Wednesday, October 26, 2016

Abu Dhabi Commercial Bank 3Q2016 Results: A Tale of Two Newspapers

Where Would We Be Without Ambition?

On 23 October Abu Dhabi Commercial Bank issued its interim unaudited financial statements. 
  1. Net profit for the first nine months of the year was AED 3.2 billion versus AED 3.7 billion for the comparable period last year (a decline of 14%). 
  2. Net profit for 3Q16 was AED 1.0 billion versus AED 1.2 billion for 3Q16 (a decline of roughly 17%). 
  3. The major factor impacting net income was impairment provisions which increased from AED 391 million in the first nine months of 2015  to AED 1.083 for the first nine months of 2016 (an increase of 77% percent) and from AED 66 million in 3Q15 to AED 380 million for 3Q16 (an increase of 475%).
How did UAE’s two flagship English language newspapers cover this story?
The Nation’s 23 October headline was ADCB Net Profit Falls 17% in Third Quarter

Abu Dhabi Commercial Bank said its third-quarter profit slid by 17 per cent as provisions for bad loans jumped almost six-fold.
Net profit declined to Dh1 billion in the three months to the end of September versus Dh1.2bn in the same period last year, the bank said. Impairment allowances shot up to Dh380 million from Dh66m in the third quarter last year

Two days later Dubai’s Gulf News took a slightly more optimistic view:  ADCB Reports Dh999m in Q3 Profits Figure brings profit for first nine months to Dh3.14 billion.

Abu Dhabi: Abu Dhabi Commercial Bank (ADCB) continued to register growth in net loans and customer deposits in the first nine months of this year despite increased challenges in the banking industry.

“The bank delivered strong financial results for the nine month period of 2016, reporting a net profit Dh3.153 billion and an industry leading return on equity of 16 per cent.   
While the challenging operating environment and the turbulent markets have impacted the industry, our underlying performance and fundamentals remain strong and we continue to grow our businesses. Our balance sheet remains resilient and registered a healthy growth in net loans and customer deposits year to date, 10 per cent and 7 per cent respectively,” said Alaa Eraiqat, ADCB’s group chief executive officer.

In a statement, the CEO reiterated his confidence in the long-term growth of the UAE’s economy, stressing the bank’s strong fundamentals and outlook of delivering value to shareholders.

In the first nine months of this year, the bank’s assets grew 12 per cent to Dh255 billion, while net loans and advances to customers increased 10 per cent to Dh162 billion compared to December 31, 2015.”

Technical notes: 
  1. AA’s calculations are based on net change not simply a division of this year’s results divided by last year’s. 
  2. Gulf News appears to be using net income attributable to controlling equity holders in the bank not total net income.
What a difference a point of view makes. 

One comes away with two very different conclusions from reading these two articles.
  1. Everything sounds just fine from the account in Gulf News. 
  2. The National the “hometown” newspaper of ADCB with perhaps more at stake to  paint a rosy picture does not.  In AA’s view it presents a more accurate picture by providing comparatives to prior periods and discussing negatives as well as positives.
Another post to follow soon with comments on things to watch in ADCB's financials.

Saturday, October 22, 2016

ذكرى ناظم الغزالي

1963 23 October


Friday, October 21, 2016

SEC to Rely on FINRA to Monitor Brokerages

"Daddy, read me the story of the self-regulating market again"
If your daddy didn't read you this fairy tale when you were young, maybe your "Uncle" Milton told it to you at university.  Or a kindly professor relayed the Uncle's wisdom to you. 

If this didn't happen, here's a quick recap. 

Even if each businessman single-mindedly pursues his or her own profit to the exclusion of all other concerns, where there is intense competition of the "free" market (note that requirement) salutary outcomes result:
  1. individual or overall market excesses are magically curbed 
  2. firms offer the best service and prices, eventually competing profits away to zero unless, of course, they make improvements to products.  [Because profits never go to zero (except in bankruptcy) this no doubt proves the creative power of free markets to constantly improve products.]
  3. those firms that do not lower their prices or improve their products are forced out of business
Since by definition, the market in the USA is not only "free" but "intensely" competitive, then with such miraculous powers there is little if any need for government regulation.  In fact by interfering with the market, governments are liable to do more harm then good as this quote attributed to Mitt Romney demonstrates. 

