015

$315bn

Stock market value erased
in 2017

World Finance spoke to Daniela Gabor, Professor of Economics and Macro-Finance at the University of the West of England, whose research focuses on shadow banking activities. “It is just an alarmist story”, she said. “I don’t see the same potential for systemic crises and runs that you have in the US shadow banking sector.”

In the US and Europe, the kind of runs triggered by the shadow banking sector are characterised by liquidity and haircut spirals, prompting shadow banks – as well as ordinary banks – to lose access to wholesale collateralised funding. According to Gabor: “The systemic risk comes from volatile collateral valuation practices: when you have asset prices falling, then those assets that are used as collateral to raise wholesale funding generate margin calls.”

Unlike the US and Europe, China doesn’t have fully liberalised repo markets, and its collateral valuation practices differ considerably. As a result, it remains relatively protected from the kinds of fire sales or liquidity crises seen in the western finance sector.

Darker shadows
Meanwhile, more substantive dangers lie elsewhere. “For now, everything depends on whether there will be a major revision to Basel III… [something] that Donald Trump seems to be intent on”, Gabor said.

Owing to post-crisis regulations, growth in the wider shadow banking sector has been somewhat restrained in recent years. The latest figures published by the Financial Stability Board (FSB) revealed its ‘narrow measure’ of shadow finance – which focuses on areas within the non-bank financial sector where risks to financial stability may arise from shadow banking – reached $34trn in 2015, up 3.2 percent from the previous year.

At the same time, reliance on wholesale funding from other financial institutions (a proxy for shadow banks) has actually declined. Indeed, according to Gabor: “The Basel III new rules on liquidity and leverage, together with the FSB rules on reform of money market funds and repo markets – however diluted – are constraining the kind of pre-crisis dynamics that we have seen.”

As a result, the relative stability seen today is severely threatened by Trump’s conviction that such post-crisis regulation acts as a gratuitous obstacle to bank lending. Basel III regulations aim to provide a global framework that levels the playing field between banks in different geographical locations. Crucially, this means if the US reneges on its commitment to the rules, it is likely Europe will follow suit, which amplifies the risk of such a move from the Trump administration.

Accordingly, when it comes to concerns over the emergence of an unmanageable shadow banking sector, advanced economies would be at fault to assume all risks have shifted elsewhere.

How Vietnam’s attracting foreign investment despite global market instability

Posted on by Max Tomlin

The global economy experienced a sluggish year in 2016, with several unexpected events, such as the Brexit vote and Donald Trump’s surprise election victory, stunting growth around the world. However, despite the uncertainty, Vietnam’s economy remained stable, with GDP growth exceeding the averages posted by neighbouring south-east Asian countries and emerging Asian economies.

The country’s stock markets also generated significant uptrends throughout the year, with the VN and HNX indexes having grown a combined 15 percent year-on-year and the total market capitalisation of Vietnam’s most prominent exchanges amounting to 37 percent of GDP.

Vietnam’s success can be largely attributed to the state’s commitment to creating an attractive business environment for both domestic and international companies. Building on the country’s solid foundations, the government has introduced a number of regulatory changes to help increase both foreign direct investment (FDI) and foreign portfolio investment. This pro-business attitude has also stimulated growth in the private sector, driving local business and improving competition.

By leveraging the country’s political stability, sustainable economy and high quality investment opportunities, Vietnam has become an attractive proposition to investors around the world. Here at BIDV Securities Company (BSC), we fully expect Vietnam’s steady growth to continue in the years to come.

Cutting the red tape
Under the management of the State Bank of Vietnam (SBV), the Vietnamese financial system has continued to thrive. The government’s commitment to creating a favourable business environment has seen foreign investment grow significantly in the past decade, with FDI businesses now accounting for 71.6 percent of the country’s export turnover. The introduction of new regulatory frameworks has been key to attracting these high levels of foreign investment, and has helped control inflation, motivate economic growth and stabilise the interest rate domestically.

By adopting active and flexible fiscal policies, the government has turned Vietnam into a business hub. Some changes involve a daily adjusted rate, providing tax breaks to specific sectors, reducing corporate tax and providing a number of support packages to both foreign and local businesses. These packages have primarily focused on growth and attracting investment, aiding the development of social housing and hi-tech agriculture while also providing support to the country’s rising number of start-ups.

