Southeast Asian banks have shown resilience as they rode through the Covid-19 pandemic, however, the challenges in tackling the uncertainty of the macroeconomic scenario are huge in 2023.
The banking sector in Southeast Asia has demonstrated stability throughout the COVID-19 pandemic. However, as the economy moves into a rising interest and inflationary rate environment, the challenges in tackling the uncertainty of the macro-economic scenario will remain, said Li Yun Sea, ASEAN banking and capital markets leader at international consultancy EY in Singapore, in a note.
While higher interest rates will benefit net interest income (NII), as assets are repriced faster than liabilities, it also means banks should continue to remain cautious in the management of credit risk as higher interest, inflation rates and forex depreciation may lead to asset quality issues.
Main Areas of Focus
Banks’ performance remains challenging as such broader impacts of inflation and slowing economic growth may hinder the recovery expected from COVID -19 pandemic. «As we move into 2023, the main areas of focus include the regulatory agenda, climate risk and sustainability reporting, as well as the emergence of ecosystem models and embedded finance,» Li said.
With fast-moving innovation and new participants such as fintech and big technology players, there is more urgency to integrate the non-banks into supervision and regulatory frameworks. Central banks in the region will need to consider the maintenance and expansion of the regulatory perimeter as appropriate to cover competition issues such as market concentration against low prices, financial inclusion and exclusion, or access to data against disintermediation.
Riding the Digital Strategy
There is also a need to consider the regulation of new digital entrants to protect customers and ensure financial stability within the ecosystem, making digital assets and crypto technology more viable. Banks need to think about how they can continue to drive growth to ride on the digital asset strategy while tackling the challenging regulatory compliance environment, Li said.
With banks’ commitment to focus on a net-zero economy and decarbonization, there is pressing demand for greater action on climate change and greater sustainability efforts. This includes stepping up on engagement with customers on their sustainability roadmap, aligning product offerings with green strategies, sharpening the focus on climate risk, as well as advancing disclosures in relation to data on financed emissions.
Reshaping the Sector
Through the COVID-19 pandemic, Li noted that banks in Southeast Asia have invested significantly in digital and operational capabilities. As such, while there are macroeconomic challenges ahead, banks need agility in transforming to respond to wider trends that are reshaping the sector.
«There are particular areas of opportunities in product innovation to align with digital asset and ESG agendas, implementing new ways of working to retain talents and build an agile workforce, as well as implementing dynamic customer and risk management strategies through investment in data analytics and technology,» Li concluded.
