Market reporting in Asia's financial sector: Bridging the gap ...

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Market reporting in Asia's financial sector: Bridging the gap ...

  1. 1. Financial Services quit print forward Market reporting in Asia’s financial sector: Bridging the gap between perception and reality* Contents Executive summary Introduction How does Asia compare? Easy – for now Commitment, culture and technology The analyst’s view Looking to the future Appendix: Survey results Contacts PricewaterhouseCoopers Global Financial Services Briefing Programme
  2. 2. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Executive summary Contents PricewaterhouseCoopers Global Financial Services Briefing Programme Executive summary Welcome to the second Asia specific financial services briefing entitled I am confident that you will find this briefing thought provoking and Introduction Market reporting in Asia’s financial sector: Bridging the gap between insightful. This Asia specific briefing is part of our global Financial perception and reality. Services Briefing Programme and soft copies of this, along with our How does Asia compare? previous global and Asia briefings on Wealth Management, Economic This briefing, written in co-operation with the Economist Intelligence Unit Easy – for now Capital, Risk Management, The Trust Challenge, IFRS, Compliance, (EIU), looks at how financial services organisations in Asia approach the Restructuring, Governance, Performance Improvement, Growth, Commitment, culture enhanced demands of market reporting and explores whether stakeholder Offshoring and Customer-centric Growth are all available free of charge and technology expectations are being met. Are international best practices for reporting from our web site www.pwc.com/financialservices standards being employed and how long will it take for the region to reach The analyst’s view the same stage as their international counterparts? If you would like to discuss any of the issues addressed in more detail, please speak with your usual contact at PricewaterhouseCoopers or one of Looking to the future The research effort for this briefing comprises of two initiatives: the editorial board members listed at the end of this briefing. We would also Appendix: Survey results • The Economist Intelligence Unit held over 15 one-to-one interviews with appreciate your feedback on this briefing as it helps us to ensure that we senior executives and analysts at financial services institutions in Asia. are addressing the issues that you are focusing on. Contacts • The Economist Intelligence Unit and PricewaterhouseCoopers1 conducted PricewaterhouseCoopers a special on-line survey of senior executives in financial services Global Financial Services Briefing Programme institutions on the subject of market reporting. Over 13 executives in financial institutions in Asia participated in the survey, which was conducted during August and September 006. The interviews and survey findings were further supplemented by Dominic Nixon significant desk research. Financial Services Leader, Asia 1 In this ‘Global Financial Services Briefing Programme’ publication, the term ‘PricewaterhouseCoopers’ is used to refer to the global network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independence legal entity.
  3. 3. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Executive summary continued Contents Globalisation of standards, increasing cross-border MA and tightening local regulations are all driving Asia’s Executive summary financial services sector to move toward international standards of market reporting (the reporting of financial and non-financial information to stakeholders). Developments such as Pillar 3 of Basel II and International Financial Introduction Reporting Standards (IFRS) are helping to drive this step forward. How does Asia compare? But are Asia’s financial services firms meeting the It is perhaps no surprise that respondents from 40% say they will be on par by 010. (As noted Easy – for now expectations of analysts and other stakeholders? financial services firms in Asia’s more developed in the main report which follows, international Commitment, culture According to a survey of Asian financial services markets (defined here as Australia, Hong Kong, best practice is itself a moving target.) and technology firms conducted for PricewaterhouseCoopers by Japan, New Zealand and Singapore) believe By contrast, among respondents in emerging the Economist Intelligence Unit in August- that the region as a whole is further away from The analyst’s view markets, 59% are confident they will reach September 006, they are generally confident reaching international best practice than their international standards by 010, while 38% feel Looking to the future that they are meeting demands – overall, 63% counterparts in Asia’s emerging markets (China, that this milestone will not be reached until 015 feel their market reporting is very effective. But India, Indonesia, Malaysia, Pakistan, Taiwan, or later. This suggests that respondents in Appendix: Survey results how high are the demands? Our research suggests Thailand and South Korea). By definition, firms emerging markets are underestimating the gap that many financial services firms in the region in developed markets are more aware of Contacts between themselves and their peers in more benchmark their reporting against domestic international standards, having been exposed developed markets. It also creates interesting PricewaterhouseCoopers peers, rather than overseas players. And equity to global markets for longer. They have also challenges, since financial services firms in Global Financial Services analysts judge Asian firms against the standards expended more effort in trying to reach such Briefing Programme emerging markets are more likely to be seeking of the Asian markets they cover, rather than New standards and thus have a more realistic view new or increased funding from shareholders and York or London. In some markets, analysts do of what’s involved. A significant proportion (41%) bondholders as they expand. not use all of the information disclosed by of respondents in developed markets say that companies; in others, they ‘are used to doing market reporting in Asia will not be on a par with Another reason to believe that international more with less’, comments Addison Everett, international best practice until 015 or later, while standards are further away is experience Partner with PricewaterhouseCoopers in Beijing. elsewhere. Surveys of the 005 annual reports 3
