The battle to bank Asia’s next corporate champions
Having the largest and most successful corporations in Asia as clients brings prestige and profit to the banks involved, but just beneath the very top is where the fight for the spoils of the future is raging. How do you pick – and bank – Asia's next generation of corporate champions?
The battle to bank Asia’s next corporate champions is a fierce one. In a world where the income has drained out of many previously lucrative businesses, the bread-and-butter profits that come with corporate banking are more prized than ever. Capturing steady, reliable revenues from the region’s developing companies is both a smart long-term strategy and an opportunity to serve clients across several business areas.
In Asia the competition to bank these firms often starts at a very early stage, but spotting them among the thousands in existence is not always simple. Once a company has become wildly successful, it is hard to imagine that banks would ever have thought of it as anything other than hot property.
However, for any firm there was commonly a time when banks needed convincing to start a relationship with them. Vikas Jain, business director and co-founder at India’s second largest smartphone company, Micromax Informatics, knows that feeling.“Of course, the banking relationships are never easy at the start,” he tells Euromoney. “It required a lot of persuasion, presentations and meetings on our part, but it was easier once the bankers began to understand our business.”
Banking Asia’s corporate champions of tomorrow is a strategic priority for Citi. We have the global network and product set to serve them as they expand both domestically and globally
In a fast-growing region like Asia, decisions on whether to bank companies like Micromax at this early stage can be vital in developing a long and profitable relationship. And considering the rewards that can result, this is the type of business that everyone wants to win.
Micromax started as a software development company back in 2000. In 2014 it notched up revenue of over $2 billion. The company uses seven banks in total; Jain cites services such as credit lines, trade finance and foreign exchange as important to running the business. Citi is one of the international banks that services Micromax, and Jain stresses the global presence of the bank as valuable, along with the ability to provide feedback when the firm launches in other markets. “Banking Asia’s corporate champions of tomorrow is a strategic priority for Citi,” says Stephen Bird, CEO for Citi in Asia Pacific. “We have the global network and product set to serve them as they expand both domestically and globally. Many of these companies are suppliers to our corporate champion clients, so we also have a good understanding of their business already.
“We want to ensure these clients are receiving the same access to Citi and the level of coverage that we offer to our corporate champions. We want to partner with the next titans of Asia and support them on their journey of transformation.” Citi is far from alone in this ambition. Bank of America Merrill Lynch, for example, is another international bank that is looking to build a bigger regional presence through its corporate and transaction services business, rather than leading through traditional investment banking services. A similar strategy has long underpinned the ambitions of the likes of HSBC and Standard Chartered. JPMorgan, Barclays and, to some extent, Deutsche Bank are other big international firms seeking deeper relationships with corporate clients in the region.
In the past, much of the competition for banking relationships was focused on the big Asian companies that had already reached multinational status. Such is the level of competition that banking the likes of Samsung, Lenovo or Huawei offers a lot in terms of prestige, but less in terms of profit. Now attention is shifting away from the top five companies in countries such as Korea and Taiwan to the next tier: those starting to boost their commercial presence overseas.
It's not just the big global players that spot an opportunity among this client base. Banks with strong domestic bases and increasing regional ambitions – the likes of ANZ, DBS, CIMB and, no doubt before too long, the big Chinese banks – see a chance to build scale among clients that may be deemed too small for their global competitors.
On top of that, these are companies that still have long, deep and important relationships with the biggest domestic banks in their home markets. Some of these banks have ambitions to grow internationally with their clients.
It is yet another story of opportunity in Asia, set against the backdrop of intense competition. So what will it take to be a winner?
Multi-banked corporates Malaysian exporter Mac World is another company that had to try hard to convince banks of its prospects early in life before becoming the successful multi-banked firm that it is today. Since its inception in 2005, Mac World has been an exporter of a wide range of products, including palm oil and palm products, agri-commodities, chemicals and animal feed. It had a turnover of approximately $350 million in 2014 and has steadily built a presence in markets such as the Middle East, Africa, Europe and India.
“We struggled for survival like any start-up,” says Abraham Thomas, Mac World executive director and majority shareholder. “During the establishment of the company, investors and bankers were not particularly persuaded about the advancement or survival of Mac World and no one wanted to lend to us. A lack of finance was a big hindrance to the progress of the company.” Mac World now uses four banks: Standard Chartered, HSBC, Maybank and Bank of Nova Scotia. According to Thomas, it uses the last three mainly for trade finance, but goes to Standard Chartered for some of its more complex needs. “I was already a priority card member at Standard Chartered when I met one of their bankers at a conference, where we first discussed a corporate banking relationship,” he explains.
“With Standard Chartered I have normal trade finance facilities, forex facilities as we mainly need US dollars as that's what we use to trade, and bill-discounting-buyers-risk facilities.”
