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Leading independent research and advisory firm, Financial Insights, an IDC company, today announced the release of a new report on Standard Chartered’s transformation of its Transaction Banking Group. While analysts and industry observers pour over the financial results of banks like Standard Chartered and look closely at the wholesale banking numbers, little attention is given to an important line of business: transaction banking. This is an oversight since it is a rapidly growing line of business in Asia/Pacific and Standard Chartered’s recent acquisitions in the region are intended to further support this growth.
“The drive to expand and stay ahead of aggressive competition has driven many of Asia’s leading corporates to look to their banks as a source of competitive differentiation,” says Douglas A. Jaffe, research director, Financial Insights Asia/Pacific. “The challenge, however, is to find banks that can credibly provide both domestic and cross-border services in these emerging economies, and while this list is growing; today, it only includes a select group of financial institutions.”
Sustained economic growth in Asia/Pacific has created an emerging class of corporates and financial institutions that are no longer content to remain wedded to their own domestic markets. As ambitions increase, so too does the need for sophisticated banking and advisory services. Many of the largest Asian names are familiar to international investors, but most are small by global standards. However, they are growing rapidly and moving cross-border in search of growth opportunities. This makes them prime candidates for a range of banking services including cash and liquidity management, payments, and trade services.
A new dynamic that is helping spur renewed interest in these traditional banking services is the increasing importance of new trading corridors. Asia and OECD country trade remains strong, but the growth of intra-Asia, Asia-Middle East, and Asia-Africa activity is driving new requirements that banks must fulfill if they wish to remain relevant. Moreover, the growing sophistication of the physical supply chain – innovation driven by better processes and technology, for example – has forced banks to improve their own offerings and move towards the provision of integrated financial supply chain services.
As a leading cross-border bank with a strong domestic presence in a number of key Asian markets, Standard Chartered is very well positioned in the region. It is therefore instructive to look at how this bank is transforming itself, both as an indication of where future transaction banking opportunities lie, but also as a proxy for how Asia as a whole is developing.
Early indications of the future benefits from this transformation can be seen in the bank’s recent numbers. The wholesale bank saw 28% YOY growth in income from 2005 (US$3.06B) to 2006 (US$3.92B).
A number of factors contributed to this growth, but a few specifics are worth highlighting:
• Segments – Business from commodity corporates grew 19%, global corporates grew 22%, financial institutions grew 27% and the local corporate segment saw growth of 24%.
• Products – Trade and lending grew 14%, cash management and custody grew 38% and the global markets business grew by 32%.
These growth figures are not unique to Standard Chartered and can be seen in the results of a select group of institutions that operate in the same high-growth economies. It should also be noted that the major profits for transaction banks still come from multinational corporations that operate across Asia/Pacific, but the contribution of the region’s emerging corporate class is increasing rapidly.
Transforming Transaction Banking
To address the business landscape of the future, banks like Standard Chartered are in the midst of major undertakings to transform their transaction banking organizations. These include acquisitions, new alliances and partnerships, and massive investments in people, product, processes and technology. What makes this all the more daunting is the reality of attempting comprehensive transformation in a high-growth environment. A loss of focus or insufficient resources could lead to serious problems and rapid erosion of market share.
The Future Is Uncertain
High growth markets do not in and of themselves make transaction banks like Standard Chartered succeed and a number of challenges remain. These include increasingly sophisticated and aggressive domestic banks, an immature fee culture, inefficient domestic payment and settlement systems, and a lack of finance talent in many Asian companies. The threat of a global slowdown is also a concern and there are political risks inherent in some of Asia’s most enticing emerging economies. Nevertheless, these are the markets of the future and this is driving aggressive global banks to stake their claims now.
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