The invisible hand of the market always moves faster and better than the heavy hand of government.

This theory seems to be the rationale for this recent SEC decision reported this Monday by Reuters.

The Securities and Exchange Commission is leaning more heavily on partner regulator the Financial Industry Regulatory Authority to monitor brokerages as it devotes extra staff to oversee the rapid growth of independent financial advisers, a top regulator said Monday
What could possibly be a reasonable objection to FINRA taking over SEC duties?

Simply put, FINRA is an industry group and therefore has an inherent conflict of interest. 

Does this mean that it is certain that they will fail to do a proper job or that they have failed in the past?  No.  What it does mean is that a conflict could cause them to fail.

What are some of the potential trouble "spots"?

  1. Setting professional qualification standards too low.  FINRA doesn't report the pass rates on its qualification exams (Series 7, etc).  The pass rates for the CFA, CFP, FRM are all reported and suggest these certifications are difficult to obtain.  Why is that?   
  2. Restricting information on actions against brokers.  If you'll recall a while back, FINRA was criticized for failing to provide enough information in its Broker Check (BC) tool to allow investors to determine whether to work with a particular broker.  FINRA announced some improvements but just recently the  Public Investors Arbitration Bar Association found those improvements lacking and criticized FINRA because BC doesn't include reasons for a broker's termination by a firm, information about bankruptcies, tax liens and scores on relevant industry examinations.  PIABA noted that some of this information is provided by state security regulators (government agencies) which suggests (but does not prove) that legal liability issues did not motivate these omissions.  
  3. Applying a light touch on penalties when perhaps a heavier one is justified.  In the past the maximum fine was $15,000 per "offense" in the NASD days. (FINRA is the combination of the "old" NASD and NYSE separate self-regulatory bodies).   This has changed. Fee levels have increased.   In 2016 FINRA is set for a record year of estimated fines of some $160 million due to some "supersized" fines.  ("Supersized" is defined as a fine $1 million or more).  The estimated 2016 total fines is less than the fines levied against Wells Fargo by government regulators for the "fake accounts" scandal. The last time I looked FINRA's largest 2016 fine was some $25 million against Met Life (2015 revenues $70 billion net income $5 billion).  See the analysis of these "ginormous" fines by Sutherland Asbill and Brennan here.  And here for K&L Gates' analysis of 2015 fines in which it's noted that most FINRA actions are resolved for less than $50,000.  It should be noted that FINRA fines individuals as well as firms and that many of the firms in the industry are minnows alongside the major brokerage firms so $50,000 could be a firm threatening fee. 
Just to be clear, I am not accusing FINRA of improper behavior.  I am merely pointing out a conflict of interest.

During his illustrious career, AA has seen a lot of conflicts of interest turn into conflicts of action. 

Here's one "sweet" story - not witnessed by AA.

Early warning signals of the coronary heart disease (CHD) risk of sugar (sucrose) emerged in the 1950s. We examined Sugar Research Foundation (SRF) internal documents, historical reports, and statements relevant to early debates about the dietary causes of CHD and assembled findings chronologically into a narrative case study. The SRF sponsored its first CHD research project in 1965, a literature review published in the New England Journal of Medicine, which singled out fat and cholesterol as the dietary causes of CHD and downplayed evidence that sucrose consumption was also a risk factor. The SRF set the review’s objective, contributed articles for inclusion, and received drafts. The SRF’s funding and role was not disclosed. Together with other recent analyses of sugar industry documents, our findings suggest the industry sponsored a research program in the 1960s and 1970s that successfully cast doubt about the hazards of sucrose while promoting fat as the dietary culprit in CHD. Policymaking committees should consider giving less weight to food industry–funded studies and include mechanistic and animal studies as well as studies appraising the effect of added sugars on multiple CHD biomarkers and disease development

Why take a risk with this conflict of interest? 

