Banking in emerging markets

Transcrição

Seizing opportunities,
overcoming challenges
Contents
Introduction
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Section one
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Section two
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Section three
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Introduction
Where is growth expected? What products do customers want? What investments should be made
to compete successfully? How are other banks responding to opportunities and challenges? These
are some of the key questions our clients are asking themselves about the emerging markets.
Yet these markets are far from homogenous. Success for
both global and local banks operating (or seeking to operate) in
them is contingent on understanding the specific opportunities
that exist in each and overcoming the inevitable, and sometimes
unique, challenges.
With expanding economies and a fast-growing customer base for
financial services, the emerging markets are an attractive prospect
for any bank looking to grow its revenues. They also provide a muchneeded antidote to the challenges of some developed markets.
However, the financial prospects and needs of emerging market
customers tend to be much more fluid than those in developed
markets. Many of the economies remain volatile, and an economic
shock can dampen the appetite for banking products. Technological
advancement can open up previously inaccessible and unprofitable
customer pools. As things can change so rapidly, it is important
for financial institutions in these markets to monitor the evolving
appetite for products and services, to understand what is driving
demand and to identify how they can operate most profitably.
Ernst & Young has launched a survey to help track changes in
sentiment in the emerging markets and to provide insight into
opportunities and challenges for both domestic and international
banks operating in these markets. This report initiates our emerging
market coverage and incorporates the results from the first edition
of the survey.
We focus on 10 rapid-growth markets (RGMs) that our clients have
identified as part of the next wave of developing markets beyond
the BRICs:
>jgfla]jJ?Ek2Nigeria, Vietnam
LjYfkalagfYdJ?Ek2Colombia, Egypt, Indonesia
=klYZdak`]\J?Ek2Chile, Malaysia, Mexico, Turkey, South Africa
We have also selected these markets because they are at different
stages of financial maturity. Our frontier RGMs have per capita
GDP below US$2,000, the point at which deposit and savings
products typically emerge. Our established RGMs have all exceeded
US$8,000 per capita GDP, the point at which credit products
become established. Our transitional RGMs lie between the two.
These 10 markets can therefore stand as proxies for other countries
at similar stages of evolution.
Despite their differences, there is a common thread running
through all of these markets. These countries are experiencing rapid
growth and, as their economies grow, they are seeing dramatically
increased demand for banking products and services. Banks
operating in these markets face some similar challenges:
How can they serve the unbanked without developed market
infrastructure?
How can they meet growing demand for retail and corporate
lending when their balance sheets are constrained or the
capital markets are underdeveloped?
@go[Yfl`]qklYqhjgÕlYZd]afl`]^Y[]g^`]a_`l]f]\
competition?
Identifying and learning lessons from institutions in markets that
have already faced similar challenges, and successfully adapting
them to their local context, will be key to the success of banks
looking to exploit growth opportunities in these economies. We hope
this report will provide some food for thought on addressing both the
opportunities and the challenges. This report deals with the 10 RGMs
at a global level and the companion report contains specific analysis
on each of the 10 markets. Both have been developed through a
survey and interviews with senior executives from more than 50
major institutions operating across these markets, conducted in
Spring 2013. The banks represented account for over 40% of the
combined banking assets across these markets and include most of
their largest domestic banks and a sample of global banks.
3
Stages of financial maturity
Demand for financial products and the development of
capital markets are closely linked to economic growth
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Source: World Bank data, IMF, Ernst & Young estimates. Analysis uses latest publicly available data.
*Capital markets depth is a measurement of the evolution of capital markets. It represents a country’s stock market capitalization, plus its domestic and international debt outstanding, as a ratio to GDP.
Market and threshold
Countries/2011 GDP
per capita (US$)1
Description
Frontier RGMs
< $2,000
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Transitional RGMs
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Established RGMs
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Average stock market capitalization to GDP is around
four times greater in advanced economies than in the
frontier RGMs and one and a half times greater than in
transitional RGMs.