With a significant increase in foreign investment, BSC’s role in the Vietnamese financial market has continued to grow

These pro-business changes have been spurred by the long-term stabilisation of interest rates, which has provided the means for increased capital expenditure. This capital has been largely devoted to the development of the private sector, which has become an important driver of the economy in recent years, contributing 40 percent of GDP.

To this end, the Vietnamese Government is carrying out a comprehensive renovation of the regulatory system. By simplifying procedures, enhancing national competitiveness and improving transparency, the government has created an environment geared towards international business. In fact, the changes implemented by the government witnessed Vietnam rise nine places on the World Bank’s Business Environment 2017 report. The report cited the country’s significant improvement in areas such as the protection of small investors, taxation and international trade as the reasons for the rise.

With a view to encouraging further growth, the government has sought to clarify its position within the market. Since the start of 2016, SBV has given daily updates on both the country’s central exchange rate and the foreign exchange market. These announcements have helped standardise market valuations and dull any potential shocks to the Vietnamese economy.

The government has also publicly clarified which industries it intends to maintain a controlling stake in, and which enterprises it will pull funding from in the near future. This clarification has reinforced the country’s stock market, giving investors a clearer understanding of the market and strengthening the position of state-owned businesses.

Furthermore, the announcement is expected to encourage a flurry of IPOs in the coming year, with many industry-leading state-owned enterprises planning to participate. Should these IPOs come to pass, the Vietnamese stock market will be provided with quality investment choices, and foreign investors will be able to diversify their portfolios within the market, in turn bringing further capital into the country. As a result, Vietnam’s stock market is expected to record an uptick in both index value and liquidity in 2017.

In addition, the government has sped up the reorganisation of Vietnam’s banking sector, restructuring the debts held by joint stock commercial banks and consolidating or merging unprofitable banks in order to increase capital capacity. This has helped to standardise state-owned enterprises and has allowed foreign investors to buy shares in both public and private companies.

Foreign investment
With a stable government and a growing level of economic integration, Vietnam is now considered to be one of the world’s most attractive markets for foreign investment. The state’s commitment to establishing a business-friendly environment has seen FDI rise steadily since 2009, reaching a staggering $15.8bn in 2016, according to the Ministry of Planning and Investment (MPI) (see Fig 1). Manufacturing has remained the most popular industry for foreign investment. In the coming months, the government will continue to invest in supply industries, advanced technologies and environmentally friendly practices in order to attract foreign investment and strengthen the link with domestic enterprises further.

Vietnam’s sizeable marketplace and relatively large population – 60 percent of which is aged under 35 – have attracted growing interest from the likes of Hong Kong, Japan, South Korea and the US, all of which have committed to economic integration in general and free trade agreements in particular. In fact, Vietnam now holds 16 independent free trade agreements with strategic partners from around the world.

As a result, Vietnam has witnessed an increase in the number of mergers and acquisitions (M&As) in the last few years. The United Nations Conference on Trade and Development suggested the number of M&As rose by as much as 61 percent in 2015, with 531 deals with a total value of $5bn executed during this time. This growth continued into 2016, with more than 600 transactions taking place, and is expected to rise again in 2017. The size of these deals has also increased, with the total value of M&As in 2016 reaching $6bn. More impressively, foreign investment accounted for 46 percent of all M&As during this period.

With the economy opening up, many high profile transactions have been carried out between Vietnamese and foreign industry leaders. For example, Thai retailer TCC Holding successfully acquired Metro Cash and Carry Vietnam, while Japanese carrier ANA Holdings purchased Vietnam Airlines. These deals helped Vietnam rise to 15th place on the global M&A rankings, a stark contrast to the slowdown experienced across the Asia-Pacific region.

Indirect investment in Vietnam has also reached a record high. The improved transparency demanded of Vietnamese businesses, along with a reduction in foreign ownership limits and the introduction of new investment products, has seen foreign investors’ holdings in the stock market skyrocket. By February 2017, investment in the Vietnamese stock market had reached $20bn.