  4. 4. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Executive summary continued Contents of banks and insurance companies1 conducted Senior management commitment. It is critical better processes were required to improve market by PricewaterhouseCoopers found that the for senior managers to overcome their customary reporting at their firm. In addition to investment Executive summary implementation of IFRS has proved to be a distrust of disclosure, and promote effective in IT systems, companies must place equal Introduction real challenge. market reporting. More than half of our survey importance on processes that support them. respondents cite greater management And processes must be continually improved Respondents to this survey can see some of How does Asia compare? commitment as being vital in driving in order to reduce costs, cope with increasing the obstacles that must be overcome to meet improvements in market reporting. This is volumes and minimise operational risk. Easy – for now international standards. In developed markets, particularly true in emerging markets, where increasing volumes of transactions, cost Technology. Data collation and compatibility Commitment, culture middle managers accounted for a greater pressures and a lack of skilled personnel are cause headaches in all markets but problems are and technology proportion of survey respondents. The greater deemed the biggest challenges in the provision even more severe in Asia, where many markets share of C-level executives among survey The analyst’s view of market reporting information. In emerging are still developing and there are few established respondents in developed markets suggests markets, where labour costs are lower, financial indicators. In fast-growing economies such as Looking to the future a greater involvement in market reporting by services firms struggle in different areas, and are China, financial services firms can only imagine senior management in those markets. Appendix: Survey results often challenged by a lack of procedures to what their customer base will look like in ten aggregate/produce information, as well as data Culture. Senior management commitment is years. Of our survey respondents, 57% said Contacts quality issues. essential for promoting a culture of disclosure improvement in this area would require better IT and an increased awareness across the company systems. Financial services firms need a long- PricewaterhouseCoopers Yet financial services firms believe that regulatory – from credit to IT and finance. Karen Loon, term IT vision that takes into account likely future Global Financial Services pressures will require them to continue to Briefing Programme a partner with PricewaterhouseCoopers in regulatory, demographic and economic changes, increase their levels of disclosure, 55% of our Singapore, remarks that ‘Different departments not a ‘sticky tape solution’. This vision should survey respondents believe that regulatory are frequently using the same data and facing also take into account the interlinking data pressure for greater disclosure will increase many of the same issues but may not be aware of requirements of Basel II, IFRS and other substantially over the next three years. this’. Fostering a culture of openness within the reporting requirements. To respond to these challenges, financial organisation and embedding processes are both In order to succeed in improving their market services firms in Asia must focus on the necessary to meet the demands for the collection reporting, senior managers at Asia’s financial following areas: and analysis of increasingly complex information. services firms will need to: Of the respondents to our survey, 57% said that 1 Accounting for change, a survey of 20 banks by PricewaterhouseCoopers, September 006 and Reporting under the new regime: A survey of 2005 IFRS insurance annual reports, July 2006. 4
  5. 5. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Executive summary continued Contents • Take a holistic view. Market reporting concept as a means of improving promoting efficient and consistent reporting should not be left to the finance department performance, rather than simply reacting to multiple stakeholders. This is a particular Executive summary alone. In order to embed good reporting to regulatory requirements. challenge in Asia where matrix reporting Introduction practices, senior management and structures are not as common as they are • Think beyond the silo. Processes and organisational commitment is required elsewhere in the world. functions overlap and affect each other. How does Asia compare? across multiple functions, including risk Risk managers, treasurers, financial and • Develop a long-term vision for technology. management, finance and operations. Easy – for now regulatory reporting accountants all use the Good quality market reporting to various Of our survey respondents, 38% said they same data and face similar issues when stakeholders requires an organisation to use Commitment, culture need better integration of market reporting determining how to meet the demands of their efficiently the data it has for multiple purposes. and technology functions. A centralised approach, drawing various stakeholders. But in many cases these Quick-fix solutions which meet the requirement on the efforts of a number of different The analyst’s view parties rarely talk to each other. A greater of one stakeholder may not provide sufficient functions, is the best way to ensure awareness of how other functions are using information for reporting to another stakeholder, Looking to the future improvements. But this should be led data should result in the organisation thinking and could result in misreporting of information from the top – management must take the Appendix: Survey results more as one rather than as several units. as well as considerable reconciliation efforts opportunity to increase its involvement in Promoting such a culture should also help to ensure consistency. More advanced market reporting and to embed the reporting Contacts ensure that data sources are used effectively, organisations are using more flexible data warehouse solutions to help them manage PricewaterhouseCoopers What steps could be taken to improve market reporting at your institution? their numerous data requirements. Of the Global Financial Services Select up to three options. Briefing Programme respondents to our 006 survey, 57% said Greater commitment from senior management 54% they need better IT systems if they are to Greater information sharing with stakeholders 5% improve market reporting. This confirms the Better processes 57% findings of a global survey conducted in 003 Better IT systems 57% that showed that 68% of the firms moving More qualified accounting staff 16% to adopt IFRS planned a ‘significant’ additional Better integration of market reporting functions 38% investment in IT and data systems at the Don’t know 5% global/group level as a direct result of the Other, please specify 1% move, while 59% expected significant Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 investment at the business unit level. Illuminating value: The business impact of IFRS, PricewaterhouseCoopers 003 5
