INTRODUCTION 

The banking industry is facing the perfect storm. Almost simultaneously, technological changes of the Fourth Industrial Revolution, re-regulation in the wake of the Global Financial Crisis, or GFC, and the persistence of slower economic growth are severely challenging the status quo. Banks everywhere have to recalibrate their business models to survive and thrive again, without a clear picture of what lies after the storm has passed. All these make trying to predict what ASEAN banking will be like in 2025 very difficult indeed. 

CIMB’S ASEAN JOURNEY 

It has been my privilege to lead the transformation of CIMB from a Malaysian investment bank to a leading ASEAN universal bank through a series of mergers and acquisitions as well as new builds across the region since 2005. CIMB aligned its international strategy with the ASEAN Economic Community, or AEC, agenda from the moment it became official in the 2007 ASEAN Charter. Inspired by the promise of ASEAN as a single market and production base, we committed ourselves to being an integrated ASEAN company, and expanded rapidly across the region to create a banking platform that would best serve the needs of institutions, companies and individuals in the region, especially those that operate in multiple ASEAN countries. We became arguably ASEAN's biggest cheerleader by making our tagline "ASEAN For You". 

We fully embraced the AEC - the promise land of a single production base with the free movement of goods, services and skilled labour by 2015 - and we designed our business model to benefit from the expected greater flows of businesses across borders and easing of rules on operating across national borders. While we knew it would take a long time, we dreamt of a time when we could operate seamlessly across ASEAN, perhaps with one primary regulator enabled by delegated regulatory functions from various other central banks. At times, when we got over-excited, we even envisaged the day of an ASEAN Central Bank. 

From being a single-market investment bank in 2004, with the launch of CIMB Bank (Vietnam) in 2016, we are now present with our desired licenses and capabilities in all ASEAN markets, except the Philippines, where an application for a new license, under the country's new framework for foreign banks, has been submitted. In 2017, in ASEAN's 50th year, we expect to complete our ASEAN platform. 

The AEC is a beautiful idea, but as I reflect on our regional journey, the first lesson is that we ought to have been a little more careful with what the label said! We knew that operating in multiple markets, especially in incredibly diverse ASEAN, is very challenging as it means managing and navigating different cultures, languages, economic structures and political systems. What surprised us was how slowly non-tariff barriers would come down so trade, capital and people flows did not grow as fast as we expected, and, more importantly, how resistant banking regulators were to regional integration. Indeed, the central tenet of the 2011 ASEAN Financial Integration Framework rather ironically became bilateral agreements between central banks of ASEAN countries. 

The ASEAN banking challenge was compounded by global banking re-regulation in the aftermath of the GFC. When we first embarked on our regional expansion, CIMB was significantly over-capitalised; new requirements not only wiped out about 30% of the capital value of our equity base by 2014, re-regulation has also made cross-border intra-banking group activities subject to far greater scrutiny and restrictions. 

The new realities about the costs and limits of the ASEAN banking integration have to be built into our strategic plans for the future. In terms of materiality, however, they do not even begin to compare with other forces that make up the perfect storm now facing the banking industry. 

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THE PERFECT STORM 

The banking industry is being revolutionised by technology, as an enabler for banks to deliver better products and services cheaper and faster to customers, and for non- banks to challenge in many areas of banking or become banks themselves. The rise of fintech companies and new fintech banks is most dramatic in China, where a combination of entrepreneurial innovation, large market and regulatory support has fuelled the emergence of the likes of WeBank, MyBank and Ant Financial as serious long-term threats to the established order of banks in China and beyond. 

Traditional banks are also struggling to cope with re-regulation that demands higher capital, liquidity and governance. Better governance is also applied on the oversight of staff behaviour and compensation, which has, in turn, made banking a much less attractive career for top talents. A Financial Times analysis of the career paths of graduates from the top 10 MBA programmes from around the world shows only 10.6% chose banking as a career in 2015 compared with 17.4% in 2008. 

Revenues for banks are also much tougher to earn due to slower global economic growth and margin compression, driven by competition from non-banks as well as disintermediation. In terms of profitability, the golden age is surely over. A study by McKinsey shows that between 2002 and 2007, the banking industry’s global revenue growth was 16.8% and global average return on equity, or ROE, was 14%. In the period between 2012 and 2015 following the GFC, revenue growth whittled down to 6.2% and the average ROE fell to 9.1%. 

THE FUTURE FOR ASEAN BANKS 

The future will depend on how ASEAN banks as well as governments and regulators respond to the challenges I have outlined. We collectively have to see the future for what it is and not how we like it to be. 

Banks have to embrace technology and not just how they themselves imbue new technology into how they operate, but also how they embrace providers of technologically-advanced solutions, vendors and fintech companies. Customers will no longer be as loyal to brands and their traditional ways of banking. Convenience and pricing will overwhelm other differentiators, which means that banking will become a technology game, not just in facing the consumer, but also credit decision-making, payments, product bundling, pricing and so on. The right technological solutions may often be found outside the bureaucracy of banks themselves so how a bank attracts, selects and works with fintechs could be crucial. 

I doubt many fintechs will actually survive in the long run as they battle bank balance sheets and domain knowledge, and their innovations get copied very quickly. However, they will have devastating impact on banking margins and the few that survive will be huge threats to incumbents, not least those that become licensed to be banks, yet have superior technology, and no legacy costs in terms of branches and people. 

Banks will need to choose between being large-scale white-label providers of capital to major platform players, or themselves owning the customer and becoming an orchestrator of a significantly larger eco-system. This will be important as lines rapidly get blurred in the customers' minds; between traditional siloed products offered by traditional industries, such as banks and telcos, and a more fluid offering in their decision journeys. New growth opportunities will also emerge, particularly in ASEAN, where there are over 250 million mass-market, unbanked customers and micro enterprises. New low-cost technology-based business models will allow banks to participate in these opportunities. 

The conservatism that characterises how ASEAN regulators look at the AEC will likely turn out to be helpful to incumbent banks facing the onslaught of technology. The regulators will be cautious with new fintech banks, and avoid anything too disruptive to incumbent banks given their perceived importance to protecting savings and channeling capital. At the same time, being too rigid can be too costly for the local economy and leave domestic banks behind the curve. 

The long-term competitiveness of ASEAN banks will be determined by how they recalibrate their business models - costs, organisational structures, talent pool, processes and so on. Economies of scale will prove crucial, which means that banks that can exploit the scale of ASEAN as a whole will have the best chance. Regulators will make the difference; they will determine whether the scale of ASEAN can be brought fully to bear to enable a few ASEAN banks to evolve and be able to stand up to the most technologically-advanced global new and established players. In this scenario, some banks will be able to do well; but many will fall by the wayside, unable to invest sufficiently in technology, and withstand lower margins and higher regulatory costs. 

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CIMB IN THE FUTURE 

Recalibration has been our theme at CIMB since 2014. We know we have to transform extensively to ride out the perfect storm and adjust to new realities, including new limits of regional integration. We are reducing costs, removing unprofitable business lines, investing heavily in technology, revamping our talent pool and organisational culture, and adjusting our regional operating model to a multi-local one and so on. 

I believe we will thrive after the storm, and, in 2025, be one of the few ASEAN banks that compete intensely in every ASEAN country, but not necessarily in the same way in every market. In some, we will be amongst the digital disruptors; in others, we will evolve our large legacy franchise and defend our costumer ownership. Our main competitors will be the fewer pure domestic players in each market as well as global banks, many of which were fintech companies just a few years ago. We can continue to make attractive returns, but like all banks, we will not reach anywhere near the highs of the golden era of banking.