Interviewed By Foo Boon Ping
Well Fargo’s regional president and head of corporate and investment banking for Asia Pacific, Jafar Amin, discusses the rebound in inter regional trade and payments that may buoy outlook for 2021, and the need for institutions to be more efficient, lower cost and higher value-add players in a rate and margin depressed environment
Jafar Amin, Well Fargo’s regional president and head of corporate and investment banking for Asia Pacific, is sanguine about a rebound in inter regional trade and payments with a resumption of domestic consumption in China and the reopening of key markets across the region as COVID-19 is brought under control. The bank has seen a strong increase in volumes since the third quarter and he expects the trend to hold should the pandemic continue to be kept under control and there are no further deterioration or shocks on the geopolitical front.
Wells Fargo’s capital markets and asset distribution business has benefitted from the record trading year. However, the balance sheet business will continue to suffer from historical low rates and margins. He remarked, “We have to be prepared for a lower for longer scenario in terms of rates, to be more focused on taking advantage of fee driven businesses, to generate the right returns without just relying on the yield from our balance sheet”.
He added, “I actually think that's a good thing. Because it forces us and banks to be much more focused on value added services and driving solutions”. He believes that the key is to focus on improving efficiency and lowering costs by increasing digitalisation and automation as well as to add value through innovative solutions, especially around risk management and customer service.
The following is the full edited transcript of the interview.
Foo Boon Ping (FBP): I am very happy to be speaking with Jafar Amin, the president and head of corporate and investment banking for Asia Pacific of Wells Fargo. And I would like to ask you about the impact of COVID-19 on your cash and trade business
Jafar Amin (JA):In terms of where we are from the impact of COVID on the payments and trade business in particular, it's no surprise that given that Asia was the first region, China specifically, that was impacted back in February, and it's such a very significant part of overall flows. That there was an overall decline in both outflows and inflows from a cross border payments perspective. And that's according to SWIFT data. And that really continued into the most of the first half of the year, we saw pretty significant declines. So, there's anything between -6% on payment outflows and -3.5% on inflows. But what would be important to highlight is that if Asia was also the first region, and China in particular, to rebound much more quickly. And if you start looking at the flows that we started seeing, probably around the end of May, early June, and then into the third quarter, we saw a pretty strong rebound in the third quarter. Particularly as markets in Asia, not all markets, but certainly key markets emerged from lockdowns, and the economic activity started reviving. And as you look at our year on year, situation, clearly, it's always challenging sitting where we are today, if I look at September, year to date numbers, to make up for the significant drop during the first half of the year. But what I will say, which is extremely encouraging, is that in the third quarter, when we saw a rebound, in some markets, we actually saw an increase in volumes versus the same period last year. As I look at a year to date comparison overall, we are down in single digits in percentage terms in Asia. But that drop is nowhere near as significant as it is in markets like Europe, Americas. And more importantly, is something that we're certainly very excited about is that the market share is something that we track. And so overall, whilst transactions may have been down, we've continued to not only in most markets retained, but in some cases, we've actually been able to grow market share during that time. And trade has been impacted, I would say more significantly, just on the back of overall, the decline, probably closer to 9.2% decline in world trade in 2020. And that's been impacted by the fact that from a logistics perspective, a lot harder to get goods across. So even as economies opened up here in Asia and China, where you have export markets like the US and Europe where frankly, there has not been the same level of reopening of the economy and some pretty inconsistent challenges in terms of COVID as well, that's definitely had an impact on global trade.
Inter regional trade was always viewed as the opportunity. And some of the rebound, particularly in the third quarter and beyond has been based on domestic consumption in China, and some inter regional trade. And we've seen, particularly countries like China, Korea, Taiwan, and Vietnam, Bangladesh, began recovering, but overall volumes being down and the other factor more than COVID that has impacted trade is the geopolitical challenges to a degree has definitely had an impact. And so again, if I look at the year to date, the payments flow has improved significantly since the first half of the year. Are we going to make up the gap from the first half of the year? Probably difficult to do. But if you're thinking about it from an outlook perspective, assuming that we don't have a return to some of the challenges that we have had, some of our markets in Asia feel pretty positive about 2021, particularly if we get to a situation where we have a vaccine in place, and then we start to see some of the issues that we're seeing today in Europe and the US in particular, beginning to be more under control than it is today.
