, Singapore

ASEAN supply chain shifts a win for Singapore banks

They will be attracted to the banks’ strong balance sheets and access to USD funding.

Singapore banks will benefit from the rising number of China-based multinational corporations (MNCs) shifting their supply chains to ASEAN, as these companies will be attracted to the banks’ strong balance sheets and access to US dollar funding, reports Maybank Kim Eng.

Rising labour costs in China and generous investment incentives in SEA have pushed MNCs to shift their supply chains from the Mainland to ASEAN, and the pace is now accelerating, Maybank noted in a report.

In 2019, 13% of American businesses in China looked to ASEAN to redirect investment, a proportion that was only 9% a year before. These shifts are already starting to have an effect: from January to October 2019, US imports from ASEAN rose 11% YoY, whilst it fell 15% YoY from China.

Shifting MNCs and Chinese companies will likely look for banks with a low balance sheet. Further, these companies are expected to desire US dollar funding given its predominant use in cross-border transactions in the region.

Singapore’s three largest banks offer both of these.

“Singapore banks have the highest credit ratings in ASEAN, whilst their USD funding mix has increased from 14% of deposits in 2013 to 30% in 2019E–22 percentage points higher on average than other large regional banks. High levels of integration over common technology platforms and wide product suites in trade financing, cross border transactions [amongst others] also gives them an edge,” said Maybank analysts Thilan Wickramasinghe, Lee Ju Ye and Linda Liu in a note.

Also read: Credit costs to weigh on Singapore banks in 2020

“These structural shifts will happen over a long, multi-year cycle. The Singapore banks’ positioning early in the cycle should provide a competitive advantage and supplement slower growth at home. This will further improve dividend visibility,” they added.

Of the big three banks, the analysts believe that UOB will benefit the most from the supply shifts given their high level of regional integration and a proven cross-border execution track record.

Similarly, OCBC will also benefit from the shift, but longer term sustainability will depend on the successful execution of their Greater Bay strategy connecting North Asia and SEA trade flows. 

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