Emerging markets ramp up

Asset and liability management systems sales continue to be strong in the US and Europe, thanks to Basel II preparations. But it is in the emerging markets that vendors say strong sales growth will come in 2002.

Banks headquartered in the emerging economies of Asia, Africa, and Eastern Europe are investing heavily in asset and liability management (ALM) systems, according to systems vendors and bank executives. The banks in these three regions are being prodded by both regulators and competitive forces to increase the sophistication of their ALM systems. As a result, technology vendors expect the share of their revenues from emerging markets to increase substantially over the next five years, fuelling a compound annual growth rate of 9% – or $1.4 billion – on global ALM system spending.

US-based information technology (IT) analyst firm Meridien Research predicts that spending on ALM systems among the world’s 500 largest banks for 2001 will total $936 million. Europe – which includes emerging Europe – will account for almost half of those sales (46%). North America and the Asia Pacific regions are at 33% and 19% respectively. ALM spending in Africa and South America amounts to less than 2% of the global total.

The general consensus among ALM vendors is that the most active region in terms of acquisition and deployment of new ALM systems is the Asia Pacific – specifically Singapore, Malaysia, Indonesia and the Philippines. An Asia-based spokesman from Toronto-based risk management vendor Algorithmics, says that the Chinese banks also represent a huge potential market for ALM solutions. “These are big banks; the country’s second largest – China Construction Bank (CCB) – has a balance sheet of $3 trillion; more than twice as large as, for example, JP Morgan Chase,” he says.

Countries making up the former Eastern Bloc – Poland, Slovakia, the Czech Republic, Hungary and Russia – are also proving to be rewarding markets for vendors. And some pockets of Africa and South America could also ring up increased sales. In Nigeria alone, for example, more than 90 banking institutions have been established since January 2000.

However, the majority of spending in dollar-volume terms is in the developed markets. Charles Richard, president and co-founder of Chicago-based Quantitative Risk Management (QRM), ALM systems says: “Sales for us have typically been with the sophisticated, large commercial banks around the world, and more specifically the US and Canada, the UK, France and the Netherlands.” QRM, by their own admission, concentrate their sales and marketing efforts in the US and Western Europe, although they do have a number of clients in Australia, Brazil and Mexico. However, other vendors such as IPS Sendero, SunGard, Riskflow, Algorithmics and Kamakura have a strong presence in the emerging markets of Eastern Europe, Asia Pacific and increasingly, sub-Saharan Africa.

Basel II effects
The most demand for ALM systems is coming from the regulatory authorities in many countries. Since the Basel Committee on banking supervision published its second consultative paper on the new capital Accord (Basel II) in February 2001, many banks say they can see the writing on the wall, and feel that now is the time to invest in the kind of ALM software that will enable the institution to adopt some of the more sophisticated provisions of the new credit proposals. Zeca Lopes, European director of South African-based ALM vendor Riskflow, reports that demand for systems in sub-Saharan and North Africa is stronger than ever. “A lot of the interest in new systems by banks in Nigeria, Ghana and Togo stems from their awareness of Basel II,” he says. “African banking regulators are also trying to introduce best practice guidelines to be adopted across the entire continent, but the primary driver for ALM sales is the eagerness for African banks to gain inclusion in the global banking community.”

But another strong motivation for buying an ALM system is enhancing profitability. “The due date for Basel II implementation is still a long way off,” says Katerina Arvaniti, head of ALM at the National Bank of Greece (NBG). “Compliance will become more important, but at the moment NBG’s core focus is on ALM issues for economic reasons and, not for satisfying the regulators.” She adds: “The primary reason for deploying Sendero Vision [IPS Sendero’s ALM product] was commercial.” NBG faced a changing balance sheet risk profile due to Greece’s entry into the European currency union, and increased domestic competition. Explains Arvaniti: “Now that there are no longer international borders within the European Community, clients are in a position to bank outside Greece. Internet and telephone banking, especially within Greece, has also increased the competition between banks for clients.”

The IPS Sendero-supplied ALM system was deployed almost two years ago, but it has only been live for the last 12 months as staff and members of the ALM committee (Alco) needed to familiarise themselves with the new reporting formats and methodologies.“The bank uses the ALM system mostly for income and expenditure forecasting,” says Arvaniti. “We are mostly interested in the mean interest rate spreads between our assets and liabilities. Interest rate risk is managed by a combination of the ALM and market risk departments.”