In addition to the payments and trade part of our business, the other side of the business that has always been core to Wells Fargo's franchise in Asia is a strong markets distribution platform that we have supporting our US origination activities, but also the distribution into the very important institutional client base here in Asia. And no surprise, if you've spoken to other banks, it's been a record year for both our markets divisions across the mortgage backed securities, rates business, credit trading, have all performed really well, and again record years. And we've also managed risk through the volatile periods in March and April, exceptionally well. And then the capital markets have also been obviously very active. And companies have obviously taken advantage of those conditions. And this has been particularly true for us in the US, and on a more selective basis here in Asia, because obviously, our franchise is much more focused in terms of the client base that we support in that area, particularly in US dollars.
And we've, globally, had record years in terms of just the markets activity, but also from the capital markets side, and there's just tremendous liquidity in Asia. That's the other aspect of what we're seeing. And everybody is looking for ways to make their money work. And the stimulus that we've seen from central banks, Federal Reserve, has certainly helped. And it's happened in a different way. But it's obviously a completely different scenario to what we saw back in March, where there were significant concerns around for corporates and institutions in terms of how they would manage through this period of volatility.
Pricing in Asia has been very thin, whether it's on the lending market, and you've seen what it is on the capital market side. And I would say, that's probably one of the biggest challenges. So out of all the things that I would look to the area that's been more challenging, has been the balance sheet businesses, both lending and deposits. Lending margins are thin, and opportunities that we really like are going to be fewer and far between. And so, that's something that has been a challenge this year, though, we've, stepped up and supported clients where we've needed to. And then of course, the interest rates falling the way they have had an impact on our deposits.
When I say impact, I mean, the profitability, the contribution that makes to the bottom line. So hopefully that gives you a little bit of an overview of our business. I would say that the core businesses have taken full advantage of the market conditions and our strength in those areas and the client relationships, but the balance sheet side of the business, whether that's deposits and lending, no concerns just the profitability and the yield from that business is clearly challenged at this time.
FBP: So how do you see that panning out in the year ahead?
JA: Everything that you're reading at the moment doesn't sound like we're going to see an increase in interest rates in the near term. We have to be prepared for a lower for longer scenario in terms of rates for some time. I do think that means that we need to be more focused on opportunities to take greater advantage of fee driven businesses, and businesses that are going to generate the right returns without necessarily just relying on the yield from your balance sheet, whether that's deposit or loans. I actually think that's a good thing. Because it forces us and banks to be much more focused on value added services and driving solutions. And I guess, in some ways, making sure that we don't get too lazy, as we look for opportunities to drive better returns in a difficult operating environment.
This is all about scale. And having a proposition that adds value. At the end of the day, if we as banks are not adding value in the end to end process, we will find ourselves challenged in the medium to longer term. And the reality is, fees are going to continue to fall. And therefore, being very focused on making sure that we are running a much more efficient platform and lowering our unit costs is going to be critical. And you can do that with a combination of looking at our end to end processes. We've talked about the fact as a company at Wells Fargo that we have more work to do in that area. In fact, if you look at some of the senior leaders that have come on board recently, including Lester Owens, our new head of operations, who actually knows these businesses exceptionally well. I believe there's actually tremendous scope to lower our unit costs and make it much more effective and efficient through a combination of both digitalisation, innovation, but at the same time, being very clear that the value-added proposition and service that we provide from a relationship and customer service perspective.
And the overlay of the people side of things when we look at risk management is going to be the key differentiator. I personally believe. I keep getting asked this question, “what are you doing from a digitalisation perspective, artificial intelligence”. And those are all very important. In today's world, if COVID-19 has taught us nothing else, having a much more digital proposition, much more innovation is going to be critical in the go forward model. But at the same time, I do think that it's important to recognise that there's always going to be an important place for the value added customer service model that has real people that customers can actually speak to, to help them with their business, their solutions and their issues. And if I look at the FI metric survey results, we see very clearly how much of a differentiator that is.
And I equate that also, to things like sanction screening. There's absolutely a place, and we need to focus on making that much more efficient, because I would say that's one of the areas where the costs have really gone up for banks. And is becoming more and more complex, and the use of artificial intelligence, and other new forms of technology is absolutely what we need to work on. But at the same time, I don't think you can depend purely on technology to manage risk and add value, because what I've found is that the insights, and the analysis, and assessments that we do as risk managers are using that type of data is going to be absolutely critical to keep up with what is increasingly a more complex and difficult environment for financial crimes risk, AML issues, etc, which, by the way, is the value add, that I believe banks have over any other competitor.