Nonetheless, despite reaching record levels, foreign investors appear to have remained relatively cautious, favouring companies with traditionally high dividend yields, such as those in the food and beverage, real estate, or consumer goods markets. Investors also predominantly looked towards the market leaders and those companies set to lose state funding.

International development
With a significant increase in foreign investment, BSC’s role in the Vietnamese financial market has continued to grow. Presently, we manage more than 2,000 foreign trading accounts, with a combined trading total in excess of VND 1.3trn ($57.3m). With business relations extending to around 50 foreign funds, BSC is one of the most active market participants in Vietnam, and has facilitated the country’s growth over the past decade.

As a local financial advisor, BSC guides clients through M&A transactions, whether buying or selling. In just one year, we closed two gigantic deals, helping a Danish private equity fund divest its shares in a Vietnamese window manufacturer to a Japanese investor, and assisting a multi-national Korean-based firm purchase a Vietnamese food processing company. We currently have a further three deals active, and have also continued expanding relationships with funds around the world.

These relationships will be essential to BSC’s growth in the future, as we look to build on the successes of the past few years and extend our operations internationally. The strength of the economy has allowed Vietnam to take to the world stage, and as investment continues to facilitate growth and provide a platform for expansion, BSC will seek to play the leading role in Vietnam’s international development.

Global politics help Philippine investments soar

Posted on by Max Tomlin

The US has seen renewed optimism over the past year or two, as much-anticipated fiscal recovery finally set into the world’s largest economy, allowing the US Federal Reserve to raise interest rates once more in March 2017. As rates continue to increase, with another two hikes expected this year alone, the US dollar is projected to strengthen further against other currencies.

While global power shifts and surprise political events such as those of the past year may cause some investors to lose faith and sell their stock investments, they can occur to the immense benefit of far-removed markets such as the Philippines. In comparison to potential market volatility in the US, the Philippines’ improved demographics offer a safe respite for stakeholders looking for a new investment opportunities.

Given that no elections are due in the Philippines this year, the country’s own economy is projected to grow more slowly at 6.3 percent, compared with the previous year’s 6.8 percent. Nonetheless, there could be a pleasant surprise in store for the economy if Rodrigo Duterte’s government proceeds with the immediate implementation of a sound tax reform programme or rolls out several major planned infrastructure projects. With a higher interest rate in the US, the US to Philippine exchange rate is expected to rise further to PHP 51.50 ($1) by the year’s end.

With so many variables across global economies over the next six months, World Finance spoke to Ador A Abrogena, Executive Vice President and Trust Officer at BDO Unibank, to discuss the group’s position within the Philippine market, how the company can help both new and current investors improve the economy even further, and how it plans to stabilise its retirement programme.

What are BDO Trust’s flagship products?
In 2005, Unit Investment Trust Funds (UITFs) were introduced in the Philippines, offering much greater investment options. Similar to mutual funds, UITFs are investment vehicles that allow funds to be pooled from different investors with similar investment objectives. These funds are managed by professional fund managers, and are invested in various financial instruments, including money market securities, bonds and equities. BDO is the leading provider of UITFs, comprising nearly 40 percent of industry assets under management, as well as a number of investment accounts.

There are various UITFs available, depending on an individual’s investment goals and risk preference. These are generally classified into four types: money market, bond, balanced and equity funds. Money market funds are meant for investors whose main concern is liquidity and preservation of their principal investment. These can also be used for parking funds in while waiting to use them for other investments. For those who want higher yields and can invest for longer, the bond funds are more suitable.

Most Filipinos are risk averse, and they prefer short-term, fixed income placements

In between bond and equity funds are the balanced funds, which provide a middle ground between the high risk of equity funds and the relative stability of bond funds by investing in a proportion of bonds and equities.

What is the current state of the Philippines’ investment market?
Investors are optimistic that the Philippines can sustain its GDP growth momentum of six to 6.5 percent. This is because the country’s growth instigators, which are predominantly associated with consumer demand, domestic investments and government spending, remain intact. There is also ample liquidity and a stable currency.