FINRA has a role to play.  

But should the SEC cede what is properly a government responsibility?

US Presidential Election 2016: AA Ahead of the Trend

"Shovel Ready"

Regardless of the outcome of the election, Bayt Abu Arqala will be prepared. 

These beauties will go right above our Category 3 B-7 already in progress.  

Tuesday, October 18, 2016

Third US Presidential Debate: A Lonely Nation Turns Its Eyes to You

Where Have You Gone?
Given the state of US politics, Disneyland might have been more appropriate, though there is precedent for Las Vegas where the "house" and not the customer generally wins "anyway you look at it." 

Tip of AA's enormous tarbush to his departed father who shared this and other of his music with me.

Tuesday, October 11, 2016

Major US Presidential Candidates Ask Muslims to Report Stuff: Are You Doing Your Part?

It's Easy.  It's Fun.  It's Patriotic!

At the "debate" earlier this week the candidates of the Republican and Democratic parties called on Muslims to report suspicious activity.   No other group was asked to report.

Apparently, only Muslims know what's going on.  Or perhaps they are the only ones who can be trusted to file accurate and complete reports.  In any case, the ball is in your court.

Ms. Clinton: 

We need American Muslims to be part of our eyes and ears on our front lines.

Mr. Trump:

In San Bernardino, many people saw the bombs all over the apartment of the two people that killed 14 and wounded many, many people. Horribly wounded. They’ll never be the same. Muslims have to report the problems when they see them.

Within moments, patriotic Muslims sprang into action by establishing a real-time forum for the relay of suspicious activity. 

You'll find it here.   Or you can use this forum.  File your own report.

If you have an Arabic origin name or look "Middle Eastern", but are not a Muslim, you can file a report too.  No one in the USA will ever figure it out. 

A public service message from Abu Arqala and the staff at Suq al-Mal blogspot. 

Friday, September 30, 2016

Metadiscussion on "Are Big Banks Safer?"

Often More Dogmatic and Less Scientific

Natasha Sarin and Lawrence Summers of Harvard published a draft paper for the BPEA Conference in September titled “Have big banks gotten safer?
The authors use a market-based methodology to answer the question whether banks are safer now than they were before the Great Financial Crisis (or as AA prefers to call it The Almost a Second Great Depression) given global regulatory actions.
This post is not meant as an analysis or critique of their work.  Rather I’m using their paper to pose some larger questions about economics, particularly market-based economics. Think of this post as metadiscussion on themes in their paper. 
Before I begin a few disclosures. 
I think that economics is not a science per se, though a scientific approach is useful as a heuristic tool in approaching the topic, e.g., defining terms carefully and as precisely as possible and most importantly recognizing the limits of the endeavor.  The economy is a complex not a complicated system. Therefore, it cannot be successfully modeled.  All the mathematics in the world cannot change this fundamental fact.
Like many who toil in the financial world, I was raised on the prevailing standard economic theory that invests so-called “free markets” with magical wisdom and efficiency. That theory posits that markets are self-regulating, that is, if left to their own processes, they reach a stable full employment (as defined) equilibrium. Extraneous shocks not anything inherent in the market itself cause economic problems.  Vigorous competition keeps participants in the economy “honest” and largely results in maximizing social benefits. Government regulation and taxes distort these virtuous operations. Market prices represent the best available valuation of assets, if not always, then generally.      
As my language suggests, I am not a true believer.  It’s not that I think markets have no value.  It’s that I do not think they are omniscient.  Markets are also inherently unstable, that is, economic problems result from factors within the markets not just extraneous shocks.  Market outcomes do not always maximize social value.  Market valuations can stray from real value for prolonged periods.  Homo economicus is fiction.   That I suppose puts me in the Minskyite camp. 
To start things off, quotes from the abstract in the Sarin/Summers paper.  The quote is in italics.  I’ve boldfaced a few points that I want to use as springboards for my own comments.
“Since the financial crisis, there have been major changes in the regulation of large financial institutions directed at reducing their risk. Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress testing has sought to further assure safety by raising levels of capital and reducing risk taking. Standard financial theories would predict that such changes would lead to substantial declines in financial market measures of risk. For major institutions in the United States and around the world and midsized institutions in the United States, we test this proposition using information on stock price volatility, option-based estimates of future volatility, beta, credit default swaps, earnings-price ratios, and preferred stock yields. To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased. This does not make a case against the regulatory approaches that have been pursued, but does caution against complacency.

