INVESTORS may not have noticed the resilience of banks in southeast Asia amid a string of failures among their US and European counterparts, says Pendal’s Samir Mehta.
It’s due to a growing maturity of regulators and governments in the region says Mehta, who manages Pendal Asian Share Fund.
It wasn’t always that way.
Southeast Asia’s currencies, markets and banking systems were heavily impacted during the 1997 crisis as well as the GFC.
A dash to safety — the tendency for capital to be withdrawn in favour of safer investments — led to macroeconomic instability.
But this year’s slow-burn banking crisis in the West — which has seen the collapse of three US banks and the demise of Credit Suisse — has so far left Asia relatively unscathed, says Mehta.
“This is very different from the pre-1997 crisis in Asia when this region would typically be the worst hit from a macro instability during a dash to safety.
“What people are missing is the genuine change in the approach by central banks and governments in most parts of Asia to reign in indiscriminate borrowing resulting in unbridled speculation.
“Whether it’s Singapore, which is leading the way, Indonesia, Malaysia or to some extent even Thailand, regulators have really tightened down.”
Mehta highlights Singapore’s lending and housing policies which have been significantly tightened in recent years to clamp down on speculation and prioritise housing for owner occupation.
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The highest profile of these policies is the immense stamp duty faced by foreigners buying property or locals buying second properties.
Stamp duty of 20 per cent of applies to locals buying a second property, rising to 30 per cent for the third and subsequent properties.
But for foreigners buying any residential property, stamp duty is now a staggering 60 per cent of a property’s purchase price.
Singapore also charges sellers an additional stamp duty if they sell a property within three years of buying.
“Now, all of this is draconian,” says Mehta.
“Regulators have made it so difficult so that the only those who have savings for their equity contribution, the ability to repay, are willing to pay additional taxes and importantly will hold the property for the long run can buy property.
“This is reflective of a mindset change that central banks in this part of the world incorporated from the lessons of the past.
“That is why it is now such a different regulatory regime in this part of the world.”
The Monetary Authority of Singapore (MAS) — the island state’s central bank and financial regulatory authority — has also directly regulated leverage available to borrowers, cracking down on banks’ ability to make risky loans.
“Human nature is such that if I work for a bank, profits I make are shared to me as a bonus but losses I make are borne by shareholders — it’s a disproportionate risk reward situation,” says Mehta.
“We have seen it time and time again. Banking crises are almost always driven by significant increase in leverage because the payouts from leveraged speculation are disproportionate for the person who takes the risk.
“This is a lesson that central banks in this part of the world — particularly the MAS — have learned.
What the MAS does is something the Federal Reserve and Western banks have rarely done — directly tweak margin requirements and loan to value ratios.”
This control over the lending market curbs banks’ ability to make excess profits but also dramatically reduces the chance of a bank failure.
“If and when there is a crisis, the probability of Singapore banks being badly affected has come down sharply,” says Mehta.
“So, among all the universe of banks out there, as an investor I want to find those banks in a regulatory environment where I won’t lose my shirt.”
The security provided by tight regulation also plays into why the Singapore dollar remains so stable and why Singapore is attracting so much foreign capital, says Mehta.
“That’s a virtuous cycle — these actions demonstrate the willingness of the central bank to take draconian measures to provide stability and that stability which by definition then encourages more people to invest capital in this region because they know it enhances stability.”
Samir manages Pendal Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.
Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
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