Perspective: The rise and rise of emerging market banks
www.infosys.com/finacle The emerging market banks which were plagued by excess regulation and inefficiency a few decades back have finally come into their own and are here to stay.
Published on: Mar 4, 2016
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Four years after the crisis broke, Greece and a contraction) of advanced country banks, manyfew others are looking to survive, whereas of which still face multiple risks, implies thatcountries like China are trying to use this quiet the relative importance of the former will quicklyperiod to take giant leaps forward and emerge grow. Yet, in most emerging markets, the bankingahead of developed nations in the race for global industry remains immature. As a result, bankingsupremacy. As the backbone of economy, the revenue as a percentage of GDP is still small,financial sector will play a huge role in the offering great growth potential to incumbents anddynamics of a likely shift in the world order in the new entrants alike, unlike in the stagnant andtwenty-first century. saturated Western markets.While emerging nations have a host of problems Impact of Financial Crisisto deal with, they have a lot going for themwhen it comes to the financial sector. Emerging There are several reasons why the financialmarket banks have done a number of sector in the developing world came throughfundamental things right, for instance, banks in the crisis with relatively little damage. Firstly,China and India have participated in a number loan-to-deposit ratios are very low due to the netof financial inclusion initiatives to take their saving position of this region. Developing worldservices to some of the most backward regions banks have always gathered savings, in contrastand previously untapped markets. Banks in the to Western banks, which borrowed heavily. ThisBRIC nations have used their technological insulated emerging market banks from theprowess to provide cost efficient platforms and collapse of the interbank market and preemptedmobile applications, which have helped to the need for substantial deleveraging. As acatalyze industrial development. Regulatory result, these banks have been able to continuebodies, i.e. Central Banks, have played a key role lending using a stable and often growing sourcein ensuring that their banking sectors are well of deposit funding. Second, most emergingprotected and fundamentally strong. market banks already have high capital ratios which limit pressures for balance sheetThe crisis in Western banking, still reverberating adjustments. In addition, the new capital rulesin Southern Europe, seems to have accelerated under Basel III are likely to be much less painful forthe shift in banking muscle from rich countries to these banks as they typically have less risky assetsthe developing world. Banks in emerging and smaller investment banking businesses.countries are now measuring up with those inthe developed world, when it comes to the real Role of Statething, which is money. Not only are they wellcapitalized and well-funded, they are also really Along with the status of emerging market banks,big and growing. By profits, Tier-1 capital, the crisis has also transformed the role of thedividends and market value, they now account state in banking. The main reason for thefor a quarter to half of the global banking industry. continuing growth in China, which had relaxedChina’s lenders head the list of banks by market its grip on the industry since a decade, wasvalue, and Brazilian and Russian banks are the government’s direction to continue lendingamong the world’s top 25. At current growth during 2008 and 2009. In Brazil, India andrates, India’s banks will catch up with the top global Russia, state-owned banks have seen a sharpbanks in a decade. improvement in their fortunes, gaining market share at the expense of private banks.Emerging market banks’ asset growth hasbeen impressive as well, with Chinese institutions Customer Expectationstopping the ranks. While emerging marketbanks already grew faster than their advanced Banks all over the world are trying to reestablishcountry counterparts prior to 2007, the financial customer confidence and spur organic growth.crisis has further accelerated this trend. The Global banks are returning to core competenciesexpected continued growth of emerging market and simplifying new products in order to adaptbanks and the likely stagnation (or even to a new era of customer expectations. Emerging The Rise and Rise of Emerging Market Banks
market banks are finding it easier to compete fragmented banking sectors), and acrosswith developed market banks by winning over borders. Large banks in China and otherlocal customers by providing greater access to emerging countries are likely to becomevital financial services. significant regional or global players over the next 10 to 20 years through outward organicAccording to Ernst & Young’s recently released and inorganic expansion.global consumer banking survey 2011, titled “ANew Era of Customer Expectation”, the level of 4. Talent Acquisition:customer trust in banks has fallen 55% in theUnited States and 50% in Europe. But it has With Russian banks hiring investment bankersdropped far less in key emerging markets such from London, Chinese banks recruitingas India (down only 8%) and Brazil (off only 18%). American or European executives and