Banks must combat strengthening headwinds in emerging markets to realise sustainable growth: Ernst &
Monday, 16 June 2014 00:00
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Underlying potential outweighs short-term volatility for banks in emerging markets
Emerging markets have been the principal driver of global growth in the last five years and are expected to continue growing at twice the rate of developed markets. As a result, banks in emerging markets expect improved financial performance, despite facing challenges oftougher regulatory burdens, rising costs and intensifying competition, finds a new EY report, Banking in emerging markets: Investing for success.
The study, which surveyed more than 50 leading financial services institutions and over 9,000 retail banking customers in emerging markets, identifies three challenges for banks looking to emerging markets as a growth opportunity:
nTougher regulation: Regulators in the emerging markets are moving to catch up with, or in some cases get ahead of, regulators in developed markets. This has impacted growth opportunities for global and local banks in terms of cost of entry and increased regulatory burden respectively. For example, all the respondents in Indonesia expect the regulatory compliance burden to increase in the next 12 months – given that Indonesian banks must get used to working with its new regulator as micro-prudential regulation was transferred from Bank Indonesia to the Indonesia Financial Services Authority.
nIncreasing costs: The average operating expense for 50 leading emerging market banks has risen 81% in last four to five years from $ 3.6 b in 2009 to $ 6.5 b in 2013, driven by increased funding, labour and investment costs. IT spend will rise by 14% over the next four years with the most rapid growth expected to be felt in the emerging markets.
nIntensifying competition: New entrants to the market, including foreign banks and non-banks, are intensifying levels of competition. Unsurprisingly, 67% of Malaysian respondents see banks in neighbouring countries as a threat, while European banks are on the radar of 47% of Vietnam respondents; and Japanese banks represent a significant threat for all Indonesia respondents.
Jan Bellens, EY’s Global Banking & Capital Markets Emerging Markets Leader, says, “Success in these emerging markets is not straightforward, but there is great potential for those banks that get it right. In order to be successful in the long-term, banks must focus on designing the right business model and developing strong execution capabilities – learning and adapting from what banks have done well and not-so-well in both developed and other emerging countries.”
To overcome the challenges successfully, banks must think beyond immediate fixes and plan to invest in the following three areas:
nTechnology: EY estimates that bank credit to the private sector in the 11 markets studied will grow from around $ 3.5t in 2013 to $ 5.1t in 2018, triggering a need for significant investment in technology across emerging markets. Banks must invest in IT to provide new, low-cost ways to reach customers in markets with limited infrastructure, better assess credit risks, build enduring customer relationships and improve operations.
nPeople: Despite the growing cost pressure, the war on talent in the emerging markets continues, with 44% of bankers expecting headcount to grow, especially in business lines that are experiencing especially high growth or involve more intensive levels of customer service, such as premium and private banking.
nPartnerships: Banks can plug skills and capacity gaps through collaboration with companies in other industries such as telecoms and technology, as well as other financial institutions. This will be essential for banks looking to expand rapidly into new markets, products and services.
According to Steven Lewis, Global Banking & Capital Markets Lead Analyst at EY, “Domestic banks in these markets are already starting to strengthen risk management and improve capital and business efficiency, which will underpin profitable growth. However, if they want to keep pace with the growth of their customers, as businesses expand overseas and personal wealth in these markets increases, they will need to find ways to overcome skill and capability gaps or risk losing these customers to larger global players.”