Some established RGMs, such as South Africa and Malaysia,
have already embraced equity markets, but bond markets
remain less developed. In 2010, average bond markets in
advanced economies were more than two and a half times
larger than those in our established RGMs. They are around
eight and a half times greater than those in transitional RGMs,
while frontier RGMs have comparatively tiny bond markets.
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most of the 10 RGMs. In advanced economies, capital markets
are larger, with higher turnover and liquidity. In 2010, the
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average of these RGMs.
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savings and risk transfer products, play a key role in the
development of the capital markets. However, investment
and insurance products typically become more common only
when countries reach the established RGM stage.
What financial products
are common?
Who provides financial
services?
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5
Executive summary
There is a wealth of optimism in our 10 rapid-growth markets (RGMs). Retail banks are
growing as increasing affluence in under-penetrated banking markets drives demand for
more financial products and services. Corporate and investment banks are expanding
as government programs, aimed at improving infrastructure and public services
and attracting foreign investment, create the conditions for business growth.
But amid the bullishness throughout these RGMs lie creeping
concerns about the ability of local banks to maintain profitability
and capture market share as balance sheets come under pressure
and resources become constrained in an increasingly competitive
environment. The need to find new sources of funding and the need
to grow and nurture talent are both key issues at an industry level.
markets is expected to be high, but domestic banks, with
restricted balance sheets, may struggle to meet this demand.
Without significant investment in corporate and investment
banking capabilities, international and regional banks with
large balance sheets and access to cheaper funding will gain
market share in these areas.
The potentially volatile nature of these markets can also make global
banks hesitant to commit the resources necessary to establish a
major presence there, for fear that political or social upheaval might
erode profitability or damage their reputation. However, there are
significant long-term opportunities for international banks willing
to make the commitments necessary to capitalize on them.
Advisory services and hedging products will be critical for
banks that want to retain and grow with their business
customers. As companies, particularly those in more
established RGMs, expand their presence beyond domestic
borders, they will need support to manage the risks and
complexities of international trade. Many domestic banks
already play a leading role in the provision of hedging products,
but they will need to invest to develop more advanced
products as their clients’ needs evolve. As clients look for
support with cross-border expansion, banks that have already
expanded into neighboring markets will have local knowledge
and be better placed to offer their clients the advice they need.
If this support cannot be provided locally, businesses are likely
to look to regional banks with a pan-continental presence
across South America, Africa or Asia for guidance.
To achieve profitable growth, banks in these markets must
balance their desire to expand rapidly with the need to do so
efficiently. As a result of the pressures of funding, competition
and declining margins, efficiency is already rapidly becoming
the watchword of RGM bankers. Domestic banks are looking
to maximize returns on existing assets and cut costs. However,
they must also invest in growth, and some of these cost
savings will need to be reinvested in growth areas.
We have a\]flaâ]\ four core initiatives that banks need to
focus on as they look to overcome the challenges and capture
the growth in these markets. Key to each of these will be
identifying where the lessons of other markets, emerging
or developed, can be applied locally, and how they should
be adapted to take into account local variances. The specific
investments that banks must make will depend not only on the
markets in which they are operating, but also on the segments
they are targeting, as well as their own existing capabilities.
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cost retail products from poorer customers. Banks must not only
meet that demand, but also move ahead of it.
Strong capabilities in debt and equity financing will
be increasingly important for banks looking to fund
transformative infrastructure programs and for businesses
looking to expand domestically and overseas, especially in
transitional and established RGMs. Demand for credit in these
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New wealth management products are needed to persuade the
affluent to invest onshore. While the wealthiest investors are
likely to favor established global wealth management brands,
we believe local banks that offer a broad range of products and
services will be better positioned to capture and nurture massaffluent customers. As opportunities for domestic investment
become more established, high-net-worth individuals may also
be tempted to invest some of their wealth onshore, using local
institutions for some of these services.
Low-cost retail banking products will be critical for banks
expanding lending into lower-income segments. Many
institutions have been reluctant to serve this customer
base, as it is costly to manage a high volume of low-value
transactions. But with the limits of easy growth being reached
in more established RGMs, banks now see the unbanked
segment as an opportunity. However, many traditional
products are inappropriate to the needs of these individuals,
and we believe banks targeting this segment must develop
innovative products that can better match customer needs at
a lower cost to both customers and the bank.