We examine a number of possible explanations for our surprising findings. We conclude that financial markets may have underestimated risk prior to the crisis and that there may have been significant distortions in measures of regulatory capital. While we cannot rule out these explanations, we believe that our findings are most consistent with a dramatic decline in the franchise value of major financial institutions, caused at least in part by new regulations. This decline in franchise value makes financial institutions more vulnerable to adverse shocks. We highlight that the ratio of the market value of common equity to assets on both a risk-adjusted and risk-unadjusted basis has declined significantly for most major institutions. Our findings, if validated by others, may have important implications for regulatory policy.

Now to some comments.

When Results Differ from Theory, Question Theory

When results differ from what theory predicts, one sensible approach is to question the theory itself, especially in this case as markets have a history of mis-valuing assets, e.g., the dotcom boom, real estate, etc.     

While the authors do not specifically raise this point, they seem to accept that the market is not always right.  We conclude that financial markets may have underestimated risk prior to the crisis”.   If markets were wrong then, why should we trust them now?  If markets were carried away by irrational exuberance then, perhaps they are being carried away by rational pessimism now.  

Beyond that how many times does the market have to be wrong before we conclude that standard financial theory on markets is wrong or deficient?  That is of course a dangerous step that could well undermine the bases for a lot of economic dogma and the politics that dogma supports.

If we assume that markets indeed can value assets with reasonable accuracy, it’s prudent to ask whether they can value some assets better than others.  Thus, is the market price for a Picasso as “good” (accurate) as the market price for a US Treasury bond? 

Financial institutions are black boxes of risk unlike a lot of other listed firms.  What gives the market the insight to value them?  

If you believe Mr. Dimon, and I sure hope you do, senior management at JPMorgan had no idea that the CIO was engaged in risky trading (instead of hedging), that risk control was ineffective, and that rogue whales were in London, even apparently when traders at other institutions publicly pointed out that one JPMC trader was significantly moving the CDS market. 

Mr. Stumpf has testified before the US Congress that he “knew nothing” about creation of bogus accounts, despite employees contacting the bank’s compliance and ethics department and some employees mentioning this is lawsuits filed for wrongful dismissal. 

Taking their statements at face value and AA knows no reason not to (I’m definitely senior management material), if the CEO with access to inside information doesn’t know, how does the market?

Regulators get to peer into these black boxes. In the case of large banks in the US they get "invited" (or more accurately invite themselves) to station personnel inside the box.  They get regular detailed reports on assets, trading positions, and can compel the FI to provide more information. If so motivated, regulators can meet with bank officers to raise questions.  Even with this access regulators appear to have trouble regulating banks.  What about the market gives it insights beyond regulators?  Or do regulators "see" but not "see" for other reasons?

The market doesn’t have the same level and detail of information as regulators nor can it force the FI to give it more.  On what basis does the market form an opinion?  If it is operating on less than complete information, is its market price more directional than locational?  That is, it identifies troubled institutions but may not have estimated their true value.  If so, then caution has to be used with results based on market values.

By contrast, it’s much easier, but not easy, to value a manufacturing firm.  These firms generate physical goods whose acceptance by customers can be tracked. Market share is going up or down.  Margins are increasing or decreasing.  Think of the saga of Blackberry.  But even in these cases, value is directional not locational.  That being said, there is always the counter case, e.g., Sunbeam, where “clever” practices can hide the rot in the underlying business. 

If Theory is Sound, Make Sure You Have Met the Conditions

Next are questions about the “market”. 