  6. 6. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Executive summary continued Contents • Establish clear and efficient processes. • Make productivity a priority. Employing more respondents, 69% saw a strong need for Great technology is of no use if the data being technically qualified accountants on the finance improved levels of disclosure on risk Executive summary collected by it is rubbish. Clear and efficient team is not a longer term solution in an management, while 68% saw the need for Introduction processes covering the information required, environment where business volumes are improvements in disclosures on corporate and reliable data are important. ‘Usually the increasing. According to Stuart Scoular, governance. Companies should have a good How does Asia compare? first issue is the availability of data (although) a partner with PricewaterhouseCoopers in understanding of where improved disclosures improved procedures are required in order to Jakarta, ‘Rather than increasing the number of will have the greatest impact. In order to gain Easy – for now ensure that the data is collected,’ notes finance personnel, companies would be better such understanding they must increase Commitment, culture Kannika Ngamsopee, Executive Vice President advised to focus on improving the overall communication with stakeholders, a process and technology and Chief Financial Officer of Siam quality of people they have.’ Even if throwing which Singapore embarked upon Commercial Bank. The difficulty in many Asian more accountants at problems were a solution, wholeheartedly following the Asian financial The analyst’s view markets is that they are changing so fast that it is increasingly not an option. Well-qualified crisis and from which it is now reaping the Looking to the future one indicator, such as exposure to a certain finance professionals are increasingly difficult benefits. Companies such as DBS, for sector, may be relevant in January but less so to come by and costly. In our survey, 40% of example, engage in over 300 analyst meetings Appendix: Survey results in June. And monitoring exposure to a specific respondents from developed markets cited a per year, giving them a good understanding of sector in itself is a difficult task given the lack of skilled personnel as one of the most where disclosure is most demanded – and, in Contacts dearth of reliable information. For example, significant challenges to providing market- turn, allowing them to communicate clearly PricewaterhouseCoopers banks wishing to monitor their exposure to reporting information. The only solution with regulators. In countries such as China, Global Financial Services property companies may find that they are is to identify innovative ways to improve by contrast, the banks are tentatively Briefing Programme lending to numerous subsidiaries of the same processes, leveraging the technical expertise beginning to gain an understanding of property groups. Financial services firms need that is available. In other words, accounting market expectations. well-defined and automated processes in should not be left just to accountants. place to aggregate the data required and to • Know what stakeholders want. Accounting process it. Voluminous manual processes and other standards are minimum disclosure increase operational risk, and are bound to requirements, but may not be all that result in erroneous reporting in the longer run. stakeholders require. Of our survey 6
  7. 7. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Introduction Contents Rapid changes in Asia’s financial services sector in recent years have convinced financial services firms in the Executive summary region of the need for improved market reporting (the reporting of financial and non-financial information to stakeholders). Developments such as Basel II – Pillar 3 and International Financial Reporting Standards (IFRS) Introduction are helping to drive this step forward. How does Asia compare? How important is market reporting for entities in the financial sector in your location? or to raise capital in other markets. Finally, Easy – for now Rate on a scale of 1 to 5, where 1 = Very important and 5 = Not important. but not least importantly, is increasing mergers Commitment, culture and acquisitions (MA) activity in the financial 1 (Very important) 57% and technology services sector – to attract the attention 9% of investors, financial services firms must The analyst’s view 3 9% meet certain standards of financial disclosure 4 4% Looking to the future 5 (Not important) 0% and competency. Don’t know 1% Our survey questions on the incentives for Appendix: Survey results Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 good market reporting and the main drivers of Contacts enhanced awareness of market reporting pointed Indeed, in a survey conducted by the Economist What is driving this enhanced awareness? There to a split between developed markets (defined PricewaterhouseCoopers Intelligence Unit for PricewaterhouseCoopers are a number of factors. First among them is as those with more developed debt markets and Global Financial Services Briefing Programme in August-September 006, 57% of the 13 pressure from national regulatory authorities. longer exposure to other developed markets: Asia-headquartered financial services firms But also at play is globalisation. This is bringing Australia, Hong Kong, Japan, New Zealand and responding ranked market reporting for firms greater acceptance of international best practice, Singapore) and emerging markets (defined here in their sector as very important. particularly as the sector becomes increasingly as China, India, Indonesia, Malaysia, Pakistan, cross-border and Asian firms seek to operate Taiwan, Thailand and South Korea). 7