*&>gjeaf_YddaYf[]koal`ÕfYf[aYdYf\l]d][geemfa[Ylagfk
[gehYfa]k& This will give an edge to banks without the funding,
capacity or expertise to serve new segments independently.
Collaborating with a global institution can give domestic banks,
and their customers, access to stronger balance sheets and
greater technical know-how. This offers a convenient way for
banks in frontier and transitional RGMs to build employees’
skills as resources become increasingly constrained. By
collaborating with local banks, global institutions can gain
local knowledge and access to new markets without large
investments in distribution networks.
Partnerships with telecommunications companies can give
banks across our 10 RGMs access to new mobile banking
technology without significant investment costs. We believe
telecommunications providers are unlikely to develop their
own suite of banking products, as they would be subject to
increased regulation and capital requirements and would
require a larger balance sheet to support lending. Alliances
such as these will help banks reach rural and unbanked
segments more efficiently than by establishing a branch
network. Although the needs of unbanked customers
will initially be limited, those banks that have established
relationships at this early stage will be better placed to
capture market share as customers’ needs expand.
Partnerships with micro-finance institutions can give local
banks with strong balance sheets the opportunity to diversify
into higher-margin segments without recruiting a wide
network of skilled agents to assess customers, while giving
micro-finance institutions access to greater funds. This will
be crucial for banks in transitional and established RGMs that
are beginning to target higher-yielding customer segments
to offset margin compression. It will also help banks in some
countries meet government policy requirements to target
lending to these areas.
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the credit curve to boost margins. Innovative approaches to
risk management will help banks that are targeting higher-risk
customer segments, such as those with no credit history.
Developing new ways to assess credit risk, such as mobile
phone usage or utilities payment data, is vital as more
individuals and businesses with limited credit histories require
financial services. This is recognized as a key concern by
bankers in frontier markets, where the economies are less
stable and where many customers are new to banking and
therefore have no credit histories. Banks in these markets
should also consider adapting credit products to more closely
match the needs and lives of less affluent customers.
Advanced risk management capabilities are critical for banks
moving down the credit curve to boost margins. Competition
for deposits and lending is putting interest margins under
pressure, and banks in transitional and established emerging
markets are beginning to diversify from simpler lending
products into higher-risk segments such as micro- and
unsecured lending. The need for strong credit risk assessment
is recognized as a key priority by some but will need to be
a focus across all banks if they are to avoid repeating the
mistakes of the past.
,&Afn]klaf_afl][`fgdg_q&This is a crucial enabler of lowcost, high-touch banking in all markets. Technology will be a
critical factor in reaching new retail customers without the
cost of establishing extensive branch networks, and improving
relationships and cross-selling prospects with existing customers.
However, adapting technology to deliver the right service to
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Mobile technology and other innovative distribution models
will reduce the cost to serve, giving banks access to untapped
customer pools. This is particularly important in frontier and
transitional RGMs, where the cost of operating an account is a
significant barrier to financial inclusion.
Developing the mobile channel and using technology to
improve customer service can give customers more flexibility
in the way they engage with their bank and provide a source
of fee income to offset declining interest margins. This is
critical in established RGMs, where banks are increasingly
seeking opportunities to deepen relationships with and crosssell to existing customers. It is also important to minimize
additional costs.
Core banking technology and automation will improve
efficiency and streamline processes, enabling banks to
alleviate staffing pressures by rebalancing employees from
manual back office roles to the front office, to support growth
areas. This will become increasingly important as frontier and
transitional economies become more established.
The paths to profitable growth will be different in each country
and for each institution, but bankers in these markets can learn
from the lessons of others that are in, or have come through,
similar situations. As demonstrated by those that have tried and
failed, banks will struggle to make the investment required to be
successful in all areas of the business. With many of these markets
moving into the next phase of growth, banks have the opportunity
to assess their current capabilities and leverage them to focus on
areas of strength and target investment in key growth segments.
