Welcome to the latest edition of Protiviti’s Asia-Pacific (APAC) Financial Services Insights. In this monthly newsletter, we provide a summary of important developments across the APAC financial services sector, including those related to the ever-changing regulatory landscape.
As we embark on the Lunar New Year of the Ox, the APAC financial service sector is seeing a healthy albeit slow recovery. Virtual banks are gaining momentum across Hong Kong and Singapore, whilst the Philippines, Malaysia, Indonesia, Vietnam are considered to have a huge growth potential for these neo-banks. Digital is becoming mainstream as we observe an increasing trend towards FinTech applications and cash-less payment methods which raise cybersecurity and fraud concerns for consumers. Sustainable finance is also gaining prominence with Japan and Hong Kong regulators considering climate risk as a key theme for their supervisory examinations. From an enforcement standpoint, regulators across APAC have imposed record penalties for financial crime and data privacy violations and we anticipate strong enforcement to continue throughout 2021.
New findings from Fenergo show that in 2020, financial institutions in APAC and globally racked up more than USD 10.6 billion in penalties related to non-compliance with Anti-Money Laundering (AML), Know Your Customer, Markets in Financial Instruments Directive and data privacy regulations. In Asia Pacific alone, organisations accrued more than USD 5.1 billion in penalties. Overall, data privacy fines in APAC totaled USD 6.9 million. APAC has overtaken the US in terms of the value of enforcement actions for the first time since 2015.
In APAC, the Philippines, Malaysia, Indonesia and Vietnam have the highest prospects in Asia for online banking (neobank) right after Australia, according to a report released by UnaFinancial. The results are based on two main criteria: the country’s attractiveness for online banking and the levels of competitiveness within the segment. Southeast Asia has long been hailed as one of the largest markets for digitization with high internet penetration rates coupled with a rising middle-class population, making it a ripe market of over 630 million inhabitants, half of whom are without a traditional bank account.
Some key trends that will continue to play an instrumental role in shaping the APAC region’s financial services sector in 2021 are:
- Geopolitical tensions in Asia continue to impact markets and deal-making- the implementation of a new Securities Law in Hong Kong by China, new tensions between India and China and the election of Joe Biden etc.
- China’s financial market continues to open up.
- Sustainable finance gains prominence.
- Digital becomes mainstream: Asia continues to make progress in digital banking. This will continue into 2021, with Singapore and Hong Kong leading the race.
As firms strive to gain competitive edge over their peers, machine learning is maturing in financial services globally and in the APAC region, as companies deploy ever more sophisticated technologies to drive innovation.
Hong Kong, S.A.R.
Hong Kong pioneered one of the world’s first smart contactless payment systems, the Octopus card. It is home to contactless and QR code payments, and one of the markets advancing China’s Central Bank Digital Currency pilot. A recent study by the Hong Kong Monetary Authority (HKMA) released in 2020 found that 86% of incumbent banks are progressively integrating FinTech applications across all types of financial services, and all incumbent banks intend to introduce one or more FinTech applications to their business in the next five years. To foster development, a dedicated team was set-up at Invest Hong Kong to offer one-stop support service to family offices interested in establishing in the city. In turn, this initiative will help further expand Hong Kong’s private capital funding pool – and thus, driving even more funding into the fintech ecosystem.
Hong Kong is not seeing fund outflows following Beijing’s imposition of a national security law in the Asian financial hub according to Arthur Yuen, deputy chief executive of the HKMA. In a stament he was quoted as saying, "it was pretty much business as usual for banks despite the uncertainty, and he had not heard complaints from customers about the landscape becoming more complicated.” Total deposits in Hong Kong rose 5.4% in 2020 compared to the previous year. Yuen stated, that while banks in Hong Kong had no legal obligation to follow US sanctions, they must consider any risk factors in their dealing with customers.
The banking system's liquidity remained resilient in 2020, as indicated by the key monetary statistics published by the HKMA. A liquidity outflow did not materialize and there were no signs of disruption to banks' capital and liquidity buffers despite economic headwinds from the lingering US-China trade tension, social unrest and the outbreak of COVID-19. Loan growth of 1% YoY was the slowest pace since 2009, while total deposit growth of 5.4% was similar to the recent five-year average (6%) and was hardly affected by the pandemic, likely due to stimulus and buoyant capital market activity. Robust deposit growth underpinned the sector’s liquidity strength and also contributed to the loan-to-deposit ratio dropping to 72%, from 75% at end-2019.
The number of unauthorized online banking and card transactions jumped sharply last year amid the COVID-19 pandemic. There were 1,848 police reports of such transactions involving criminals phishing for banking and card details from victims - up 462% from 2019's 329 cases. The number of scams reported last year also hit a high, climbing 65.1% from 2019, with fraudsters swiping around USD 201 million from victims. E-commerce scams, the most commonly reported type of scams last year, jumped 19.1% from 2019 to 3,354 reported cases, partly due to the increase in online transactions amid the pandemic. While banks must implement controls such as multi-factor authentication using one-time passwords (OTPs) to keep online transactions secure, these measures will not eliminate all scams.