The last 12 months have been positive for fund investors in the Philippine market, but that has not always been the case. Since UITFs were introduced in 2005, they have gone through both positive and negative periods. There was volatility, but as a company we pursued this industry, as we believed in its potential to help the financial needs of many Filipinos.

Early on in BDO’s history, we focused on making sure funds were sold correctly and that clients understood what they were getting. BDO has conducted many seminars, prepared materials and sponsored events to inform the public on products they may require. As of now, those that invested are benefiting, as BDO’s UITFs have grown from a low of PHP 85bn ($1.7bn) in December 2008 to PHP 333bn ($6.6bn) as of last year.

With regards to the country’s rate of savings, the Philippines has one of the lowest rates across Asia for retirement preparation. At BDO, we want to provide products that make it worthwhile for our clients to save and invest. We also want clients to invest over a longer period of time to maximise their returns.

What kind of asset classes and products are you focused on?
We offer products that are in line with market needs. Most Filipinos are risk averse, and they prefer short-term, fixed income placements. Our best seller is the money market fund, as the low volatility and higher-than-deposit yield is a good place to start. However, we also emphasise increasing risk, as this creates better yields and improves the country’s economy. This is why BDO has seminars – to help explain the benefits of risk, and how to manage it.

Where should potential Philippine investors place their money?
Navigating through the changes from last year’s global and domestic developments was challenging. However, BDO deals with professionally managed money markets, bonds, balances and UITFs – available in both Philippine pesos and US dollars. When navigating through difficult financial situations, the company advises clients to invest in the BDO Dollar Money Market Fund. For the more experienced, the BDO US Equity Feeder Fund provides diversification via exposure to US companies that are expected to benefit from Trump’s pro-growth policies. As market conditions have evolved, BDO aims to give informed, prudent and effective investment options.

When is the best time to invest?
There is no better time to invest in UITFs than now, as the Philippine economy looks good, and will improve. The Philippines is now in a better place than it was in the 1970s to 1990s. Today, we have become a net lender because of the economy’s development.

What are BDO’s initiatives in socially responsible investing?
BDO has launched the BDO ESG Equity Fund, a UITF that invests in local companies showing good environmental, social and governance (ESG) practices. The fund is the first ESG-themed UITF in the Philippines. ESG has become known as the socially responsible approach to investing. Responsible investing supports companies adhering to ESG practices that ensure environmental protection and community development which, in turn, sustain both the company’s and its investors’ profitability.

Investors are optimistic that the Philippines can sustain its GDP growth momentum of six to 6.5 percent

The fund is available to retail and institutional clients with an aggressive risk appetite, who want exposure to companies with responsible business practices. The fund can be accessed via BDO branches nationwide as well as via Invest Online, BDO’s UITF online investing facility.

Would BDO consider investing outside the Philippines?
We are diversifying our investments right now, moving from predominantly Philippine-based assets into a mix of local and offshore bonds and equities. We have collaborated with external fund managers for the feeder funds we offer. These include the major global fund managers BlackRock, Legg Mason and SLI Investments.

What about the institutional business of BDO Trust?
At BDO we manage segregated portfolios for institutional accounts – retirement plans, educational institutions, religious organisations and foundations. We are one of the more aggressive managers and have recommended a larger share of equities against fixed income equities over the past five years. Many institutional clients are conservative, so we provide good recommendations and suggest they diversify and buy riskier assets, if they can take the volatility.

Rules on corporate retirement funds have been in place for several decades now, but many companies have not set up pension plans – that’s where we help. Some are hesitant as they have to separately ringfence the funds and cannot use them for current operations. Still, some companies are looking at this now as an employee incentive. It is a slow process, but it is happening. BDO has been advocating the implementation of defined plans that would allow employee contributions, allowing employees to save on their own and make their investment earnings tax exempt at the same time.

How is BDO helping Filipinos with their post-employment security?
After hurdling the stringent qualification requirements of Bangko Sentral ng Pilipinas (BSP) and the Bureau of Internal Revenue (BIR), the Trust and Investments Group of BDO became the first institution in the Philippines to be accredited as a Personal Equity and Retirement Accounts (PERA) Administrator.

