S$1.5bn capital requirement no bar to incorporating Singapore operations

The move by the Monetary Authority of Singapore (MAS) to require foreign banks to set up a local incorporated subsidiary with a minimum of S$1.5 billion (US$1.2 billion) in paid-up capital will not be a major obstacle, say market participants.

On June 29, MAS proposed changes to the qualifying full bank (QFB) programme requiring foreign banks to locally incorporate their retail operations to safeguard domestic retail depositors.

QFBs are currently able to operate from 25 business locations in Singapore and may conduct a full range of banking services including accepting deposits from retail clients. The proposed changes would allow QFBs to operate up to 50 places of business in Singapore in exchange for local incorporation. QFBs represent close to 50% of the deposit market in Singapore, with the three main local banks accounting for the rest, according to Fitch Ratings.

At present, there are eight QFBs in Singapore: ANZ, BNP Paribas, Citibank Singapore, HSBC, ICICI Bank, Maybank, Standard Chartered Bank and State Bank of India. Currently, only Citibank has a locally incorporated entity in Singapore, while Standard Chartered announced in February it intended to locally incorporate its retail operations.

Wilson Woo, financial services partner at Ernst & Young in Singapore, says the regulator is opening up the retail sector to foreign banks but in turn they are requiring that these banks become entrenched in the Singapore market.

“To be locally incorporated, you’ve got to provide S$1.5 billion in paid-up capital under the Banking Act. It’s not a small amount, so it depends on the strategy of the bank on whether they are looking to expand their market share in the retail market.”

However, according to a local Singapore-based banking analyst, foreign banks will have no choice but to comply and can afford to do so with ease. “As Singapore is a financial hub, it is not possible for banks not to comply, especially if you are talking about banks with significant retail exposure like Maybank, HSBC and Standard Chartered. I don’t think that S$1.5 billion is too much to ask for – it is a relatively small number for banks,” he says.

As part of local incorporation, banks will be subject to Singapore’s stringent capital requirements, including a common equity Tier I capital ratio of 9% under Basel III, says Alfred Chan, director of financial institutions at Fitch Ratings in Singapore. “This, together with other prudential banking measures, would ensure better safety of banks and hence depositors’ monies in Singapore. An offer to potentially double the number of places of business a QFB can operate in Singapore to 50 should provide an attractive incentive for existing QFBs to incorporate in Singapore and help offset the higher cost of running a subsidiary compared to a branch model,” he said in a research note.

The attractions of incorporating a retail business locally is clear to ANZ Singapore chief executive Vishnu Shahaney, who says the bank is engaged in discussions with MAS on the issue. “ANZ is supportive of the changes to the QFB programme. As a bank that has benefited from the QFB licence since obtaining it two years ago, we have been able to serve our customers effectively through our branches and full banking services in this market,” he says.

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