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anking integration among members of the Association of Southeast Asian Nations (ASEAN) may hit bumpy roads approaching the 2020 deadline as gaps and uneven development remain, rating agency Standard and Poor's (S&P) has said.

According to the latest report by S&P, titled 'ASEAN Financial Integration: the Long Road to Bank Consolidation', the much-anticipated dream of financial system integration still has a long way to go.

S&P attributed the rather difficult process to the uneven pace of financial liberalization, along with significant divergence in regulatory frameworks within the 10 member countries; comprising Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

'If you look at ASEAN, the countries are not homogenous. They have different banking systems and regulations, and that makes it quite difficult to realize the integration,' S&P analyst Ivan Tan told The Jakarta Post during a telephone interview.

The banking integration is part of a larger integration scheme in the region, dubbed the ASEAN Economic Community (AEC). AEC will enable greater movement of goods, investment, services, capital and skilled labor between the countries.

The creation of AEC will lead to ASEAN becoming the fifth-largest trading bloc in the world, with a combined GDP of about US$2.4 trillion.

'What's more, Standard & Poor's believes that regional GDP growth will increase to 5.8 percent in 2016 from 4.9 percent in 2014, second only to China,' it wrote in the report.

While the AEC will begin in 2015, integration of the financial system, including banking and insurance, is set to take place in 2020.

The agency noted that some countries ' such as Malaysia and the Philippines ' were already gearing up for the integration, but said that Indonesia was instead heading in the opposite direction with a move to restrict foreign ownership to 40 percent only.

'That was highlighted during the DBS-Danamon case,' Tan said.

In 2012, Singapore's DBS Bank Ltd., which is the largest bank in ASEAN, expressed its intent to acquire a majority stake in local lender Bank Danamon.

However, it scrapped the plan entirely in 2013 following Bank Indonesia's (BI) decision to only allow DBS to take over 40 percent of Danamon's shares.

'Liberalizing the systems will be challenging, but there is still time until 2020. We believe that the integration will pick up momentum sometime soon,' he said.

In the report, S&P also emphasized the need for banking consolidation in each respective country as financial integration was expected to intensify competition, especially with the entry of large global banks.

'Banks in ASEAN ' with the exception of Singapore's DBS Bank Ltd., Oversea-Chinese Banking Corp. Ltd. [OCBC] and United Overseas Bank Ltd. [UOB] ' are small by global standards and don't have the scale and footprint to compete effectively with global behemoths,' it said.

In particular, the fragmented banking systems in some countries, including Indonesia, have a large number of small financial institutions with weaker financial profiles than their global peers. 'These systems would find it difficult to compete if the larger banks join the fray,' it said.

Tan acknowledged that banking consolidation might seem unnecessary in Indonesia in the short-term, citing the country's current positive banking situation.

However, he argued that persistent overcrowding ' with 119 commercial banks managing total assets of Rp 5.22 quadrillion ($427.6 billion) only ' would make it harder for Indonesian lenders to achieve higher efficiency in the long run.

'Indonesia's cost to income ratio of 75 percent is quite high compared to 40 to 50 percent in Singapore and Malaysia. Low efficiency will make it difficult to compete with large foreign banks that are highly efficient,' Tan said.

Meanwhile, commenting on the integration, Budi Gunadi Sadikin, president director of the largest Indonesian lender, Bank Mandiri, said that Indonesia should have prepared itself for the integration years ago.

'We must work hard to prepare for 2020 [...] but I do think that Malaysia and Singapore must open up to lenders from other countries as well, so that ASEAN members can achieve higher equality,' he said.