The PERA implementing rules and regulations were issued on October 21, 2009 by various regulatory bodies. These were detailed in regulatory issuances by the BSP and the BIR, the latest of which was dated December 2016.

PERA is the Philippine version of similar laws covering retirement savings vehicles prevalent and long standing in more developed countries, such as IRA and 401(k). It establishes the legal and regulatory framework for voluntary personal retirement plans as a means to promote savings, capital market development and long-term fiscal sustainability. It also provides Filipinos with a means to supplement their future pension benefits from the Social Security System/Government Service Insurance System.

At BDO, we believe that being the first PERA administrator is a distinct privilege. This will allow us to promote our advocacy for financial inclusion. Implementing PERA is complex as it involves efficient coordination with the various PERA participants, like the cash/securities custodian, investment product providers and investments managers, as well as providing the required regulatory reports. More importantly, it involves educating and inculcating financial literacy across PERA contributors.

The challenges notwithstanding and with the continuous support of BSP as the government agency working for the implementation of PERA, BDO looks forward to fulfilling its responsibilities as the country’s first PERA administrator.

Exploring Vietnam’s new derivatives market with BIDV Securities Company

Posted on by World Finance

In June 2017, Vietnam opened its derivatives market. Five companies are authorised to trade on the new market, which is hoped will make the country’s stock exchange even more attractive. BIDV Securities is one of those companies – its CEO, Đỗ Huy Hoài, discusses the instruments currently available and planned for the future, as well as the changes already being seen on Vietnam’s main stock exchange.

World Finance: The new derivatives market: what instruments are available, and how much interest has there been so far?

Đỗ Huy Hoài: The main products that will initially be available are stock index futures of VN INDEX and HN INDEX, and government bond futures.

I think that along with continued market development, there will be more and more products. These products are quite new to the Vietnamese market. The authorities are fully aware of this and taking it into consideration for their strategic planning.

Government agencies, as well as securities companies, have also been offering training programs for investors, promoting and giving guidance on conducting transactions, as well as introducing these products’ benefits to individual and institutional investors.

Regarding institutional investors with high-volume transactions, they will participate in the high-value stock index futures and high-value government bond futures.

We also hope that institutional investors will get on board faster. And the market will become more dynamic.

World Finance: What other instruments are planned for the future, and what’s the timeline?

Đỗ Huy Hoài: In the near future, products offered on the market will follow two directions. First, products will be diversified for both individual and institutional investors.

Second, products will bring a level of liquidity to the market, which will make it livelier.

Following the same directions, we will also provide one additional investment channel for investors, known as warrants.

In order to facilitate the market’s liquidity, there will be products that allow investors to sell securities during the settlement period or on the T+0 basis (same day settlement).

World Finance: Investment on the main stock exchange reached $20bn in February of this year; what have been the main investment trends you’ve been seeing?

Đỗ Huy Hoài: On average, the total trading value reached VND 4.5-5trn per trading session, which means that market liquidity is very high, equivalent to periods prior to the financial crisis in 2008.

And with such momentum, there are industries on the centralised stock market that have seen remarkable development, for example the banking industry.

Some bank stocks have seen a growth of over 95 percent: for instance, those of Asia Commercial Bank.

In second place is the real estate market, especially resorts. This is another industry with very positive signs of growth in early 2017.

In addition, stocks of the petroleum industry indicate a potential for positive growth.

World Finance: Foreign direct investment in Vietnam reached $15.8bn last year: how has the government been ensuring Vietnam presents an attractive business climate?

Đỗ Huy Hoài: The Vietnamese government has been aware of the need to create a favourable environment for economic development.

First, the Vietnamese government adopted a resolution aimed at perfecting the socialist-oriented market economy, which calls for completing the legal systems, market institutions and agencies’ operations to create the most convenient and friendly environment for investors.

Secondly, the Vietnamese government adopted a resolution regarding private economic development.

The private sector currently accounts for 40 percent of Vietnamese GDP, playing an important role in the whole country’s development.

This will help them gain access to resources, sources of financing and legal systems so that they can then access investment opportunities that help them develop their businesses.

Third, the Vietnamese Government has also agreed on a vital resolution regarding state-owned enterprises.