  8. 8. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Introduction continued Contents Tokyo Star Bank: know thy investor In Mr Hoffman-Smith’s opinion, disclosure In his view, good reporting starts internally Executive summary above the minimum required by regulators with good corporate governance. Surprisingly, For Tokyo Star Bank, an initial public offering should be met by internal reporting systems specific areas of corporate governance-related Introduction in October 005 was very important in terms and as such is not necessarily an incremental disclosures, such as executive remuneration, of deepening senior managers’ understanding cost, but good discipline. ‘Companies have are viewed by survey respondents overall as How does Asia compare? of investor requirements and increasing their a responsibility to enhance their reporting less in need of improvement than corporate Easy – for now awareness of the risks facing the bank. Kevin (above the minimum) according to the unique governance in general. Respondents seem Hoffman-Smith, the bank’s Chief Financial risks they face,’ he says. And while he to indicate that they only need to know enough Commitment, culture Officer, also believes that market reporting and acknowledges that it is difficult to draw the to be reassured that there is an effective and technology product development reinforce each other since line between what should and should not management system in place. In Japan’s The analyst’s view both concern the construction of a consistent be disclosed, feedback is key: ‘If we hear the case, only 15% of respondents view corporate corporate culture. This is a crucial objective same question in 50 out of 60 meetings, then governance as being an area in strong need Looking to the future for the bank, formerly known as Tokyo Sowa, we should be responding to that question.’ of improved disclosures, greater than the 13% a mid-sized bank placed under administration of respondents in India but fewer than those in Appendix: Survey results by the regulators in 1999. China (50%) and overall (7%). Contacts PricewaterhouseCoopers Global Financial Services A preference for guidance from regulators – least as important as management commitment There were exceptions to these trends. Briefing Programme rather than the market – was suggested by in encouraging good reporting. This undoubtedly Respondents in India and China, for example, several of the emerging-markets firms reflects the cultural context in which companies consider globalisation to be a more important interviewed for this report, with some operate, whereby strong leadership is required to driver of change than regulatory demands. interviewees pointing out that in some situations effect change and incorporating the views of By contrast, respondents in Japan ranked management does not want to increase multiple stakeholders is a concept that has not pressure from national regulators as the most disclosures unless it is required to do so. taken root. Indeed, in some countries in Asia, important driver, ahead of globalisation. Kannika Ngamsopee, Executive Vice President regulators play a far more decisive role in setting and Chief Financial Officer of Siam Commercial expectations on accounting requirements. Bank, says that regulatory requirements are at 8
  9. 9. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Introduction continued Contents What do you consider to be the main drivers of the enhanced awareness of market reporting in Asia’s financial sector? Executive summary %, up to three options selected Introduction Requirement to Requirement to Globalisation Financial measure up to measure up to How does Asia compare? Asia headquartered, Pressure from Pressure from bringing greater services sector international international assets over US$10bn national international awareness of becoming standards due standards in Easy – for now regulatory regulatory international increasingly to cross-border order to attract Respondents from: authorities authorities best practice cross-border expansion int’l investors Commitment, culture More developed markets 46 41 51 41 4 3 and technology Japan 54 31 4 38 19 7 The analyst’s view Emerging markets 57 34 5 47 33 8 China 50 17 58 50 33 33 Looking to the future India 5 30 61 35 30 35 Appendix: Survey results Overall 5 38 51 44 8 30 Contacts Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 PricewaterhouseCoopers The findings are borne out in further questioning to attract foreign investment, improve their as a means of increasing their share price, Global Financial Services Briefing Programme on the motivations for improved market relationships with regulators and gain access to improving their attractiveness to foreign investors reporting. In emerging markets, respondents saw capital markets (see tables on pages 10 and 11). and reducing the cost of capital. shareholders, bondholders, regulators and In developed markets, financial services firms financial intermediaries as their key stakeholders were more focused on shareholders and and saw improved market reporting as a means bondholders and saw improved market reporting 9
  10. 10. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Introduction continued Contents How important are the following incentives to market reporting? Executive summary Mean score‡ Asia-headquartered, Introduction assets over US$10bn Improved Better Better Increased attractiveness to communication communication with Better comparability How does Asia compare? Respondents* from: share price foreign investors with regulators customers and staff across institutions More developed markets# 1.84 1.95 .17 .5 .3 Easy – for now Japan 1.65 .15 .35 1.96 .19 Commitment, culture Emerging markets # .03 1.79 1.86 .1 .14 and technology China .5 .17 .17 .67 .08 The analyst’s view India 1.87 1.5 1.7 1.83 . Overall 1.93 1.88 .0 .19 .19 Looking to the future Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 Appendix: Survey results ‡ 1 = Very important Contacts * Number of respondents, China (1), India (3), Japan (6), Emerging (58), More developed (63), Overall (13). # More developed defined as Australia, Hong Kong, Japan, New Zealand, Singapore; Emerging included responses from China, India, Indonesia, Korea, Malaysia, Pakistan, PricewaterhouseCoopers Sri Lanka, Taiwan and Thailand. Global Financial Services Briefing Programme Among respondents from developed markets reporting standards. According to Daniel Wan, Financial services firms believe that regulatory bondholders were considered to be almost as Group Chief Financial Officer of the Bank of East pressures will require them to continue to important as shareholders, whereas the gap Asia, analysts or fund managers do not increase the level of disclosure – 55% of our between the two categories among respondents necessarily read annual reports from cover-to- survey respondents believe that regulatory from emerging markets was 30 percentage cover. In contrast, bondholders ‘have to pressure for greater disclosure will increase points. This suggests that the greater depth understand every detail…and read every last substantially over the next three years. and breadth of bond markets in the developed page of the prospectus’. markets is an important factor driving market 10