We’re focusing on corporates who have multiple product needs, a multinational footprint, professional management, a responsible capital structure and that are, ideally, growing above market
Standard Chartered refers to a lot of the companies that fall under the umbrella of the next wave of corporate champions as commercial clients, and they typically have a yearly sales turnover of anywhere between $20 million and $150 million, although that's not a hard and fast rule.
“It's the acorn to oak theory; you need to catch these companies young. As they undertake their journey, they become more sophisticated users of more complex banking services,” says Neil Daswani, global head of commercial clients, transaction banking, at Standard Chartered. “As the bank grows with these corporates, we continually reassess their needs and present to them solutions that help make them more working-capital efficient. “You will probably find banks taking a more cash and collateral-oriented approach until these clients establish their credentials. When the company does not have several years of audited business accounts, you certainly have to keep your ear closer to the ground and understand the nitty-gritty around the cash flows of their business. There needs to be a higher frequency of client contact.”
Daswani explains that the small and medium-sized enterprise commercial clients are the backbone of a number of Apac economies. “People normally talk about state-owned enterprises in China, or big chaebols in Korea for example, but what is less well-known is that commercial clients often account for anything between 40% and 60% of the GNP and exports of a number of major economies in Apac. These opportunities are in all the growth economies, and we are dedicating a lot of time to this segment.” Competitive advantage
The challenge for a bank of staying relevant when a client company becomes more successful and its banking relationships start to mushroom is a tricky one. Most companies will not realistically limit the number of banks they use, but may tend to rank some higher than others in importance. And this pecking order can be crucial for a bank trying to do as much business as possible with a particular firm.
“Some companies would have five to six banks in their earlier stages, but that could expand to 20 by the time they have got closer to being a global champion,” says Farhan Faruqui, chief executive of international banking at ANZ. “Our job is not to figure out how to be one of five or one of 20, but how to provide value whether we are one of five or 20. We need to differentiate our service for that group and get a disproportionate share of wallet.”
One of the ways in which ANZ differentiates itself is the expertise it has in its home markets, according to Faruqui. “If there is a client in Asia that does business in Australia and New Zealand, where we are a substantial player, we have to dominate that corridor to make sure we provide full banking services end-to-end.” He also highlighted the bank’s expertise in resources and agriculture.
“To spot a company that is going to become a future corporate champion, the company must have a competitive advantage,” adds Faruqui. “We’re focusing on corporates who have multiple product needs, a multinational footprint, professional management, a responsible capital structure and that are, ideally, growing above market. When we find companies that check many of these boxes, they become very attractive clients.”
In Euromoney's cash management survey of 2014, HSBC was voted the bank that companies with less than $1 billion in regional gross sales used most for international cash management services in Asia, with Citi in second place and Bank of China in third.
“For me it’s not about spotting the next Alibaba or Apple, because there are only going to be a handful of those,” says Noel Quinn, regional head of commercial banking for Asia Pacific, at HSBC. “Being a very successful entrepreneurial business that is big and multinational is still a good business to be. For me, it’s about being happy and focused on banking dynamic, successful companies growing internationally, even if they don’t reach the status of an Alibaba or Apple. The majority of businesses don’t become the big superstar, but for me, it’s just as rewarding to bank family businesses.”
For me it’s not about spotting the next Alibaba or Apple, because there are only going to be a handful of those. For me, it’s about being happy and focused on banking dynamic, successful companies growing internationally
Quinn marks out Hong Kong, China, India, Singapore, Indonesia and Malaysia as the core markets that HSBC concentrates on in Asia Pacific, but also stresses the potential that exists in the wider region. “Within Asia, I see companies with the potential to be the next generation of corporate champions in all 19 countries I cover. They don’t just exist in Hong Kong or Singapore, for example. They exist in countries like Bangladesh, India and Sri Lanka too.” According to Quinn, HSBC has a range of products and services that a client can tap into as they grow. “We typically start with a lending relationship and expand into a range of trade products like invoice discounting, factoring and broader supply-chain solutions. They are all under the banner of trade. We would also move into payment and cash-management solutions.
“It’s important that we can offer clients global ability to manage their cash through multiple geographies, multiple currencies, and to make cross-border payments. We can offer cross-border cash pooling, so a client’s cash balances from around the world are in one pool. We can then move into FX: currency conversion and currency hedging.” Muhammad Aurangzeb, head of Asia Pacific corporate banking at JPMorgan, also says that often one of the first things a company asks for is straight lending. “But this is quickly followed by a risk-management agenda across asset classes: whether there is a mismatch in currencies; if it is necessary to hedge their FX, rates and commodities exposure. Depending on how fast they are growing, they may also be looking at moving into supply-chain finance. If they have expanded into four to five markets, optimizing the movement of cash across borders will be on the agenda, although I would say this is still more relevant to the top tier group.”
