Asia-Pacific banks need to gain scale, pursue tech partnerships to stay competitive: McKinsey
- Average banking return on equity in Asia decreased from 12.4 per cent in 2010 to 10.1 per cent in 2018, McKinsey says
- Personal financial assets in region expected to increase to US$69 trillion by 2025, creating an opportunity for banks
Tightening margins and greater competition from non-financial players could spark a wave of consolidation and technology partnerships in the Asia-Pacific banking industry, as the sector looks to gain scale and streamline operations, according to a new report from McKinsey & Company.
Banks in Asia have been some of the most profitable worldwide since the global financial crisis, but have seen their margins shrink sharply in recent years as they face pressure from technology companies and more agile rivals, the consulting firm said. Average banking return on equity in Asia decreased from 12.4 per cent in 2010 to 10.1 per cent in 2018, the report found.
“While digitisation and advanced data analytics are creating important opportunities for Asian banks, they also render long-standing business models obsolete, as new entrants compete aggressively to steal market share from incumbents,” McKinsey partners Jacob Dahl, Ervin Ng and Joydeep Sengupta wrote in the report. “What is more, Asia is facing a tougher macroeconomic environment as growth slows, asset quality declines, and uncertainty about the macroeconomic outlook increases. The storm over Asia is gaining force, and banks must act quickly to counter attackers stealing market share.”
As incomes continue to grow and more people in Asia-Pacifc join the middle class, the amount of personal financial assets in the region is expected to increase to US$69 trillion by 2025, accounting for three-quarters of those assets globally, according to McKinsey. That creates an opportunity for the region’s lenders, but also a challenge if banks are slow to adapt to a more digitally driven landscape.
One area where traditional lenders have faced stiff competition is the payments market, where revenue in the Asia-Pacific region is expected to top US$1.2 trillion by 2023 – a 71 per cent increase from 2015 and more than half the worldwide total, according to a separate report McKinsey released in September.