For foreign lenders, Myanmar is no zero-sum game

SINGAPORE – A Foreign bank setting up a branch in Yangon must take its first step together with eight other lenders, all eager to tap a country that has been in isolation for more than 50 years.

But international lenders noted that co-operation, not direct competition, will serve the greater good for now.

“Competition among the foreign banks is to be expected. However, I think we should all be collaborating more and focus on the long-term development of Myanmar’s financial market instead,” said Go Watanabe, CEO of Asia & Oceania Region, Bank of Tokyo-Mitsubishi UFJ (BTMU).

“Given Myanmar’s banking industry is still in its infancy, it would make sense for all the foreign banks to pull our knowledge and expertise together to develop the necessary banking and finance-related infrastructures that will help move it to the next level.” Given the nascent stage of the financial market, foreign banks must partner one another to set up club loans that enable them to share the risk of borrowers’ default.

Armed with just one branch for corporate lending only, the nine foreign banks invited into Myanmar have to also work within a narrow band for onshore lending rates, which is between 10 and 13 per cent, said Andrew Wood, head of Asia country risk research, BMI Research.

“It does not allow the banks much room to tailor loans to the client and thus restricts credit growth.”

Even with better rates for offshore loans, the kyat’s large intraday trading range should be a concern for investors, who must match funding with their revenues in the local currency, Mr Wood added.

Head of OCBC’s global commercial banking Linus Goh also noted that the use of the US dollar there is not as pervasive as in other regional markets such as Cambodia.

Since international lenders are limited to a single branch – but must help their larger clients to manage their cash and forex exposure – foreign banks must work with the domestic banks to expand their reach, said Ian Wong, head of strategy and international management at UOB. Local lenders are also needed to hold collateral for larger loans.

But an inter-bank lending system is not in place. Local lenders are also not mature enough to make longer-term loans, since those would have to be funded by short-term deposits for now – a fundamental risk in banking that ironically, is only being vigorously addressed in developed financial markets after the financial crisis.

And it’s difficult to tie up loose ends there when lending goes sour. A World Bank study last year showed that resolving insolvency in Myanmar can take up to five years, said Melvin Poon, Myanmar financial services leader, PwC. The recovery rate for a loan is 14 US cents on the dollar, which is “a very low rate” compared to countries in the rest of Asia as well as the OECD (Organisation for Economic Co-operation and Development), he added.

There is also skittishness over the country’s general elections, as well as a brewing issue over hundreds of migrants from Myanmar who have been out at sea for months and with nowhere to go.

Banks seem clear-eyed about the challenges ahead. “Despite the enormous opportunity, the economic transformation of Myanmar is not a foregone conclusion,” said Rajesh Ahuja, chief representative of Myanmar at ANZ, the only Western bank there. “With the right policy settings, Myanmar could enjoy five decades of economic catch up over just the next five years.”

Pollie Sim, CEO of Maybank International, added that international lending is a new concept there. “Without existing rules as a guide or prior precedence for reference, the challenges related to financing of deals are foreseeable though not insurmountable,” she said. That being said, international lenders will be sharpening their knives.

With the government laying out significant goodwill on the Japanese banks’ behalf, BTMU also boasts of a tangible partnership with Myanmar’s Co-operative Bank (CB Bank) through an alliance agreement signed in 2013.

BTMU and CB Bank will work on greater knowledge-sharing and cross referrals, Mr Watanabe said. The Japanese bank will focus on encouraging greater inflows of foreign direct investments from global corporates, especially those from Japan and Thailand, Myanmar’s second-largest trading partner after China.

Sumitomo Mitsui Banking Corporation (SMBC) had sewn up a similar working agreement with Myanmar’s Kanbawza Bank (KBZ) in 2012, and told the press in Myanmar in April that it hopes to eventually snap up a minority stake in KBZ, the country’s largest lender. This is currently not allowed under Myanmar law.

BT was unable to contact SMBC for more comment. Mizuho Bank, the third bank that will enter Myanmar, has yet to set up its branch there.

While OCBC and UOB do not have such direct links with specific Myanmar banks, they note that they have relationships with the domestic lenders.

“We have long relationships with the Myanmar banks built through collaboration in training,” said OCBC’s Mr Goh. “In more recent years since the opening of the economy, we have focused on strengthening our partnerships with the domestic banks in the areas of joint financing, capability building and nurturing of local talents for the industry.”

UOB is understood to have relationships with more than a dozen local banks. It started a foreign direct advisory unit in Myanmar two years ago to establish ties, and link potential investors. The bank also has a larger branch network in South-east Asia than any of its local rivals.

Source: Asia One

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