As I understand standard financial theory, there are some requirements for a market. 

Three guys trading among themselves infrequently is definitely not a market.  A market where participants have colluded (think LIBOR, think FX, think …) to “fix” prices in not a market.

To the extent that these markets’ prices are inputs into the valuation of securities, then one would have to question the accuracy of price determination of those other securities. 

Even where markets are not manipulated, they may not meet the test of a real market.  In which case their price “discovery” may be wildly inaccurate. It’s no secret that the only true bond market qua market is that for USG securities.  Other bonds trade infrequently and in too small numbers to meet the underlying requirement that the market price reflect the outcome of differing views among a multitude of participants.  CDS isn’t a real market.    

Don’t Push Theory Beyond Where It Functions

Related to this is pushing an assumed sound theory too far.  

Some years back, a client showed me an analysis he had received from a competitor.  It was a masterful piece of mathematics applying the Capital Asset Pricing Model etc. to various countries, showing individual country betas and cost of capital. I don’t remember all of the countries, but do remember that Finland and Bahrain were included. 

I noted that Nokia was roughly 70% of the value (market capitalization) of the Finnish market and so it seemed to me that the Finnish market was essentially Nokia idiosyncratic risk.  Since diversification of idiosyncratic risk is a key requirement for the CAPM etc, application of the theory was "dubious" at best.  I expressed doubts that the liquidity of the Bahrain market met the test for a "market".  What does a market price mean when there is no or almost no trading?

Look for Factors that Cause Theory to “Break Down”

But if we do have “real” markets that can generally estimate prices with reasonable accuracy, can there be factors that disrupt price discovery? 

After JFK was assassinated and after 9-11, the NYSE fell dramatically.  For 9-11 it was the largest one day fall since the Great Depression. And the market was closed until 17 September.  While horrific, these events did not wipe out billions in real value.   Liquidity preference, uncertainty, and outright bed wetting fear drove the market down. 

Similarly, there have been markets that imagined value creation e.g., the dotcom boom.   The authors recognize this with their conclusion that markets underestimated risk before the GFC. 

Given that admission, how do we know when to trust the market’s judgment?

It was an article of faith at the highest levels of at least one major country’s economic management apparatus that it is impossible to determine the occurrence of a bubble until after it pops.   I believe that maestro also held that markets self-regulate away excesses.  Views it is clear that worked very very well in theory, but less so in practice.

Are there any factors that could explain a similar pessimism and divergence from real value today?  While the NBER pronounced the GFC ended in 2009, there has not been the usual recovery.  Economic growth is anemic.  Central banks across the world are engaged in unprecedented intervention in financial markets that some fear is distorting markets and sowing the seeds for future busts.  Some are worried that conditions will remain so weak that unwinding intervention will not be possible without plunging the world back into GFC2.  Markets are jittery.    

As a sector, banks have been identified as the key culprits responsible for the GFC.  Thus, against the general worry about the economy, banks have pride of place as more risky than other firms.  If that weren’t enough to drive perceptions of bank risk higher, banks have also been repeatedly shown to be (a) apparently ethically challenged in the conduct of business--not just with respect to mortgage securities, but Libor rate setting, FX trading, and recently the creation of dummy customer accounts--and (b) lax or incapable of applying laws relating to sanctions, money laundering, etc.  Some institutions are serial offenders, “financial recidivists” as Ms. AA calls them.   Additionally note that the unprecedented central bank intervention is directly focused on the financial sector and thus on banks.  

In some cases, regulatory settlements have imposed onerous conditions on businesses and hefty fines while only deferring prosecution – leaving that risk “unsettled”.  In other cases, settlements have yet to be reached.  In one case regulators have opened what appears to be public haggling over the size of the fine –not something that is likely to calm market jitters. 

Compliance issues like trading losses appear all of a sudden.  One day everything is fine the next day the fur hits the fan. 

How does one quantify regulatory risk emanating from a "black box"?

In such an environment investors sensibly would demand higher risk premia.  Since the true risk is unknown and thus unquantifiable, that premium would be large to cover the unknown.  Perhaps larger than necessary?