SOEs shall continue to be actively equitised. In sectors where State control has been deemed unneccessary, SOEs that have undergone equitisation will have their remaining state-held shares sold off on the open market. SOEs that have yet to undergo this process will continue to be equitised.

World Finance: What does the future hold for Vietnam, and for BIDV Securities Company?

Đỗ Huy Hoài: In the near future, the work of drafting second-generation legal documents will take the stock market another step forward.

When our securities market is perfected it will approach international practices and will bring more opportunities for future economic development.

Following the same trend, BIDV Securities Company, on the one hand, actively participates in a range of market activities and supports investors in their businesses, and on the other hand, collaborates with state agencies such as the Vietnam Securities Depository to help develop the stock market in general.

The investment banking model is one that we are continuing to pursue and prepare for, so that if and when the law is in place, we will be one of the first entities to adopt investment banking.

By becoming an investment bank, BSC will be able to support the market better and help BSC to grow stronger in our business.

World Finance: Đỗ Huy Hoài, thank you.

Đỗ Huy Hoài: Thank you.

How competitive banking is taking Macau global

Posted on by Max Tomlin

A rising hub in China’s banking sector, Macau is working to link the country to the wider world by helping emerging markets connect with the Asian nation. A key component in this strategy involves helping local SMEs to extend their reach across the entire region and beyond.

The Special Administrative Region’s banks are leading this push, with Banco Nacional Ultramarino (BNU) a particularly active example. A subsidiary of Portugal’s Caixa Geral de Depósitos, BNU’s focus is on building bridges between China and the Portuguese-speaking world, while simultaneously working to improve the already-competitive local banking industry in Macau.

In light of this, World Finance spoke to CEO Pedro Cardoso, the 2017 Banker of the Year for Asia, about how BNU has tackled recent economic hardships to maintain growth and connect Macau to other countries and continents.

How has Macau’s banking industry dealt with the recent contraction in the economy?
Macau is a very competitive market. The territory only has around 650,000 inhabitants, with 28 banks in operation competing to serve them. Nonetheless, some of the large Chinese banks are now seeking to gain market share in Macau, which is resulting in a decline in the profitability of banking operations. That said, despite this challenging environment, the banking sector in Macau has continued to perform well, with good solvency, liquidity, profitability and asset quality indicators.

What’s more, under the guidance of the Macau Government and Monetary Authority, the banking sector is looking for new avenues to expand into. These include cooperation with Portuguese-speaking countries, financial leasing and wealth management.

What strategy have you implemented and how has BNU fared in this climate?
Following this pattern of growth and diversification, BNU has grown steadily and prudently over the past few years. Since 2011, our total business has grown by an accumulated 107 percent, and over the same period our ratio of loans overdue over 90 days has also declined from 1.68 percent to just 0.97 percent. The main focus of BNU’s expansion has been in the areas of SME finance and retail banking. We have, above all, concentrated on Macau’s residents and companies, while also exploring synergies with the very strong network in Portuguese-speaking countries that our parent bank – Caixa Geral de Depósitos – has created.

Deciding whether to keep investing in physical branches or to guide customers towards digital services is one of banking’s great dilemmas

Unlike some banks that focus on gaining market share at low prices, BNU has geared itself towards growth. We aim to create the necessary conditions to generate value in an increasingly competitive environment, and to build ourselves up to better provide what the market demands. And, of course, we always aim to stay in tune with our clients’ needs.

In terms of everyday banking, we have been working to better understand our customers’ behaviour and expectations through surveys and mystery shopping. Alongside this, we have also worked very hard to provide new and innovative products and services, as well as providing extensive training and knowledge to our team members, and motivating them to excel in the pursuit of our mutual goals. To this end, we have frontline staff that are proficient in English, Mandarin, Cantonese and Portuguese, and are able to provide all of our services to our diverse client base.

As a result, we have seen an increase in our customer base of about 17 percent, to around 225,000 customers – more than a third of Macau’s total population. Additionally, our top line has progressed quite smoothly, with a 93 percent jump in net interest margin since 2011. We have also decreased our cost-to-income ratio from 35 percent in 2011 to just 29 percent in 2016. We’re particularly proud of this indicator, as it’s in line with the highest international standards.