As Greek interest rates declined and spreads narrowed, NBG needed to structure its balance sheet to increase profitability. The main challenge was to develop product-pricing strategies, which would preserve margins and allow growth simultaneously. The bank uses the system’s analytics to run ‘what if’ scenarios to predict the influence on income and the bottom line brought about by pricing changes. “We’re trying to accomplish both market share and revenue growth, but sometimes growth is not the answer,” adds Arvaniti. “You may increase your profitability by pricing your products better without increasing your growth in terms of headcount or market share.”

There are lots of other factors driving emerging market banks into the arms of ALM systems vendors. Some banks want to raise their overall level of credit quality, especially in the eyes of the international ratings agencies. Other banks are feeling different kinds of market pressures.

According to Nigel Sirett, managing director Europe, Middle East and Africa, of ALM vendor IPS Sendero: “We have found two drivers for the deployment of ALM systems in former Eastern bloc countries – we’re seeing ex-communist banks, particularly state-owned institutions being privatised, ripping out their old systems and replacing them with state-of-the-art core banking systems in order to operate more efficiently. The second driver results from mergers and acquisitions by large Western European banks who are taking stakes in local banking institutions and there is a need to come up with a common IT infrastructure.” Poland’s Pekao SA bank is a prime example of this practice, where four state-owned banks merged and were subsequently bought by UniCredito, Italy’s second largest banking group.

For some of these countries, it is a matter of catching up with the West. Joanne Shun, global product management and support director at London-based financial systems vendor Misys International Banking Systems, says: “Some of the emerging market areas, because they were behind in enterprise risk and the modern ALM approach, are now trying to leapfrog and move to an integrated environment sooner than their mature market counterparts. For these institutions it may be easier to get to an integrated risk and ALM environment than some of the more established players in North America. If you have nothing then you may as well go for fourth generation.”

Other vendors advocate a more basic approach. “You have to learn to walk before you can run, which is the case in the emerging markets,” explains Sirett. “The risk side of ALM is converging rapidly with other risk management disciplines within the tier-one institutions of the US and Europe, but this doesn’t apply to banks in the emerging markets which need to address more basic ALM issues before they can move on to analysis integration.”

In other countries, state-imposed policies have flown in the face of traditional Western-style ALM practices. Governments in those countries are now urging banks to invest in ALM systems as a means to sort out banking system problems. Says one systems vendor: “Large China-based banks are battling with the effects of the country’s entry in to the World Trade Organisation, with credit risk being of greatest concern.”

It is difficult to compile a definitive list of the market’s leading lights, but the general consensus among users, vendors and analysts is that IPS Sendero, SunGard, Iris, Algorithmics and QRM represent the big five. Based on the Meridien figures of current installations, IPS Sendero accounts for between 40–45% of the global market, followed by US-based SunGard on between 15–20%. Swiss-based Iris Integrated Risk Management has a more modest representation by comparison – perhaps 7.5% – with regional players making up the remainder of the better-known vendors.

One development that is of significance is the recent entry to the ALM market of software giants SAP and Oracle – usually associated with enterprise resource planning (ERP) and database management systems respectively. SAP’s focus is in it’s traditional stronghold of the German-speaking countries, the US, and increasingly the UK, with demand determined to a large degree by clients already running their R/3 suite who wish to deploy the banking strategic enterprise management module. Oracle’s influence is wider than SAP’s, with a number of high-profile UK banks using their Oracle Risk Manager application, in addition to clients in the US and Asia. Their combined market share is small but not insignificant and is sure to increase due to their financial clout, substantial resources – especially in research and development and support – and brand quality in the mainstream IT industry.

The trend of spending on ALM systems is so strong that it seems as though it might be immune to the current economic difficulties being experienced in the US and Japan. Although the September 11 attacks dented sales, for example, technology vendors expect the effects to be temporary in many of the emerging markets. “Several institutions have put all purchases on hold subject to year-end reviews,” said Robert Fiedler, Algorithmics’ senior director of ALM solutions, Frankfurt. “That said, we’re confident about 2002, with the majority of our customers most likely to be in areas that we have targeted.”Risk

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