  11. 11. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Introduction continued Contents In your opinion, how important is market reporting information to the various stakeholders of a financial-sector entity? Rate on a scale of 1 to 5, where 1 = Very important and 5 = Not important. Executive summary 1 2 3 4 5 Don’t know Introduction Shareholders 68% 5% 4% % 1% 0% Bondholders 51% 35% 11% % % 0% How does Asia compare? Customers 6% 34% 30% 6% 3% 0% Easy – for now Tax authorities 9% 34% 4% 10% % 1% Regulatory authorities 43% 39% 14% % % 0% Commitment, culture Non-governmental organisations 4% 19% 43% 1% 7% 6% and technology The public 1% 3% 35% 1% 8% 1% The government 19% 37% 8% 9% 6% 1% The analyst’s view Financial intermediaries 37% 39% 16% 5% 1% % Looking to the future Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 Appendix: Survey results What do Asian financial services firms consider to standards will have a competitive advantage over easier to communicate results to investors Contacts be the most important factors in effective market those who do not. Respondents to the 003 and 65% thought it would improve corporate reporting? Of our survey respondents, 77% cited survey clearly saw the implications of better governance and transparency. As we discuss PricewaterhouseCoopers common accounting standards as important to transparency for fund raising – 66% believed that below, however, such standards may not be Global Financial Services effective market reporting while 74% cited good adoption of IFRS would make it easier to raise particularly relevant to situations in some Briefing Programme corporate governance. Financial services firms capital globally, while 60% thought it would be emerging markets. in Asia believe that the implementation of International Financial Reporting Standards (IFRS) IFRS in Asia will lead to better market reporting, specifically to better comparability and more transparent Countries which have already substantially adopted International Financial Reporting Standards disclosures. This confirms findings of a global (IFRS) include Australia, Hong Kong, Malaysia, Pakistan, the Philippines, Singapore and survey conducted in 0033, in which 63% of Sri Lanka. Countries which have yet to set firm dates for full convergence include Japan, India, respondents believed that institutions that adopt South Korea and Taiwan. Meanwhile, China plans convergence with limited exceptions from IFRS will be more transparent in their reporting, January 1 007. Indonesia, Thailand and Vietnam are adopting certain IFRS provisions but not and 47% believed that those who adopt the planning full convergence while Bangladesh is adopting IFRS on a case-by-case basis. 11
  12. 12. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality How does Asia compare? Contents How do the current reporting standards of Asian financial services firms compare with international practices? Executive summary If Asian firms are not yet on par, when will they be? What do they need to do to reach international standards? Introduction While there is a belief in the West that Asian financial services firms are a long way behind China Construction Bank: constructive disclosures How does Asia compare? ‘international practice’, Asian firms have a Given the huge growth that some financial services firms operating in emerging markets are Easy – for now different view. According to our survey, Asian experiencing, it is not surprising that many are focusing their efforts on internal, rather than financial services firms generally feel they have Commitment, culture external, reporting. done well in educating themselves on the and technology importance of good market reporting. At the same time, external reporting is viewed as an increasingly important driver of internal The analyst’s view discipline. ’Increasing transparency of information disclosure is not only a challenge but also an Clearly, there has been progress in meeting opportunity for Chinese banks,’ says Pang Xiu Sheng, Chief Financial Officer of China Construction Looking to the future international standards. One high-profile example Bank (CCB), the first mainland incorporated company to have its Hong Kong shares added to the is the overseas listing of three of China’s top former colony’s Hang Seng Index. ‘CCB regards information disclosure as an effective method to Appendix: Survey results four banks and that country’s general move demonstrate core competitiveness after listing.’ Mr Pang notes that governance structures are towards IFRS. Contacts now becoming more important as a source of competitive advantage in China in the wake of Interestingly, however, financial services firms in several high-profile scandals involving corporate executives, including two at CCB. Indeed, the PricewaterhouseCoopers emerging markets are more confident regarding prospect of increased competition following WTO-mandated market opening at the end of this Global Financial Services their knowledge of market reporting than their year is encouraging China’s banks to start thinking like developed market operators. Briefing Programme counterparts in developed markets. In India, Mr Pang says that parts of the bank’s financial reporting system are far from meeting international for example, 43% of respondents said that all standards. But they are working to bridge the gap. Help in this regard has come from the bank’s of their business units were well informed about strategic partners such as Bank of America. According to Mr Pang, Bank of America and CCB the importance of market reporting. No Japanese are currently collaborating on dozens of projects. These include seven projects aimed at or Chinese respondents made this claim. The improving information technology systems and four aimed at promoting better risk management, majority of respondents from China say ‘Most all of which will indirectly improve the banks’ market-reporting capabilities. business units are well informed,’ while more than two-thirds from Japan say ‘Some business units are well informed.’ 1
