If you have to be a banker during the global financial crisis, the best place to be is Asia. The region is home to a thrifty and conservative population that already holds 60 percent to 80 percent of its wealth in bank deposits. And bankers from Taiwan to India to mainland China have seen increased deposit flows as investors fled equities in the wake of the global financial crisis. But can bankers attract and retain more deposits in the flight to safety while still making adequate returns?
Like their counterparts in most of Asia, Taiwanese banks are witnessing deposit gains. State-owed Bank of Taiwan (BOT) saw robust 15 percent growth in deposits last year as the country’s stock market dropped 45 percent. Taiwan’s state-owned or affiliated banks have benefited more than non-government banks because they are seen to be more sound: Deposits in state banks grew an average 8 percent last year against 3 percent for non-state banks.
To bolster investor confidence in banks following the financial crisis, Taiwan is guaranteeing deposits until the end of this year, a move that is leveling the playing field for lenders competing for deposits, and is reported to be considering extending the guarantee to the end of next year.
But what happens after the guarantee ends or when the market takes a turn for the better? Will Taiwan’s banks be able to retain those deposits? The question is particularly important for Taiwanese banks without a strong capability in deposit gathering or those perceived to be less sound.
Even as deposits rise, Taiwan’s banks need to find new ways to spur investor interest over the long term. Bankers in Taiwan and throughout Asia have grown overly reliant on wealth-management services and consumer lending to fuel revenue and earnings growth.
But with skittish customers staying away from investment products, credit cards and loans for now, the best option for reinvigorating their business lies in competing for the unglamorous but deep pools of retail deposits.
The battle to win more deposits than rivals will be a zero-sum game with a big prize for the winners. But the passive approach by Taiwan’s banks to collecting deposits from customers who are already heavily inclined to save means their business muscles in this area are weak. Accustomed to earning higher returns during a market upswing, bank customers may be unwilling to settle for the low yields currently paid on conventional accounts.
The intensifying competition for deposits risks driving down returns as banks, unaccustomed to aggressive moves, may succumb to the pressure to overpay to hold on to skeptical account holders and attract new ones. In Taiwan, where most customers have put their money into time deposits, the pressure could be strong, as the interest rate difference between time and demand deposits is currently narrow.
The big question is: When the time deposits expire, will banks in Taiwan be able to hold on to depositors who start looking elsewhere for higher returns?
Innovation is, therefore, key for banks to retain and attract customer deposits. But innovation is one area where banks in Taiwan — and throughout Asia — have trailed those in other regions. Basic products that have worked in other markets — low-balance transaction accounts, hybrid interest-bearing checking accounts, flexible savings accounts that combine check-writing privileges with higher-yield term-deposit features, no-frills high-rate savings instruments — are largely unknown in Asia.