Investors no doubt are also worried about the uncertain and potentially unfair results of civil suits, e.g., Arab Bank and the one against HSBC and several other major EU banks.   Something the government has little to no control over. And the results of which are left to the whims of judges and impartiality of juries.    

 Are You Conclusions Well Grounded?

Does this mean that bank franchise values have gone down?  

It depends. 

It depends on the accuracy of the two value points being compared. 

If the market underestimated risks before the GFC, then the market overestimated pre-GFC franchise values.  In this case, how can you make a comparison?

But it get worse.  Once you accept that the market made a single valuation "mistake", then you've accepted that it can make others.

So, why should one have more confidence in the current valuation? 

Particularly when economic conditions are not "normal":  a very anemic recovery and extraordinary central bank policies.  Conditions that have obtained for at least eight years despite the NBER's pronouncement. 

Nominal and Real Values

While one might compare nominal values, I think that “real” values (to the extent they might be known) would be more important for policy considerations.

But it has to be a challenge to untangle multiple factors affecting bank security prices to identify the main driver.  Well, at least, it’s hard for AA.

Wrapping Up

At this point, I’ve come back full circle to  where I began: skepticism about economics and market wisdom/valuations.

Don’t read the above as necessarily saying that market prices are “rubbish”, but rather that they are not infallible just as the market is not infallible.   A great deal of skepticism, caution, and humility has to be brought to bear when applying economic or financial theories to the real world.            

Friday, September 23, 2016

Bank De-Risking Likely to Trump Calls for Financial Inclusion

For Some Activities Risk Avoidance Makes More Sense Than Risk Management

On September 8th, the Hong Kong Monetary Authority (HKMA) issued a circular to the CEOs of all Authorized (financial) Institutions (AIs) in the HKSAR (Hong Kong Special Administrative Region) entitled “De-risking and Financial Inclusion”.
The circular sets forth the HKMA’s expectations (read “instructions”) that AIs adopt a risk based approach (RBA) to implementing anti-money laundering AML) and countering the financing of terrorism (CFT) regulations and cease the practice of de-risking, that is refusing to open or maintain accounts for certain customers.

As outlined below, the HKMA is rowing against some very powerful tides.  The circular is unlikely to have the stated desired effect.

Some quotes from the circular to set the stage for this post.  I’ve added boldface to highlight certain points. 

Noting the progressive tightening of AML regulations over recent years the HKMA states “While it is important to ensure that AML/CFT controls are sufficiently robust and comply with all the relevant regulatory requirements, the HKMA expects AIs to adopt a risk-based approach (RBA) and refrain from adopting practices that would result in financial exclusion, particularly in respect of the need for bona fide businesses to have access to basic banking services.”  

In a similar vein, the HKMA defines “de-risking” as “The phenomenon of banks declining or discontinuing business relationships with customers or categories of customers to avoid, rather than manage, the risk involved.

On the subject of an RBA, the HKMA makes the following points: 

"RBA does not require or expect a “zero failure” outcome. While AIs should take all reasonable measures to identify ML/TF risks at the account opening stage and, for existing customers, on an ongoing basis, it is unrealistic to expect that no ML/TF activities would ever occur through the banking system. AIs are not required to implement overly stringent CDD processes with a view to eliminating, ex-ante, all risks. Otherwise, such an approach would result in a large number of bona fide businesses and individuals not being able to open or maintain accounts. CDD is only one part of an effective AML/CFT regime. AIs are also required to implement a system that can monitor and detect suspicious transactions in order to report them to the relevant authorities and take the necessary mitigating measures, such as enhanced CDD."
News reports suggest that the HKMA's action was occasioned by several banks “tossing” existing customers.   Bloomberg refers to the alleged abrupt closure by HSBC of accounts of a long standing client that is an offshore fund. 
That’s borne out in the circular itself which also notes the refusal of some unnamed FIs in the HKSAR refused to accept new clients or set “onerous” requirements.  See the annex to the circular.
The HKMA’s circular follows one issued in late August by five US regulators of financial institutions in the country.  Yes, you read that right “five”.   Apparently one regulator is insufficient for the USA's financial sector.  It's that big!  That circular also contained an appeal for banks to adopt a RBA, but did not include the HKMA’s statement that it didn’t expect RBA AML/CFT to prevent all illegal transactions.  Instead the five US regulators offered the comforting thought that “the Treasury and the FBAs do not utilize a zero tolerance philosophy that mandates the strict imposition of formal enforcement action regardless of the facts and circumstances of the situation”.  