  13. 13. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality How does Asia compare? continued Contents But opinions diverge on just when market challenges, since financial services firms in reporting among Asian financial services firms these countries are more likely to be seeking Executive summary will be on a par with international best practice. new or increased funding from shareholders Introduction A significant proportion (41%) of respondents and bondholders as they expand. The doubts in developed markets say that market reporting expressed in developed markets echo the results How does Asia compare? in Asia will not be on a par with international best of a survey of banks’ 005 IFRS annual reports4 practice until 015 or later. Among respondents conducted by PricewaterhouseCoopers, which Easy – for now in emerging markets, by contrast, 59% of found that the implementation of IFRS has Commitment, culture respondents feel that targets will be met by 010, proved to be a real challenge. At any rate, and technology while 38% feel that international standards will international best practice is a moving target. not be reached until 015 or later. The divergence In the US, for example, consensus on the The analyst’s view of views perhaps comes as no surprise since approaches, conditions and timing of Basel II Looking to the future financial services firms in more developed implementation has yet to be reached. markets are more aware of the costs and volume Implementation of the accord in other developed Appendix: Survey results of work involved in investing in improvements in countries, however, is set for 007 and 008 market reporting, having been through the for banks to adopt the simple and intermediate Contacts process of implementing IFRS. However, for (F-IRB) and advanced (A-IRB) internal risk-based PricewaterhouseCoopers emerging markets this creates interesting approaches respectively. Global Financial Services Briefing Programme 4 Accounting for change, a survey of 0 banks by PricewaterhouseCoopers, September 006 13
  14. 14. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Easy – for now Contents Views on the ease with which good market-reporting information can be produced vary across the region. Though Executive summary 40% believe it is easy to provide such information, only 11% feel it is ‘very easy’. This compares with more bullish emerging markets firms, 17% of whom felt it was ‘very easy’. Introduction How does Asia compare? In interviews conducted for this report, however, Whilst most financial services firms surveyed counterparts based on lower labour costs. it became clear that this view applied only to believe that producing good quality financial However, for many of these firms costs are rising Easy – for now existing standards for disclosure and that information is generally ‘easy’, they recognise as firms need to invest more in the areas of increased disclosures would be far more difficult. that there are still a number of challenges in compliance, risk management and IT. Add to Commitment, culture and technology This attitude was based on perceived difficulties doing so. In more developed markets, increasing this a scarcity of human capital, increasing in gathering accurate information but also a volumes of transactions as well as cost pressures sophistication of products and higher transaction The analyst’s view reluctance to disclose competitive information. were deemed the biggest challenges to providing volumes, and financial services firms are facing Indeed, while managers would be happy to market reporting information. Financial services little choice but to seek ways to improve Looking to the future provide additional reporting to their seniors, they firms in these markets historically have had lower performance through automation, to reduce Appendix: Survey results would be reluctant to release it for public scrutiny. cost-income ratios than their international costs and to lower operational risk. Contacts What do you think are the most significant challenges to providing market-reporting information? PricewaterhouseCoopers %, up to three options Global Financial Services Asia-headquartered, assets over US$10bn Lack of Lack of Lack of Briefing Programme Unreliability Unavailability procedures to management skilled Volume Respondents from: of info of info provide interest personnel of work Cost More developed markets 4 4 7 18 40 40 40 Japan 8 8 4 15 46 58 54 Emerging markets 40 34 43 34 1 6 6 China 67 5 58 33 17 5 17 India 35 48 6 30 35 30 Overall 33 30 35 5 30 33 33 Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 14
  15. 15. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Easy – for now continued Contents In emerging markets, where labour costs a lack of procedures on how information should are lower, financial services firms struggle in be aggregated or produced, as well as data Executive summary different areas. They are often challenged by quality issues. Introduction How does Asia compare? DBS branches out challenge of Basel II relates to data integrity we making the wrong decisions on this and the connectivity of data across locations’. industry? Or with this group of customers?’ Easy – for now Singapore’s largest bank, DBS, has emerged This is easy to manage on a stand-alone branch The first two challenges relate to data and as a regional player over the past decade. or subsidiary basis, but pulling this information their use. The third challenge is regulatory – Commitment, culture It has done this by making various overseas and technology together in real-time, across the whole group, Ms Wong notes that the Basel II rules give acquisitions, and by leveraging its base of is a challenge. individual regulators a lot of scope in terms of The analyst’s view high-quality assets – rooted in lending to application. A multi-locational bank therefore government-linked corporations that rarely Another challenge is to ‘transfer a large part of needs to ensure that the regulators are fairly Looking to the future (if ever) default, self-liquidating trade-financing, risk monitoring to the level where risk is best consistent in their rules to make Basel II easy and Singapore’s stable mortgage market. monitored’, says Ms Wong. DBS is attempting Appendix: Survey results to implement consistently across locations. to ensure that risk monitoring is both pushed The bank’s strategy is encapsulated in its The fundamental solution is to make sure Contacts down to the lowest level and also pulled up to slogan: ‘Born and bred in Asia.’ It aims to internally there is a clear understanding of who the highest level in order to get an overall risk consolidate its position as one of Asia’s leading is responsible and accountable for credit risk PricewaterhouseCoopers picture. For example, credit officers accompany Global Financial Services financial services providers. Expansion management end to end. At DBS, according to marketing managers on customer visits; Briefing Programme overseas, however, will undoubtedly increase Ms Wong, ‘The final say on whether to lend or responsibility for credit monitoring lies on the its exposure to operational risk. The latter is not may rest with the credit guys, but the front line. Not only is it necessary to ensure that not easy to track since ‘You don’t know the marketing people are equally responsible for credit and marketing people know their extent of operational risk until something bad decisions on on-boarding the credit and risk customers well, but also that there are enough happens,’ says Jeanette Wong, the bank’s monitoring.’ Elsewhere in Asia, a cultural analytics around a credit portfolio so that risks Group Chief Financial Officer. emphasis on preserving relationships can make are monitored holistically. From a more macro it difficult to refuse loans to valued customers, To mitigate that risk, DBS tries to pull together point of view, says Ms Wong, ‘A build-up of even when they propose to expand in all available risk data from different operating provisions in a certain industry or with a certain overheated sectors. units. According to Ms Wong, the ‘most basic category of customers might lead us to ask, are 15
  16. 16. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Commitment, culture and technology Contents What can be done to improve this situation? Financial services firms across Asia believe that better processes are Executive summary key to improving the quality of market reporting. Introduction More than half of our survey respondents cited The upside of waiting for the rest of the world to collation and compatibility problems are common greater management commitment as being vital adopt new standards first is that companies can in Asia, where many markets are still developing How does Asia compare? in driving improvements in market reporting. This learn from the mistakes of others. The drawback and there are few established indicators. Of our Easy – for now is particularly true in emerging markets, where is that some firms wait too long, leaving little time respondents, 57% (refer to graph on page 17) middle managers accounted for a greater when implementation is finally made mandatory. said improvement in this area would require Commitment, culture proportion of survey respondents. better IT systems. As pointed out by Mr Singh, and technology This is worrying. By working outside normal these should take account of likely future Senior management commitment is essential for operating systems, firms leave themselves The analyst’s view regulatory, demographic and economic changes. promoting a culture of disclosure and increased exposed to data loss. Staff turnover may result in Looking to the future awareness across the company – from credit to the process being just as painful in the second Interestingly, few of the respondents felt that IT and finance. Indeed, it is people that make and third years as it was in the first. As Asian hiring more qualified accounting staff would help Appendix: Survey results processes work. Sarjit Singh, an insurance firms draw closer to international best practice, to improve market reporting. Even now, there is a specialist with PricewaterhouseCoopers in they need to start thinking of how they will wider range of practices between players in the Contacts Singapore and author of Rising to the challenge – embed processes and adapt to changes in same market than between players in different PricewaterhouseCoopers an analysis of IFRS annual reports in Asia’s reporting requirements. As Mr Singh puts it, they markets, when it comes to the efficiency of the Global Financial Services insurance sector, states that, ‘the one need to think about ‘sustainable reporting rather accounting and finance function. In China, for Briefing Programme consistency’ we found was that most (of the than quick fixes’. example, ICBC had 90,570 staff employed in firms analysed) worked outside normal operating finance and accounting at the time of its listing, Financial services firms across the region, but systems to implement IFRS.’ compared with 38,047 for China Construction particularly in developed markets, believe that Bank and 1,60 for Bank of China5. greater IT investment is also required. Data 5 Listing prospectuses of the banks 16
  17. 17. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Commitment, culture and technology continued Contents What steps could be taken to improve market reporting at your institution? Executive summary %, up to three options Asia-headquartered, Introduction assets over US$10bn Greater senior management Better integration Greater info sharing How does Asia compare? Respondents from: commitment Better processes Better IT systems of functions with stakeholders More developed markets 41 56 60 38 1 Easy – for now Japan 35 58 58 35 19 Commitment, culture Emerging markets 68 58 54 39 8 and technology China 64 55 55 45 18 The analyst’s view India 65 70 65 35 4 Overall 54 57 57 38 5 Looking to the future Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 Appendix: Survey results Contacts PricewaterhouseCoopers Global Financial Services Briefing Programme 17
  18. 18. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality The analyst’s view Contents Financial services firms in Asia believe that more could be done by analysts to use the information provided by Executive summary them more effectively. Only 8.3% of all survey respondents said that analysts were making use of market-reporting information to a great extent. Analysts in developed markets say that the volume of information they receive has Introduction increased substantially in the past five years and that there is now more than enough information – although some How does Asia compare? analysts complain that ‘Regulators and companies like to discharge their reporting requirements with ‘stuffing’ Easy – for now rather than relevance.’ Commitment, culture In emerging markets, analysts say that it is more because, most of the time, investors will apply Despite the confidence expressed in the quality and technology difficult to interpret information because rapid an optimistic assessment of an issue,’ based on of their market reporting, particularly by The analyst’s view growth and market volatility mean it is harder to the growth story of the markets they operate in. respondents in emerging markets, financial know which indicators capture the story. For Such attitudes increase market volatility, since services firms across the region agree that Looking to the future example, a decision to acquire a bank may be share prices are bid up (above prices justified by improvements need to be made in market made more on the economic fundamentals and the fundamentals) until the outlook turns bearish, reporting data in Asia, although to different Appendix: Survey results outlook for the country in which the bank is at which point prices tumble and the economy degrees. In particular, they agree that there is a Contacts located than the data regarding the bank itself. comes to a standstill. strong need for improvement in the information Chinese banks, for example, are highly priced produced on risk management and corporate PricewaterhouseCoopers According to Sally Ng, co-head of Asian Banking relative to their Western counterparts based on governance: 41% of institutions in emerging Global Financial Services Research at UBS, the volume of information the fact that they are used as a proxy for China’s markets believe that there is a strong need for Briefing Programme disclosed by companies has resulted in her growth. At any rate, if Chinese banks were priced improvement in disclosures on risk management workload increasing dramatically in the past five at the same price-earnings ratio as Western at their institutions compared with only 7% of years and she expects this trend to continue. banks they would be priced at a discount to firms in developed markets. Similarly, 36% of But quantity does not necessarily equal quality. book value based on their relatively low earnings, firms in emerging markets believe that there is a ‘Markets are evolving rapidly with behavioural which brings into question the usefulness of strong need for improvement in disclosures on patterns shifting significantly over short periods IFRS financial measures in emerging markets. corporate governance, compared with 17% in of time,’ she says. ‘Even though the level of developed markets. As one analyst remarked, ‘Companies don’t disclosures may differ among banks, ultimately wish for investors to completely understand the company fundamentals are the most important.’ underlying economics (of their business) 18
  19. 19. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality The analyst’s view continued Contents Do you see a need for improved levels of disclosure in these areas in your location? Executive summary Asia-headquartered, 1 = strong need for improvement, 5 = no need for inprovement assets over US$10bn Introduction Risk Corporate Segment Corporate social Business Notes to Respondents from: management governance information responsibility activities the FS How does Asia compare? More developed markets .3 .51 .6 .9 .76 .9 Easy – for now Japan .7 .5 .76 .85 .96 Emerging markets 1.91 1.97 .4 .5 . .4 Commitment, culture and technology China 1.67 1.75 .5 3 .17 1.83 India . .43 .59 .78 .43 .78 The analyst’s view Overall .11 .4 .51 .7 .48 .65 Looking to the future Source: PricewaterhouseCoopers/Economist Intelligence Unit survey, August-September 006 Appendix: Survey results Of the various areas in which they feel they could In terms of risk management, financial services markets see the most need to improve levels Contacts make the greatest improvements, financial firms in emerging markets feel the greatest room of disclosure on off-balance sheet exposures, services firms in Asia felt that they could provide for improvement is in providing information on while 47% point to profit and loss segment PricewaterhouseCoopers better information in the areas of directors’ risk management monitoring methods, while information, and 47% to fair value of financial Global Financial Services Briefing Programme remuneration and experience, segmented results those in developed markets point to additional instruments. Respondents in developed markets by business unit and capital allocations across credit risk information. agreed with these assessments but also segments, and providing information on targets, recognised that they could be better at There is also room for improvement in some of results and strategy by business units. disclosing more information on non-performing the note disclosures in the financial statements. loans and accounting policies. For example, 60% of respondents in emerging 19
  20. 20. Market reporting in Asia’s financial sector: back forward Bridging the gap between perception and reality Looking to the future Contents The trends driving the move toward international standards of market reporting – globalisation of standards, Executive summary increasing cross-border MA and tightening local regulations – are likely to gather pace in the coming years. Indeed, 55% of our survey respondents believe that regulatory pressure for greater disclosure will increase Introduction substantially over the next three years. How does Asia compare? In order to bridge the gap between the current established indicators. Or else they are changing All of this will be for naught, however, if reporting Easy – for now perceived quality of reporting and the reality so quickly that indicators can suddenly lose does not provide what stakeholders require. Commitment, culture of international best practice, financial services their relevance. Providing better data will require Accounting and other standards are minimum and technology firms in Asia will need to work harder to create an improvement in IT systems – yet investment disclosure requirements. To understand where a corporate culture that views good reporting as in this area must anticipate the interlinking data improved disclosures will have the greatest The analyst’s view a means of improving performance, rather than requirements of Basel II, IFRS and other impact, financial services firms will need to Looking to the future simply an obligation to regulators. reporting requirements. Technology alone is increase communication with their stakeholders. not the answer – to improve the quality of data, Improvement will take strong leadership from Appendix: Survey results financial services firms must also improve senior management, but in some countries it will procedures and processes to ensure that the Contacts also require ingenuity. Many markets in Asia are relevant data is collected. still in the early stages of development and lack PricewaterhouseCoopers Global Financial Services Briefing Programme 0

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