South China Morning Post

Innovation will win battle for deposits

Innovation will win battle for deposits

Many Asian countries are seeing a surge in bank deposits as investors flee battered equity markets in search of a safe harbour for their savings.

  • min read


Innovation will win battle for deposits

Many Asian countries are seeing a surge in bank deposits as investors flee battered equity markets in search of a safe harbour for their savings.

China Merchants Bank saw its deposits grow 42 per cent last year. State Bank of India watched deposits grow 28 per cent in the July–September quarter over the same period. But the boom in deposits has bypassed Hong Kong, where total bank deposits at all lenders fell 6 per cent last year.

Like other Asian countries, Hong Kong has a high rate of savings. In fact, its savings rate of 28.1 per cent of discretionary income is the third-highest in Asia. And like other Asian countries, Hong Kong's stock market has been battered in the global financial turmoil. The Hang Seng Index lost nearly half of its value last year. Then why aren't Hongkongers joining the same flight to the safety of bank deposits that is happening virtually everywhere else in Asia?

There are several possible reasons. For one thing, potential depositors are deterred by Hong Kong banks' relatively low interest rates, which are tied to US rates. Hong Kong customers are known to be more demanding than their Asian counterparts.

While they may have pulled out of equities, they have put their money into higher-yielding instruments such as foreign currency deposits—the yuan has appreciated 21 per cent against the Hong Kong dollar since 2004—instead of low-interest Hong Kong dollar bank deposits. Also, Hong Kong residents have been repatriating funds to the yuan.

Meanwhile, in the troubled economic environment, Hong Kong's bankers are seeing sharp declines in fee-based revenue, especially from wealth management services that have been contributing much of their non-interest income for years.

Against such a challenging backdrop, banks would do well to focus intensely on bank deposits. By attracting and retaining deposits, banks can get a stable source of income and worried investors a safe home for their money.

Given the low interest rates, Hong Kong banks should look for innovative ways to attract the city's demanding customers towards bank deposits. Already, some banks have started down this path. HSBC Holdings offers a new product that provides depositors complete fund mobility with no handling fee in case of premature withdrawal, as well as a cash bonus within the deposit placement period. Standard Chartered has relaunched a savings account that offers rates similar to time deposits—a move that allows banks to keep the deposits longer.

In addition to boosting deposits, Hong Kong banks could take steps to increase the margins they earn on those deposits. That means banks need to get more sophisticated when it comes to pricing. They need to tread the line between luring in deposits while not overpaying for them.

One way to do this is to set different rates more dynamically based on customer segments and products. That entails regularly reviewing each pricing element, based on how different depositor segments react to changing yields and account fees. Lenders will also need to be aggressive in constantly fine-tuning their pricing strategies in response to competitors' moves.

Successful banks aiming to boost deposits also should look at offering greater rewards for employees who bring in new deposits. And the banks could do a more ambitious job of cross-selling deposit products to existing credit-card and investment-account holders.

Customers could see more promotional and merchandising campaigns wherever they come in contact with the bank—from branch windows and service counters to ATM receipts and on statement envelopes. Alert banks will time such promotions to when customers' deposits mature.

Given the high rate of savings in Hong Kong and the rest of Asia, the banks that do the best job of accommodating customers' flight to safety will become the place where much of the world's money is kept, and increasingly, where banking profits are made.

Sameer Chishty and Nick Palmer are Hong Kong-based partners with Bain & Co. Both are members of the firm's Asian financial services practice.


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