I trust like AA you find those words comforting in a particularly baffling way.  Are these regulators saying that existing regulations allow them to take formal enforcement action regardless of facts and circumstances but that they will kindly forbear from exercising these powers?  Instead might they apply strict non formal enforcement actions? On that score, what is a “strict” imposition and how does it differ from a “strict” enforcement action?  Or are they saying that existing US laws and regulations are so written that they could impose draconian penalties for a “slip or two” in compliance?  Finally, if the posture of the regulators is based on a “philosophy” and not the law, could that “philosophy” change with the next administration? If that’s the case, should banks be advised to prepare for the worst?       

The widespread use of the US dollar in both commercial and financial transactions and the propensity of the US to use that position to levy fines and impose extraterritorial requirements make US regulations and the “philosophy” of the US regulator of paramount concern to internationally active banks. 

The HKMA may have “expectations” but Hong Kong and other foreign banks are likely to be more sensitive to what the US “expects” as evidenced by its past behavior.   Thus, the HKMA’s appeal is almost certain to collide with banks’ self-interest and certain “objective conditions”.

First, banks are profit oriented not public service institutions despite some manifestly absurd industry positioning / brand development advertising campaigns that are currently running. 
In other words, profit is job #1.  Financial “inclusion” like charity work is well down the list of priorities.  And is a miniscule part of activities.  Thus, despite its ad campaign running on the Bloomberg TV, Bank of America Merrill Lynch doesn’t devote a major portion of its efforts to bring clean water to folks in Africa.
Profit on an account is a function of revenues less costs.
Providing bank accounts and related services is a low margin high volume business. Contrast that with investment banking transactions where the volumes are significantly lower but the margins are immense.  
Considering only operating costs, many SME accounts at best offer marginal profitability. We’re talking about maybe tens of thousands of dollars profit per account for many accounts. 
When the costs of customer due diligence, monitoring, preparing and filing of suspicious transaction reports are included, profit is even less.  Customer due diligence (CDD) at the inception of a relationship is particularly labor intensive.  Much of the subsequent monitoring can be done via computer programs, but at the end of the day someone has to review the reports generated, decide whether to investigate further, and ultimately whether to approach the customer for more information and/or file a suspicious transaction report STR).  
On that score, banks file a good portion of their STRs for defensive (CYA) reasons.  It demonstrates they have a working compliance system.  If something untoward about a customer turns up in the future, the bank can say to the regulators “But I reported to you.  By the way you never got back to me.”  Thus, monitoring “risky” customers taken on to promote financial inclusion may trigger the need for a CYA STR even if the bank thinks the customer is "clean".  One can't be too careful because regulatory hindsight is often more than 20/20.
Fines take a potential bite out of profit.  But by increasing expenses they can also affect the capital a bank is required to maintain for operational risk under the Basel framework.  Lower Basel capital adequacy ratios can affect credit and stock ratings.  Increasing capital can lead to declines in ROE if the profits do not cover the cost of capital.  If capital cannot be increased, then the bank may have to reduce certain other activities (e.g. credit or market risk related) thus reducing income/profit.  
Second, it’s important to remember that banks are free to select or reject customers according to their own criteria.  Even in countries that have laws to prevent discrimination, banks may reject customers as long as the as criteria used are business principles-based, e.g., risk not race and are consistently applied.  Not every applicant for a new loan or new account will get one.  Not every customer with an existing loan will be granted a renewal or extension.  Similarly, not every customer with an account is guaranteed the right to retain it. So the appeal is a request not a command.
Third, there are a variety of objective conditions and not simply bloody-mindedness that are pushing banks to “de-risk”.
Chief among these are regulatory and legal risks, but there are others.