7
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Section one
A tale of tempered
optimism in banking
Bankers in our 10 RGMs are bullish. The vast majority believe their
bank’s performance will improve over the next year, building on
strong customer demand in expanding economies (Figure 1). The
contrast with developed economies is marked. When questioned
on their expectations for their bank’s performance, almost 80%
of respondents in our RGMs forecast improvement. When their
European counterparts were asked about future performance,
just 37% expected improvement. A quarter feared their bank’s
performance would deteriorate.1
Nonetheless, these markets are far from homogenous. The
strongest growth is predicted in our frontier markets and those
transitional markets with the lowest per capita GDP: Vietnam,
Nigeria, Indonesia and Egypt are all expected to see GDP growth of
6%-7% a year by 2015. These markets have the lowest base to grow
from, but even our other RGMs should achieve between 3% and 5%
growth. In developed markets, the strongest growth is forecast for
the US, but this will only be around 3% by 2015 — the lowest level of
growth anticipated across our RGMs.2
The optimism of our interviewees is founded on long-term
expectations for economic growth. While not unscathed by the
financial crisis (of the 10 RGM economies, five contracted in 2009),
these countries recovered swiftly and all have exceeded 2008
GDP levels. Projections of future growth are also well in excess of
developed markets — Eurozone GDP is unlikely to recover to 2008
levels until 2014-15.
Despite these forecasts, the volatile nature of these economies
means growth can be derailed by political and social upheaval. This
is especially a problem for frontier and transitional economies,
where growth is not as embedded as in more established RGMs.
While 56% of all respondents are positive about their country’s
economic prospects, there is pessimism from some who expect
their economies to deteriorate (Figure 2).
Figure 1: Financial performance
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Figure 2: Economic outlook
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1
European Banking Barometer (Autumn/Winter), Ernst & Young, 2012.
2
World Economic Outlook, IMF, April 2013
9
Perhaps not surprisingly, political stability and security is seen as
a key issue facing the Egyptian economy where, in the wake of
the Arab Spring, our respondents are equally split on whether the
economy will improve or deteriorate. Nigerian respondents, who
have witnessed a resurgence in kidnappings and pipeline vandalism,
cited similar concerns. The greatest pessimism is in Colombia,
where industrial action and protests have disrupted the coal and
coffee industries (Colombia’s second- and third-biggest exports)
in recent months. Two-thirds of Colombian respondents feel the
economy will deteriorate over the next 12 months. Social and
industrial unrest is also of concern in South Africa, where study
respondents were muted in their optimism for growth and some
expect a slight deterioration.
More broadly, interviewees are worried about whether the potential
in these markets will actually be realized. This was underscored by
comments from a number of interviewees that a lack of investment
in infrastructure has kept the cost of doing business high; they
called for both more investment and improved delivery on existing
projects. These discordant notes serve as a warning to anyone
thinking the emerging markets offer unfettered growth.
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Despite occasional misgivings about the economic outlook,
interviewees were overwhelmingly confident about their bank’s
prospects. Only 2% of respondents fear their bank’s performance
will decline over the next year. There is variance in the outlook for
business lines, however (Figure 3). Respondents are most positive
about retail financial services and corporate banking. It is more
straightforward to capture natural growth in these areas, where
products remain vanilla, rather than in the more complex capital
markets products. As a result, interviewees expect an increase in
both retail deposits and lending, as well as growth in the small and
medium-sized enterprise (SME) segment.
Bankers across these markets also expect wealth management to
be a growth area as an increasing number of affluent individuals
look for more sophisticated savings and investment products. There
is also the hope that, over time and as these economies become
more stable, a greater proportion of wealthy customers will keep
their assets onshore instead of banking in offshore centers such as
Miami, Singapore and Switzerland.
There is less optimism about investment banking. Historical
analysis suggests that debt and equity markets only become more
developed when countries reach about US$6,000 per capita GDP. It
is therefore unsurprising that respondents in Vietnam, Egypt and
Nigeria are ambivalent about the outlook for investment banking.