Aurangzeb insists that JPMorgan does not want to compete for local business with local players, but rather emphasises the work the bank already does with a lot of leading firms. “We are working with the top-tier names already, but the question is: who are the next to emerge into that group?” he says. “A lot of these companies have been growing at double-digit rates and possibly have outgrown their infrastructure. We are often approached by these companies rather than having to find them.” Citi has added over 100 in headcount to rates, FX and cash management in its Asian commercial bank over the past year, and plans to hire more this year.
“Typically, these companies are very fast growing,” says Ashish Bajaj, head of Citi's commercial bank in Asia Pacific. “You will find companies that are trying to not only grow domestically, but also grow cross-border through becoming acquisitive. These are companies in the technology space, the pharmaceuticals space and also in the automobiles and industrials space. You would even find trading companies in there too. “There are certain industries where you will find a better chance of companies turning into a future corporate champion. In industries like pharmaceuticals, technology and e-commerce it is much more obvious because they often become the main manufacturer or innovator. The ones that are in the traditional industries such as packaging or chemicals for example, it’s less obvious, as they are more commoditised.”
According to Bajaj, Citi’s aim when a company has multiple client relationships is to be the first-call or at least one of their top-three relationship banks. “Being top-three or better means you get closer to the client and can develop the relationship across the bank and increase your share of wallet,” he says.
Regional banks, local banks, and SMEs Regional banks have been making headway in recent years and now present a strong case to provide services to these firms. Jeanette Wong, head of institutional banking at DBS, believes that the retreat of some larger rivals has helped banks such as hers advance in this all-important market segment.
“Since the financial crisis, some of the big international banks have withdrawn from some of the relationships in the region, which has planted seeds in some of our customers’ minds that they may not be here consistently for them in the long run,” she says. “They have been reluctant to use the balance sheet as much as they used to, and that has helped us. For us, Asia is our home and our backyard. The fact that we are born and bred in Asia, and we are living and breathing in Asia, that helps.” Singapore is still where DBS generates around 50% of its institutional banking group revenue, according to Wong, but she sees an opportunity to grow with mid-sized corporates in markets such as China, Korea, India and Indonesia.
“Of course, we compete with the big international banks for business from the corporate titans, but some of the big international banks do not compete with us as much for business from the small and mid-size corporates,” explains Wong. “We compete with local banks in Asia for business from SMEs, but we have a much bigger Asian footprint and so have an advantage for clients looking for the Asian connectivity.” The other frequently quoted bank looking to grow in southeast Asia is Malaysia's CIMB. It is focusing its efforts on Indonesia, Singapore, Thailand and Cambodia, as well as Malaysia.
“We do notice a great deal of potential in Malaysia's home-grown companies, especially those which have strong regional branding and market positioning,” says Yong Jiunn Run, acting CEO, group commercial banking at CIMB. “Typically, such companies reside in the retail, education, food and beverage and property development sectors. We also observe pockets of excellence in manufacturing, such as electronic goods, medical devices, and, increasingly so, the online services industry.”
Capital markets funding
Since the financial crisis, some of the big international banks have withdrawn from some of the relationships, which has planted seeds in some of our customers’ minds that they may not be here for them in the long run. The fact that we are born and bred in Asia, that helps
When a company reaches the stage in its life cycle when it wants to start accessing capital markets, this can often prove to be a tricky transition. Some banks admit that they simply do not have the capabilities to assist their client, and will happily recommend another firm that can do a job on that front. But for those banks that do have the means, there can still be issues over who will be the main point of contact for the firm: corporate banking or their capital markets colleagues. The answer is often a mixture of the two, but it is still a transition that needs to be managed well.
“We have an excellent partnership with our investment bank,” says Citi’s Bajaj. “We bring them in at the right time.” And according to Bajaj, an IPO or the first high-yield bond can be an emotional time for clients. “They are going public or raising capital for the first time from bond markets, it’s not easy for them and we make sure we are there for them every step of the way.” Quinn at HSBC adds: “We have built up a capability where they can gain access to debt and equity capital markets, project finance and M&A. I have a team of people in Asia dedicated to commercial-banking clients, providing advice on this particular range of services. Unless they become a large multinational corporation such as Alibaba, my team will generally stay with them throughout their life cycle. One thing we find very positive in Asia is there is a willingness to invest in capital markets transactions at a much lower level. You possibly would not have that in New York or London.”
The growing importance of Asia, and particularly China, for many global and regional banking groups means the race to bank these companies cannot be taken lightly. And as companies continue to grow along with the region, the competition to work with Asia’s next corporate champions can only get more intense.