Regulatory Risks.
Billion dollar fines concentrate the minds or bankers quite sharply.  Settlements with regulators include more than fines.  Often settlements are (legally) structured as deferred prosecution agreements or DPAs.  As the name suggests, the DPA holds a sword over the head of the financial institution and compel compliance on an extraterritorial basis.
But don’t take AA’s word for it. 
Here are two 2016 quotes attributed to Assistant Attorney General Leslie Caldwell. “[w]e can require that the banks cooperate with our ongoing investigations, particularly in our investigations of individuals. We can require that such compliance programs and cooperation be implemented worldwide, rather than just in the United States. We can require periodic reporting to a court that oversees the agreements for its terms.”
Under the right circumstances, the government “will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.”
Here are some illustrative examples of DPAs.  Standard Chartered 2014 with DFS New York State The consent order triggered significant de-risking by SCB in the UAE as you may recall.  Here’s  HSBC 2012. 
So if you were a financial institution considering opening or maintaining an account relationship, would one of your key risk mitigation concerns be avoiding the risk that a regulator could suddenly be dictating how you run your business worldwide?  See the requirements in the HSBC DPA Paragraph #5.  Note not only the number of requirements but also the short leash in later points Paras 8 and 14-16. 
But as they say on late night TV.  “Wait there’s more”.
­Civil Lawsuits
Lawsuits such as that against the Arab Bank or the one in progress against HSBC, Barclays, Standard Chartered, the Royal Bank of Scotland and Credit Suisse are no doubt worrisome.  The latter suit is predicated on these banks’ admission of transferring money for Iran which the plaintiffs assert helped finance terrorist attacks against US military personnel in Iraq. There is to my knowledge no assertion that these banks actually transferred money for those attacks.  More here.  
Banks might be forgiven--particularly in light of the Arab Bank case—for questioning whether fair trials or impartial juries are available in certain jurisdictions.
Both the regulatory and legal actions highlight what is perhaps the key factor here.  Banks are subject not only to their own regulators and laws but to those of other countries.  The primary role of the US dollar in international financial transactions exposes not only major international banks but also smaller banks to US enforcement or legal actions.
Staff Risks
International banks operate in many countries.  Staff attitudes toward government regulations vary greatly.  In many countries the population treats their own government's laws and regulations as suggestions rather than binding constraints.  In some countries as a direct challenge to find a creative workaround.  An even more casual attitude often applies to laws of foreign countries.   Bank managements have to deal with the staff they have not the staff they wish they had.  In which case exposure can be neatly mitigated by not doing certain types of business or dealing with certain customers.  Eliminate discretion and one eliminates potential problems.
Recidivism Risk
If a bank is unfortunate enough to have encountered enforcement action, a further “slip” could trigger a severe response from at least one particular country, e.g., “tearing up DPAs” “filing criminal charges” as AAG Caldwell is quoted above.  Or additional fines or additional business conditions imposed.  Or even the threat of such action could cloud an institution’s stock price, customer confidence, etc.  Here’s an example.
When the risk reward ratio is highly skewed, the most effective risk management is risk avoidance.  
I suppose I could construct an RBA for running with scissors. But I will forgo running with scissors rather than “managing the risk” of doing so.  Simply because the potential return is dwarfed by the risk.
Banks are likely to do the same with respect to financial inclusion.   The lesson of Nogales Arizona and other similar stories of US banks closing branches on the US-side of the border with Mexico and “tossing” customers may be illustrative on this point.  Banks are likely to be much less solicitous of foreign than domestic customers. And the solicitude for domestic customers seems minimal in these cases. 
As outlined in the above press report, the US banks apparently claimed that their domestic de-risking was related to revised regulations requiring additional regulatory reporting and closure of “risky” accounts.  If you close your branch, you neatly “solve” both problems.