Perhaps more surprising is that fewer than half the interviewees in
South Africa and Malaysia — countries that have begun to embrace
the capital markets — expect the outlook for issuance and advisory
to improve beyond current levels. However, banks in both these
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countries do face intense competition in investment banking from
international firms with a more global reach.
Later in this report, we will explore in more detail the outlook for
banks serving individuals (section two) and businesses (section
three), but it is readily apparent that there will be significant
opportunities in each. And not just for domestic banks. Regional
and global banks are also looking for opportunities to acquire
new customers and increase market share in these countries.
However, capitalizing on the potential in these markets will not be
straightforward, and the general bullishness of respondents should
not disguise the challenges that institutions in these markets face.
Banks in emerging markets are increasingly concerned about their
ability to maintain returns on equity as multiple pressures challenge
profitability (Figure 4). One interviewee spoke of a “fundamentally
lower ROE and ROA environment from a combination of margin
compression, changing capital and liquidity requirements, further
sector liberalization, greater operational flexibility of foreign banks
and cost pressure from investments.”
If local banks are to achieve their expected growth targets, and if
foreign banks are to expand successfully, they must address a triple
threat to profitability that is becoming a growing concern across
our RGMs:
A. Margin compression
B. Increased competition and cost of doing business
C. Impact of domestic and international regulatory changes
Figure 3: Business line outlook
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More than 80% of interviewees expect
difficulty in maintaining net interest
margins over the next year, with threequarters looking for sources of new
revenue beyond net interest income (Figure
5). Key policy rates in most RGMs are under
pressure, and central banks have reduced
rates to halt economic slowdowns, which
has led to lower interest rates on loans and
deposits and reduced net interest margins.
Only in Egypt and Nigeria have central
banks raised rates recently.
Furthermore, in our established RGMs,
interviewees believe they face increased
price competition on loans to business and
corporate customers, and increased rate
competition on customer deposits. We
expect these countries to follow the trend,
already established in many developed
markets, in which increased competition
drives down margins and banks risk looking
like — and generating returns like — utility
companies, unless they can find new
sources of revenue. Price competition on
loans is of particular concern to banks in
South Africa and Malaysia. In frontier and
transitional RGMs, such as Nigeria and
Colombia, pressure to reduce rates is less
of a worry, but it is likely to become more of
a challenge as these economies grow and
competition intensifies. Banks are already
adopting a range of strategies to ease
margin pressure, ranging from increasing
fee-based product offerings to focusing on
higher-yielding products, such as vehicle
finance, infrastructure finance and microlending (Exhibit 1 on next page).
RGMs to their local markets. However,
local variances mean this will not be
straightforward, and these are not
always low-risk strategies, so significant
investment will be required to understand
customers and mitigate risks. Advanced risk
management capabilities may prove a point
of differentiation for new entrants from
more established markets, as they will be
able to price products more accurately.
We expect to see banks in frontier and
transitional markets adapt the solutions
developed by institutions in established
Figure 4: Challenges — profitability and efficiency
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Figure 5: Challenges — serving customers profitably
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11
Exhibit 1
Managing margin compression
Banks are adopting an array of strategies to ease margin compression, including
rebalancing portfolios, growing non-interest income and repricing loans.
Rebalancing portfolios
Growing non-interest
income
Repricing
Indonesia
Lmjc]q
South Africa
Investing in high-margin lending: a number
of Indonesian banks are diversifying into
micro- and higher-margin retail credit. Profits
at one Indonesian bank rose dramatically
in 2012 due to its increased focus on the
micro-lending segment. Another bank that has
rebalanced its portfolio toward high-yielding
consumer lending saw its net interest margin
fall at a much slower rate in the last quarter
than the wider sector.
Focusing on fee income: Turkish banks are
increasingly looking for ways to boost their fee
income. One bank that is focused on the credit
card segment has started charging fees for
previously free services. Turkish banks are not
only focused on introducing new fees, but also
improving the collection rate on existing fees.
