Asian Banks to come under increasing profit pressure

05-Nov-2012

Malaysian banks, including its counterparts in Asia, may experience pressure on profitability despite continued growth, according to global management consulting firm McKinsey & Co.

Its Asia banking practice director, Joydeep Sengupta, said several imminent challenges that might put pressure on profitability included the difficult economic environment which would lead to higher risk costs, the changing regulatory requirements and the increasing shortage of capital that would put pressure on capital costs and consequently returns.

He said another challenge was the increasing sophistication of Asian consumers and decreasing levels of loyalty to their current banks.

“This would mean banks would have to work much harder to enhance levels of customer service and experience,” he said in an email reply to queries from StarBiz.

In terms of capital, Joydeep said for example in Malaysia, with the increasing pressure on availability of capital and diminishing profitability, banks would need to manage their capital much more aggressively.

This would involve reducing “wastage” of capital through operational inefficiencies, allocating capital more effectively and being much more strategic about pricing and products, he noted.

Despite Asia remaining a growth environment, he added that banks in Malaysia as well as in the region would need to be much more “granular” in identifying the “hot spots” and “pockets of growth.”

This, he said, would require much better segmentation, deeper understanding of micro-markets within cities and tailoring of business models to these micro-segments.

“Given the rapidly evolving technology landscape and the emergence of a large segment of “digital consumers,” many Asian banks find themselves ill-prepared to meet this challenge.

“They have to act quickly and decisively to leverage the new interactive technology to enhance their business productivity as well as re-orient their business models to cater to the needs of the new digital' consumer,'' Joydeep added.

In many markets across Asia, he said the slowdown in the macro economic environment, and the increasing levels of competition, had led to deteriorating credit quality, particularly in segments such as small and medium enterprises, mid-market and consumer credit the core focus areas of most Asian banks.

Therefore, modernising the credit assessment system to enhance upfront credit acquisition quality, establishing strong early warning systems and investing in collections and workout capabilities were important priorities for Asian banks.

On mergers and acquisitions for banking in Asia, he said McKinsey anticipated greater industry consolidation across many markets in Asia. Triggers could include a worsening credit environment and insufficient capital availability, he said, adding that it expected domestic consolidation in some markets like Vietnam and India to precede cross-border and regional consolidation.

Asked whether the eurozone sovereign debt crisis and the weak US economy could impact the banking sector in the region, Joydeep said there was no doubt the current challenges in the global economy would adversely impact the sector.

“Firstly, the health of a banking sector is closely correlated to the health of the economy and there are very few economies in Asia that are not globally interconnected.

“Secondly, the challenges in Europe and the United States create significant pressure on availability of capital for banks in Asia which will impact profitable growth.

“Lastly, given the regulatory changes under way, Asian banks will not be completely immune to those, which could lead to greater costs for the banks,'' he added.

Despite the challenging global banking environment, Asia would remain a driver of future growth, he said, adding that that close to 40 per cent of global incremental banking revenues would come from emerging Asian markets over the next few years.