Over the past decade, banks in the Asia-Pacific region have propelled a global industry to profit pools of more than $1 trillion in 2015. In that
year, 46 percent of the global banking profit pool came from the region, a significant increase from 28 percent share in 2005. The bulk of this expansion came from volume growth linked to dynamic economies throughout Asia-Pacific, but especially in China, which accounted for about half the region’s banking revenue pool in 2015.
But the momentum from this golden decade
is already fading, with margins and returns on equity (ROE), to cite just two metrics, moving lower. We are seeing the beginnings of a decline, with ROE in Asia-Pacific falling from 15 percent in 2013 to 14 percent in 2014. The region and its financial industry seem to be settling into a new era of slower growth rates for the region’s banks and increased challenges in generating economic profits.
Banks in APAC will be affected by 3 key threats:
- Slowing macroeconomic growth
- Attackers from outside the industry disrupting financial services
Weakening balance sheets
These three threats could come together in a powerful storm with the potential to cripple ROEs by 2018. Indeed, banks are already seeing the impact of the changing environment. Our analysis of 328 banks in the region showed that while 39 percent posted an economic profit in the period from 2003 to 2006, only 28 percent did so from 2011 to 2014.
Banks that simply try to wait out the storm will likely find themselves struggling for survival, but those that take action can uncover growth opportunities and measures that could help rekindle their momentum. Our analysis and experience suggest that four imperatives must be understood and addressed for banks to gain strength amid the turbulence:
1) Focused growth:
Banks should explore three clear pockets of growth – services for the unbanked and underbanked, an expanding affluent middle class, and the emerging importance of small and midsized enterprises to corporate banking. The choice will depend largely on a bank’s capabilities and strategy, with some universal banks pursuing them all.
2) Drive a value-focused digital transformation:
With margins under pressure, banks must rapidly drive digitization, especially to control costs. Approaches will vary, but include building new digital businesses and using digital technologies to transform existing systems and customer journeys.
3) Strengthening balance sheets:
Banks must also find ways to strengthen their balance sheets by addressing the growing volume of non-performing assets. Banks can explore creating asset management companies as a short-term solution, while working to improve risk management provides a longer term fix.
4) Enabling the organization:
Banking organizations must adapt to the new environment. In particular, they should build partnership skills and form alliances with FinTechs and others to create and enable a digital ecosystem. The organization also needs to become more flexible and nimble to bring out new products and services much faster than in the past. And finally, banks must revise their approach to talent and culture, creating room for innovation.
The coming storm is potent and is a clear threat to most banks in Asia-Pacific. But it may also provide the kind of significant industry disruption that creates opportunity for those that recognize it. The most aggressive banks will not merely survive the turbulence; they will be strengthened by it..