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  • Banking in emerging markets

    Investing for success

  • ey.com/banking

  • Banking in emerging markets: investing for success


    Introduction 1

    Executive summary 4

    I. An engine of global growth 7

    II. Strengthening headwinds 13

    Regulatory pressures 13

    Competitive pressures 14

    Cost pressures 19

    III. Investing for success 23

    Combatting headwinds 23

    Enablers of success 28

  • ey.com/banking

  • 1 Banking in emerging markets: investing for success |

    IntroductionLast year we launched EYs inaugural Banking in emerging markets survey to help track changes in sentiment among bank executives in the emerging markets and to provide insight into opportunities and challenges for both domestic and international banks operating in those markets.

    e surveyed rapid growth markets (RGMs) at different stages of financial maturity to understand where growth was expected, what products customers wanted, how demand for financial services would evolve as the countries matured and how banks were planning to respond.

    Shortly after our first survey, we witnessed the disruption of many emerging markets following the announcement that quantitative easing (QE) in the US would be scaled back. In this report, we have returned to those markets to see how this turn of events, combined with other domestic and international developments, has affected the prospects for banks. Is the demand for financial services still expected to grow at a rapid pace? How has the changing landscape impacted banks priorities? And more importantly, what investments do banks need to make to operate successfully in such volatile markets?

    This report also incorporates results from EYs Global Consumer Banking Survey 2014 to help our clients better understand what motivates their emerging market retail customers. We identify what customers look for in a financial services provider and how customers priorities map to banks priorities, to determine how financial institutions can better win the most profitable customers.

    While emerging markets are very different in nature, we believe there are also distinct similarities between them at different stages of maturity. We see demand for certain products pick up at particular points, and we see banks in these markets facing similar challenges. We believe some of the lessons and experiences of banks in one market can be extrapolated to other markets at a similar stage of maturity.

    We have identified three stages of maturity in the emerging markets. Frontier RGMs have per capita GDP below US$2,000, the point at which deposit and savings products typically appear. They also have nascent capital markets with a capital market depth under 50% of GDP. Established RGMs have all exceeded US$8,000 per capita GDP, the point at which credit products become established, or have a capital market depth of over 125% of GDP. Transitional markets lie between the two (see Figure 1).

    Drawing on the findings from our Banking in emerging markets survey and our Global Consumer Banking Survey 2014, this report covers 11 RGMs that our clients have identified as members of the next wave of developing markets beyond the BRICs. We have chosen these markets because they offer a proxy for other countries at similar stages of evolution.

    Frontier RGMs: Kenya, Nigeria, Vietnam

    Transitional RGMs: Colombia, Egypt, Indonesia

    Established RGMs: Chile, Malaysia, Mexico, South Africa, Turkey

    Banks that are successful in the emerging world will be those that are able to identify and learn the lessons of other institutions in similar markets and can adapt them to their local context. By surveying and interviewing senior executives from more than 50 major institutions operating across these markets, which account for more than one-third of their total banking assets, and through a survey of over 9,000 of their retail customers, this report identifies the common threads among the countries. It highlights their challenges and sets out the investments banks must make if they are to be successful.


  • 2 | ey.com/banking


    (GDP per capita)Threshold

    (Capital markets depth)Description Which financial products are common? Who provides financial services?

    Frontier RGMs: Kenya Nigeria Vietnam

  • 3 Banking in emerging markets: investing for success |


    (GDP per capita)Threshold

    (Capital markets depth)Description Which financial products are common? Who provides financial services?

    Frontier RGMs: Kenya Nigeria Vietnam

  • 4 | ey.com/banking

    Executive summaryGrowth is a defining feature of the emerging markets. Our 11 RGMs are growing at twice the rate of the developed markets. This growth makes them an attractive proposition for banks as the customer base expands and demands a wider range of products and services. But not all customers will be equally profitable. Banks cannot serve everyone, and they must maximize the profitability of those they do serve. Being successful in the emerging markets is not straightforward.

    olatility is another defining feature of the emerging markets and has a wide variety of causes: political or social upheaval; the creation and destruction of bubbles; and the amplified repercussions resulting from events and decisions in global financial markets. Banks must cope with this volatility if they are to thrive.

    These two forces growth and volatility have been evident during the past five years. Faced with sluggish growth and low yields in the developed world, investors turned to new markets. As hot money in search of yield flooded these markets, businesses found their cost of funding reduced. But as yields ticked up in the developed world following the tapering of QE, capital flows slowed or reversed. In the first two months of this year, more money flowed out of emerging market funds than had done so over the whole of 2013.

    As a result, interest rates have been raised in a number of the emerging markets as central banks try to prop up their currencies; thus, borrowers are coming under pressure, and banks may see their non-performing loans increase. But most banks in emerging markets are sufficiently capitalized to weather a storm, and growth will pick up again, driven by underlying fundamentals in most markets. The question many banks are struggling with is how to generate maximum return from this market growth.

    Banks must combat three headwinds tougher regulation, intensifying competition and increasing costs if they are to weather the volatility of the markets and seize the profitable opportunities they present.

    A raft of regulation to improve stability, to protect customers, to address supervisory weaknesses and to align the interests of foreign banks to local objectives is putting compliance departments under pressure.

    The opportunities in these markets (we estimate that over the next five years, bank credit to the private sector in our 11 RGMs will grow by more than US$1.5t) are attracting new entrants to the banking sector. These competitors are

    beginning to lure the most profitable customers away from incumbents with their broader reach or more specialized capabilities.

    Banks must also grapple with cost pressures. Funding costs are rising; minimum wage increases and staff shortages are driving up labor costs, and banks need to invest more in technology as they seek to improve their business efficiency and provide customers with better service.

    In response to these pressures, we see banks focusing on three areas:

    Strengthening risk management. Credit risk management is central not only to managing volatility, but also to growing business. With many emerging markets lacking credit bureau coverage, banks are looking at new ways to assess and manage credit risk. They are also focused on improving risk management more generally across their business for example, through improving governance to reassure investors.

    Improving capital and business efficiency. As demand for credit grows, banks are looking for the most effective way to deploy their balance sheets. Banks that can better target lending will be able to maintain higher interest margins. But to avoid losing customers, they also need to find alternative methods to finance those they dont lend to. As banks invest in growth, they are seeking new ways to improve the efficiency of their cost base and widen their operating jaws. Banks are looking for new, low-cost ways to reach customers in these markets.

    Winning profitable customers. The growth of the emerging markets offers huge scope for banks to expand their business. But new entrants mean that competition over a small segment of profitable customers is incredibly intense. Banks are looking at ways to profitably serve customers that were hitherto considered unattractive.


  • 5 Banking in emerging markets: investing for success |

    3. Partnerships. To do what banks cant do themselves, collaborating with other financial institutions, technology firms or firms from other sectors will be central to plugging skills gaps in the short term and improving banks capabilities in the long term. This will be essential for banks looking to expand into areas of the market in which they have not previously operated and in the provision of new services to customers

    The best route to success will vary from institution to institution and country to country. What is clear is that success will be hard to achieve without significant investment in technology, people and partnerships. However, banks dont need to start with a blank page. They can learn from those who have gone before them: institutions that have

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