One of the things that we've launched this year is the payment tracker proposition, which is built on the strength of our leading role and membership with Swift is the GPI initiative, which really has been focused on traceability and enhancing the transparency of a payment. And it's accessible 24/7, 365 days a year, and really allows the client to track their cross-border payments end to end very easily, much more so than what they were able to do before. And that is something we launched at Sibos this year and been really well received. We've seen the uptake of GPI being pretty significant as well, we are one of the biggest players in that space. So in addition to the people side, those type of overlay innovation is going to be critical in terms of maintaining market share, enhancing market share, but also reducing our unit costs.
FBP: About the adoption of ISO 2002 XM across the industry, across your FI partners, for example, to enhance interoperability, how do you see that for the industry going forward? In terms of opportunity?
JA: Well, I see these as really positive developments. I actually think transparency is a good thing that it allows. We've been at the forefront of increasing transparency. And so for more of our FI clients that can sign up to GPI understand the value and understand what they're paying for their services, what clients are paying. it's a positive, because, again, it not only helps them to support their own customers in a way that their customers are demanding today, but also helps address the competition from the nonbanks, and fintechs, etc, where there is clearly that client experience is something that has been a really important factor. And something that we need to be mindful of. So for me, the competition is two things. One is, of course, the cost, but also the customer experience. And I feel that getting to a stage where we are able to offer these type of standardised solutions, expectations, and the level of quality that our customers can all be held to is, is something that we're going to need to continue to do if we're going to be relevant, and continue to play the leading role that we do in global cross border payments today.
FBP: And on the trade side, COVID has really impacted the logistics of traditional documentary trade, trade automation and digitalisation, and what opportunities do you see on those fronts?
JA: You make a really great point in trade is probably the one area that requires more innovation, digitalisation and automation. But it's been hardest to do, given the very paper-based nature of documentary trade, and just how trade has traditionally been managed. So if nothing else, COVID has forced us to take a much more thoughtful and innovative approach to working during these times where it's been almost impossible, logistically, for trade to be done on a physical basis, whether that's signing documents, instructions, etc. And so we've been very much again, been supporting our clients with solutions, like delegated documents, submission, signing email instructions, indemnities, e-signature agreements, to basically help circumvent the logistical challenges around submitting physical documents and instructions to our branches and offices around the world. And offering things like our trade platform called CEO (commercial electronic office), and then continuing to enhance those for our corporate clients, is something that is going to be critically important. But if one thing that COVID has done is forced us to accelerate those solutions, whilst in the past, it may have required many discussions and debates from a legal compliance perspective as well. COVID has just really accelerated those solutions. there's still some way to go. It's still more challenging to fully digitalise trade and automate trade. But COVID-19 has certainly accelerated that journey.
FBP: And on the supply chain side, how do you see the shift in supply chain, what opportunities and challenges that you see in those areas?
JA: More holistically if I step back, and without getting into the nitty gritty, supply chains are being kind of reviewed overall, just as a result of COVID, but also as a result of geopolitical issues that you're seeing. And that's probably a very major fundamental change that we all need to be prepared for, and facilitating, and understanding that that's something that's happening, which is that you're going to get a scenario where there is going to be a desire not to have too much concentration. In terms of supply chains, particularly as it relates to certain goods and services that are considered to be very critical. They will be wary of supply chains that are very far flung. And you will always have contingencies in a way that isn't entirely driven purely by the cost benefit analysis. If there is one thing that has happened in these last 12 to 18 months, given everything that's happening around the world, and as I said, there are two major things that have happened, both COVID and geopolitical.
That is a pretty big fundamental shift that there is going to be a need for supply chains that are more flexible, that are not concentrated, that have not just the concept of “is this the cheapest”, but they're also going to be looking at another potential risks. If you had all of the constraints that you're seeing today, because even if there is a vaccine, to be honest, people will be very, whether companies, whether those are, exporters, buyers, importers, they're all going to be thinking about what impact these things can have on their supply chains.
And it won't be just corporates, by the way, who's going to be able to make those decisions. I believe that in certain sectors, the governments around the world will influence how those decisions are made. It doesn't mean that there is going to be the complete change in logistics and supply chains and shipping and all that kind of thing. I do believe that fundamentally, supply chains are being reviewed by all companies, by governments looking at how those could be impacted by some of the pretty severe challenges that we faced in the last 12 to 18 months. And people will not want to get caught out.
FBP: Thank you very much.