One institution is specifically incentivizing
employees for fee collection, and a number of
other banks are also assessing opportunities
to improve this area of the business.
Repricing loans: all the major banks in
South Africa have increased their pricing
in line with increased funding costs. In
a declining interest rate environment,
this has been achieved by repricing more
appropriately for risk following
the financial crisis.
EYdYqkaY
Favorable changes in asset mix: banks are
reducing interbank lending and deposits with
the central bank and looking to fixed-income
instruments to drive an increase in yields.
A growing portion of the sector’s interest
income now comes from a large base of bond
holdings. The bonds issued by corporate and
project-based special purpose vehicles pay
over 4.5%, while the central bank’s short-term
instruments yield only about 3.0%–3.3%.
South Africa
Active portfolio rebalancing: some South
African banks are moving away from lowyielding products such as mortgages in favor
of higher-yielding products such as unsecured
lending and vehicle finance.
Na]lfYe
Developing fee-based products to offset
falling credit growth: banks in Vietnam are
developing fee-based offerings to offset falling
credit growth, focusing on products such as
cards and insurance as well as improving fee
collection to increase the proportion of feebased income.
Na]lfYe
Keeping loan pricing unchanged for nonpreferential sectors: the Vietnamese central
bank has capped lending rates to five key
sectors, including agriculture, SME and hightech industries. Commercial banks have been
able to avoid the pressure to reduce lending
rates in other sectors.
Forging strategic alliances with foreign
banks: some Vietnamese banks are looking to
build their product offerings through strategic
alliances and cooperation with foreign banks
and international agencies. One example of
this involves a cooperation pact with a foreign
bank to develop trade-related products as well
as to share technical know-how.
Some of these strategies are clearly higher risk than others. We expect banks that move down the credit curve — targeting highermargin products and customer segments — to invest in strengthening their credit risk management capabilities, to ensure they can limit
loan losses and expand profitability in these areas. Banks from the more established markets may be able to capitalize on their more
robust risk management capabilities to compete more aggressively in new markets and offset their own domestic margin pressures.
12
www.ey.com/banking
Figure 6: The banking landscape
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*Of those who agree there will be a significant change to the banking landscape in their countries
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New, foreign entrants are reshaping the banking landscape in
many of these RGMs (Figures 6 and 7). These new entrants
are not all from developed markets. Banks from neighboring
countries are identified as the greatest competitive threat in
Egypt, Nigeria, Malaysia, Indonesia and Colombia. In Colombia, for
example, where all respondents see regional banks as their main
threat, institutions from Brazil, Mexico and Ecuador have stated
intentions to be operating in Colombia by the end of 2013.
We are beginning to see the emergence of pan-Latin American, panAfrican and pan-Asian retail banking networks. Regional competitors
are beginning to reach the limits of easy growth in domestic
markets, and there is real potential for those with strong balance
sheets to apply the lessons they have learned in their home markets
to serve similar customer segments in neighboring countries. Such
institutions will become increasingly important in meeting the
expected demand for retail banking products over the longer term.
In the wake of the global financial crisis, a number of developed
market banks exited some of their emerging market operations. In
some cases, these institutions had expanded too quickly into new
markets, which did not deliver on their potential. Facing capital,
political and profitability pressures in their home markets, these
banks decided to retrench. However, the financial crisis has not
drawn a line through international expansion, and nearly two-thirds
of respondents see European or US banks as a main source of
competition. Global banks are once again looking at opportunities
in emerging markets, but they are now more selective in their
investment decisions. Institutions are increasingly restricting
their growth ambitions to neighboring markets or to countries
where they have an historic or cultural affinity, as illustrated
by European banks being identified as the main competitive
threat in Turkey and Mexico. With the retail banking offerings
becoming increasingly evolved in our RGMs, and in the face of
strong regional competitors, developed market banks also need
to ensure they have sufficiently differentiated products and
offerings to compete against local institutions with established
customer relationships, and think about how they can operate in
these markets most efficiently (see Exhibit 2 on next page). As
a result, the focus of many international banks will be on capital
markets and wealth management, where local institutions do
not yet have the same global reach and technical know-how.