Indian banks seeking to attract staff with internationalOpportunities for Emerging Market Banks: experience, developing world banks have started to compete globally for talent. As they1. Domestic Markets: internalize the knowledge of these employees, so will their competitiveness in both domestic Emerging market banks face a favorable and global markets increase. situation in their domestic markets compared to their advanced country peers. Firstly, their 5. Technology Adoption: countries have large unbanked populations promising growth opportunities. In contrast, Technology has made a major impact on the the outlook for credit growth in advanced way banks process information. Financial economies is bleak due to overall economic instruments, such as derivatives that enable weakness and ongoing deleveraging among risk allocation based on appetite and ability firms and households. Secondly, the are among the most significant innovations macroeconomic outlook of emerging markets of modern banking. The use of such is more positive. Unburdened by major instruments is not limited to developed market sovereign debt problems or large current banks alone; thanks to their sophisticated IT account deficits, most emerging markets are infrastructure, emerging market banks are standing on a solid platform. Even though also able to transact in them. As a result, their they will not be isolated from the problems in banking systems and financial markets are Europe and the United States, the dependence positioned to move rapidly from a basic stage of their banks on the West has diminished of development of risk management and in recent years. other commercial banking functions to an advanced one.2. Retail Banking Sector: In the same manner, the role of alternative There is good potential for growth in the delivery channels, such as ATMs, debit cards, retail banking sector in emerging markets, mobile, Internet and electronic banking, in since mortgage and consumer credit lending developing commercial banking functions is not as well developed as corporate and should not be underestimated. Given the government lending (although both these poor penetration of these channels (with the also offer considerable opportunities). Apart exception of ATMs), the vast majority of banks from this, restructuring in emerging economies in emerging markets are focused on improving should also create opportunities for private adoption. There is a big opportunity for them equity firms in the short to medium term. to bridge the urban-rural digital divide by reaching out to rural locations.3. Mergers and Acquisitions: International Expansion: Similar Difficulties The rise of emerging economies is likely to be associated with rapid growth of their key Developing world banks face exactly the same banking players, as well as increased M&A set of problems as their western peers as they activity, both within (by consolidation of try to expand abroad. Banks from advanced The Rise and Rise of Emerging Market Banks
countries have found that establishing a light future. Banks from emerging markets, being in apresence in lots of countries is a great way to much better financial position, are likely to steplose money. The same is likely to be true for into the void left by developed market banks,emerging market banks, so the smarter firms are increasing their relative importance as foreigntrying to develop a competitive advantage that investors. The global financial system is thereforethey can export E.g. Indians can export the low likely to witness a shift towards emerging marketcost technology. banks domination. It will be interesting to see how banks in emerging markets fuel the engine ofWith a large part of funds yet to be allocated to growth with this shift in global power.the unbanked population, most emerging marketbanks face a credit crunch, hampering foreign References:expansion. Also, regulators might oppose foreignadventures as the use of domestic deposits to 1. Special report: Banking in emergingfinance a subsidiary overseas exposes the bank markets/The Economist/ 13 May 2010to foreign exchange and counterparty risk. 2. Banking in 2050: How big will the emergingConclusion: markets get?/ Pricewaterhouse Coopers 3. The changing role of emerging-marketThe emerging market banks which were plagued banks/Author-Neeltje van Horen/ 25by excess regulation and inefficiency a few October 2011decades back have finally come into their ownand are here to stay. With strong fundamentals 4. “A New Era of Customer Expectation”/Globaland regulatory mechanisms in place at these consumer banking survey by Ernst andbanks, the financial crisis has actually accelerated Young/2011the pace at which these banks will overtaketheir developed market peers. According to a 5. The Banking industry in the emerging marketreport by PwC, the E7 banks (7 emerging economies: competition, consolidation andcountries which include the BRIC nations, systematic stability- an overview/ Authors-JohnIndonesia, Turkey and Mexico) will overtake the Hawkins and Dubravko MihaljekG7 banks in assets by 2036, which is 10 yearsahead of its pre-crisis prediction. Emerging Authormarket banks have set new rules in the Varun Chandrabusiness of banking, which developed market Associate Consultantbanks are trying to adjust to, making large Infosysinvestments from their side unlikely in the near The Rise and Rise of Emerging Market Banks