What new trends are now emerging in the Macau banking sector?
Macau is a world centre for tourism and leisure, but good progress has also been made recently in economic diversification away from this traditional core sector. As a result, banks are now expanding their corporate resources to serve other industries. Construction and public works are important customer sectors for banks in Macau, with the industry still growing. The local banking community is continuing to support and finance large infrastructure projects, but there is also a new focus on supporting small and medium projects too.

As well as this, since 2014, deposits have been growing slightly faster than expected, leaving banks flooded with money. Competition is, therefore, very keen in credit products such as loans and credit cards – a further boon for consumers and the industry as a whole.

How are banks adapting to accommodate changing consumer demands?
The way customers interact with their banks is indeed changing. For one thing, customers are choosing more and more to bank through a variety of digital means. Banks, therefore, need to adapt themselves and diversify their banking channels in order to allow customers of every age to carry out routine transactions in whatever way they demand – be that in a traditional branch or digitally.

What’s more, in spite of the convenience of tech-based interactions, trust and security are still crucial for customers; a strong in-branch experience remains important, especially in terms of driving engagement with banks. To put it another way, customers are coming to branches less often, but their preferred sales/purchasing model is still to meet with an account officer face to face. Whether to embrace this and keep investing in physical branches, or to guide customers away from the in-person experience and towards enhanced digital services, is one of banking’s great modern dilemmas.

Why has BNU chosen to enter mainland China?
The opening of our Hengqin branch, on an island located in Guangdong, is intended to provide a bridge for economic and financial cooperation between China and Portuguese-speaking countries, and to provide financial cooperation between Guangdong and Macau, based on the China-Portugal financial services platform. It will open up opportunities to support Chinese investors and companies from Portuguese-speaking countries that are trying to expand into the Chinese market.

650,000

The total number of inhabitants of Macau

225,000

of these are BNU customers

107%

BNU’s business growth since 2011

At the same time, another key objective is to assist Macau-based enterprises in expanding their businesses into mainland China, thereby promoting closer cooperation between Macau and Guangdong. In this respect – as an innovative step in strengthening economic cooperation between the two regions – the Hengqin branch is a milestone for BNU. The branch represents the first instance of a Macau local bank opening a branch in mainland China, and it also makes BNU the first bank to enter mainland China with immediate renminbi business operation.

How does BNU make use of new technology?
BNU has been a pioneer on the technology front, working to improve efficiency through the development and implementation of modern operational systems, such as workflow systems, document management and new front-end teller systems. What’s more, our online banking experience has now been extended to mobile, allowing services such as transfers, bill payment, time deposits and insurance subscriptions to be accessed in-branch, online or by mobile.

To solve the common problem of low foreign currency availability in Macau, a service has been introduced to allow customers to request foreign currency banknotes through online banking and collect them at a chosen branch. This system, pioneered by BNU, is the first of its kind in the Macau market.

What does BNU have planned for the future, and how do you see Macau’s banking climate developing?
We aim to continue along the path of innovation, focusing on product development and the development of better services for our clients. Alongside this central aim, we’re also looking to build ties with local and international businesses, with a particular focus on links between Portuguese-speaking countries and China. We’ll also continue to lead the local banking industry on various fronts, including excelling in the provision of high quality customer services, rapid time-to-market product development, efficiency enhancement and budget control.

As far as Macau as a whole is concerned, 2017 is looking positive for the financial industry. The sector will continue to vigorously develop ties with emerging markets and emerging businesses. What’s more, a range of opportunities will arise as a result of the Chinese Government’s One Belt, One Road national strategy, and the implementation of the five-year development plan outlined by the Macau Government.

In this context, Macau’s banking sector will act as something of a herald for the wider diversification of the entire Macau economy. In particular, the banking industry will provide support to local SMEs through various preferential service schemes, and will also make further positive adjustments to loan structures in order to support those SMEs in overcoming the various difficulties that accompany early-stage growth. By thinking ahead, we’re working to ensure a positive and stable future for Macau and the surrounding region.