(The Straitstimes, 16/02/2021)
Virtual bank licences have been something of a work in progress in Singapore over the past few years. In June last year, the MAS shortlisted 14 contenders “eligible for next stage of assessment,” and by December, the city-state had approved four digital bank licences. Singapore has strengthened its focus on the digital economy in recent years, pushing legal tech and pitching itself as a regional leader in business innovation, but last year its long-time competitor Hong Kong edged ahead in the virtual banking race after issuing licenses. MAS issued four digital bank licenses — two digital full (retail) bank licences and two digital wholesale bank licenses.
(Asia Legal Business, 17/02/2021)
OCBC, UOB and DBS are among the first lenders in Asia to report 2020 numbers. They’re in good shape. OCBC’s non-performing loan ratio, at 1.5%, is flat year-on-year, and UOB’s up just one 10th of a percentage point to 1.6%, the same ratio as at DBS. OCBC’s total non-performing assets (NPA) were up only 3% year-on-year, a period including the beginning of the pandemic, and actually declined 6% quarter-on-quarter. UOB’s total NPA book, at SGD 4.6 billion, is not much different from its pre-pandemic level a year ago of SGD 4.2 billion.
The Reserve Bank of Australia (RBA) will have to delve deeper into spending and transaction data to understand changes in the economy and possible threats to the financial system amid private sector warnings that the advent of non-banks could upend traditional central banking, according to Accenture. Aside from setting monetary policy through interest rate settings, the RBA oversees key elements of the financial system including managing the nation’s gold and foreign exchange reserves. Central banks need to review their approach given that financial institutions are adopting new technologies, data is becoming more crucial and security threats are more pronounced.
Australia’s general insurance market is projected to grow from AUD 76.3 billion (USD 51.8 billion) in 2020 to AUD 98 billion (USD 66.9 billion) in 2025, in terms of gross written premiums. A study by GlobalData revealed that the general insurance industry in Australia is expected to grow at a compound annual growth rate of 5.1% from 2020 to 2025, fueled by the gradual economic recovery from the COVID-19 pandemic, as well as growing demand for insurance against natural disasters. The general insurance industry saw improvements in investment income and underwriting results, which helped net earned premiums grow by 6.1% in the third quarter of 2020, following a 4.8% dip in the previous quarter.
China’s central bank, together with other financial authorities, has signed a memorandum of understanding with its Hong Kong and Macau counterparts on establishing a cross-boundary Wealth Management Connect pilot scheme in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA). All parties agreed to supervise the business within their respective responsibilities and cooperate with each other. The memorandum covers topics such as regulatory information exchange, law enforcement cooperation, investor protection, liaison and consultation mechanism. This will promote interconnection and financial cooperation in the GBA, boost internationalization of yuan, and strengthen the region’s role as an important bridge and link between the internal and external circulation of China's economy.
Analysts are becoming more optimistic about Chinese banks, some of which posted steep profit declines during the first half of 2020. Chinese banks could see profit rebound on the back of broader economic recovery, a gradual exit of relending programs as well as less high-cost deposit products amid regulatory moves, all of which will support revenue growth with a more stabilizing net interest margin. As Beijing pushes banks to lend more to power the economic recovery, the regulators have been trying to keep a lid on their funding costs in order to facilitate lending, which also relieved some pressure on their net interest margins. The People's Bank of China curbed interest rates on high-yield structured deposits, in January.
The coronavirus pandemic has encouraged more cash-loving Japanese to move away from banknotes and coins, giving a boost to banks in their drive toward digitalization. Banks are trying to expand cash-free locations so employees can focus on more lucrative services such as offering investment advice to clients. The government has set a goal of increasing cashless payments to about 40% of all transactions by 2025, from about 20% currently. More Japanese are using credit cards and electronic money for small purchases, according to a survey by the Central Council for Financial Services Information.
(Bloomberg Quint, 18/02/2021)
Japan’s central bank is set to launch a pilot for a digital yen in the first quarter, according to Japan’s public broadcaster, NHK. In the first phase of the pilot test, the Bank of Japan (BOJ) will work with private businesses to test the basic functions of the central bank digital currency. The tests will include the issuance and circulation details of the digital yen. The first phase is set to last for about one year, NHK reported on February 19.
(Central Banking, 23/02/2021)
The BOJ will for the first time highlight climate change risks as among key themes in its bank examinations this year, joining major peers moving to gain research clout on the effects of global warming. In guidelines on the examinations due next month, the BOJ will clarify its readiness to coordinate with Japan’s banking regulator in analyzing the impact of climate risks on financial institutions. The central bank will also beef up cooperation with the regulator, the Financial Services Authority, in studying European examples and specific ways to measure financial risks associated with climate change.