Asian banks are in for the fight of their lives. While international banks are growing in local presence, size and product offerings, their Asian counterparts are attempting to cope with the fallout of the economic crisis. The economic downturn and resulting weak balance sheets have sent many depositors running, cash in hand, for the exits and into the branches of international competitors. If Asia's banks hope to survive and win back their valued depositors, they must realize that bigger — while not always better — is a key element in a strategy to recover and win back customers.

This has been a year of mega-mergers, with the Citibank-Travelers and BankAmerica-NationsBank deals topping the list. These mergers were driven by two different strategies that could provide valuable lessons for Asian banks in their fight to fend-off foreign competitors. The BankAmerica-NationsBank merger was cost-driven, consolidating the operations of two similar organizations. The Citibank-Travelers merger, on the other hand, was customer-driven, providing Travelers with a valuable distribution channel for its financial products.

These and other international banking and investment institutions pose a significant threat to Asia's banking industry. Before the economic crisis, international banks in the region limited their focus to servicing high-end retail depositors, blue-chip corporate borrowers and global corporate finance clients in capital cities. Now, depositors from crisis-hit retail and commercial-market segments are pro-actively searching out brand-name international banks to shelter their remaining assets. Financial security and perceived bank stability is becoming more highly valued than convenience or patriotic consumerism when it comes to a lifetime's savings or the survival of a small business.

Faced with battered balance sheets, hemorrhaging deposits, a slowing in national savings rates and increasing international competition, Asia's banks should implement the following strategies if they wish to compete with their larger international rivals: 1) recapitalize the business, 2) build exit barriers around key customer segments and 3) recover lost customers, deposits and associated business. All three of these strategies can be implemented successfully through a well-conceived and well-executed merger program.

— Recapatilize. Asia's banks must restore balance sheet ratios and consumer confidence if they are to recapture the allegiance of high-value customers. They do not have the operating recapitalization options that were available to U.K. banks during the early 1990s — depressed cash flows will not allow Asian banks to recapitalize through retained earnings. However, one of the fastest ways Asian banks can recapitalize their balance sheets and regain customer confidence is to lower costs through cost-driven consolidation transactions, including mergers and internal streamlining of operations. While bigger is not necessarily better, as the Japanese banks prove, consolidation can create a platform for reducing overheads, branch costs and rationalizing information technology budgets.

Following the BankAmerica-NationsBank example, operating costs can be drastically reduced while distribution channels are widened. The consolidation of Keppel Bank with Tat Lee in Singapore and DCB with Kwong Yik in Malaysia are good examples of synergy-driven deals resulting in lower cost potential in Asia. Another method of reducing costs is outsourcing expensive back-room operations such as check processing. Outsourcing this work to larger national or international banks with excess capacity is a means for Asian banks to reduce operating expenses without sacrificing service. A bank merger can increase the volume of business to be outsourced, further lowering costs.

— Build exit barriers. Broader local distribution is a substantial advantage large Asian banks have over international banks. Although international banks are rapidly increasing their presence through acquisition, Asian banks still provide lower cost access to a wide range of market segments and a network of relationships that will be difficult to attack. Leveraging this advantage, Asian banks must focus and tailor their distribution systems and overall business models around their most attractive customer segments.

This would be reflected in branch location, in the number and focus of sales people, in the number and placement of ATMs, and in the rewards associated with customer acquisition, penetration and retention. For most banks with national scale, this would require a reduction in the number of branches. One Korean bank with 300 branches estimated that a new customer-focused approach would halve the number of branches it needed.

Access, convenient locations and low costs will not be enough to attract all customers back and overcome brand-related concerns. To compete with international banks, Asian banks must also pursue customer-driven consolidation opportunities to expand the number of financial products available to customers. The Travelers-Citibank-Nikko combination and IBJ-Nomura-type link-ups already underway in Japan will set a new standard of customer value proposition across the entire region.

Expanding product offerings beyond national boundaries may also be necessary to retain customers. To compete with international banks, many Asian banks will need to capitalize on their wide distribution channel and sell Fidelity funds, Merrill Lynch derivatives or Goldman Sachs fixed-income instruments. Products with a high technology component, like index funds, derivatives and hybrid portfolios, may well be better manufactured by global institutions, allowing local enterprises to focus their efforts on the distribution side of the value chain.

— Recover lost customers. The greatest threat to the profitability of Asian banks is not the obvious defectors who are closing their accounts, but "partial defectors" who reduce their balances significantly but do not close their accounts entirely. A larger, stronger, more accessible enterprise will have a far better chance to recover lost relationships than a small, isolated business operating on its own.

By pursuing cost- and customer-driven consolidation opportunities, Asian banks can position themselves to better compete with international banks. An effective consolidation strategy can allow Asian banks to grow during the crisis, enabling banks to restore capital and confidence, to cut costs, to expand distribution channels and to offer high-quality financial products. Ultimately, the successful Asian banks of the future will be much larger and thus more effective.

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