Increased competition, from a combination of global, regional
and domestic banks, means banks must strive harder to
attract and retain customers — particularly those in the most
profitable segments — as well as counteract the impact of
greater price competition. Bankers in established RGMs already
recognize the important role of technology in doing this; over
80% of interviewees in Malaysia, South Africa and Mexico see
Figure 7: Main sources of competition
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oà[`$a^Yfq$g^l`]^gddgoaf_\gqgmlàfcoaddZ]l`]eYaf
kgmj[]kg^[geh]lalagf7
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countries or the
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.
*Percentage of those who considered that foreign banks would become a source of competition
13
Exhibit 2
Successful expansion into new markets
Expansion into any new market can be fraught with
complexity. Getting it wrong can erode profitability and
damage an institution’s reputation. More than one-third of
CFOs underestimate the costs involved in entering emerging
markets, and 40% underestimate the time.3 As many of
these markets are already quite sophisticated in their retail
and commercial offerings, new entrants need to determine
which sub-sectors offer the greatest potential and how they
can differentiate themselves from local competition, — for
example, through technology and innovation to bring
down the cost of serving customers in these markets,
or through enhanced product or service capabilities.
Developing the right underlying operating model is
also essential for new entrants. There are, in essence,
three models new banks tend to pursue:
1.
The local operating model, where all the systems
and infrastructure supporting a country’s operations
are located in that country. This model is likely
to be used in markets where local regulations
require back office functions to be located incountry. This model can make it difficult to serve
smaller or lower-margin markets effectively.
2.
The regional hub, whereby countries in a region may
share systems and operations hosted in a single country.
This model can be more cost-effective, but the markets it
supports require a degree of harmonization and therefore
may only work across a smaller number of relatively
homogenous markets rather than an entire continent.
3.
A centralized operating model, where the infrastructure
and systems for all countries, either globally or in a
particular region, are located (as much as possible) in
a single country. This model is more efficient than the
regional operating model but may not be able to cope with
the inconsistent demands of the local markets it serves.
Regulators do not necessarily allow all these models — for
example, companies may be required to locate their back
office in the country of operation. New entrants must
therefore consider the impact of such regulations on
their ability to function profitably in these markets.
3
The Master CFO Series, Volume 2: What lies beneath? The hidden
cost of entering rapid-growth markets, Ernst & Young, 2011.
14
www.ey.com/banking
The quality and reliability of local infrastructure will also
influence a variety of issues, from the requirement for a
branch structure to the cost of cash management. And the
availability of a sufficiently skilled and experienced workforce
will be a factor if banks are to avoid big recruitment and
retention challenges.
Finally, banks must consider their mode of entry. Here again
options may be limited by local regulations. Joint ventures
can offer foreign banks access to local market knowledge
and offer local banks access to greater technical know-how
and a broader range of products. However, if institutions
have different objectives, in addition to the challenge of
different cultures, joint ventures may prove unsuccessful.
Entry by acquisition can give investors greater control
than a joint venture and provide quick access to market
share, skills and existing distribution channels. However,
valuations of targets in emerging markets can be difficult;
disclosure requirements may not be as rigorous as in
the acquirer’s home market; and corporate governance
not as robust. Again, ensuring cultural alignment will
also be crucial, particularly if resource challenges force
banks to bring in staff from offices in other markets.
Acquisition is not always possible, as local regulations in
many markets limit foreign ownership of companies. As
an alternative, banks might consider establishing a branch
or a subsidiary. Of these, a branch can be less costly and
more efficient than establishing an independent, separately
capitalized subsidiary — a situation that will be exacerbated
by moves to Basel III. However, as a branch can be more
difficult to resolve in the event of the failure of a banking
group, regulators are increasingly requiring new entrants
to establish subsidiaries. In deciding the right mode of
entry to a new market, banks must consider not only what
is most efficient now, but what will be most efficient in
the future, in light of an evolving regulatory landscape.
investing in technology to serve customers as a critical activity
for the next year. This investment will help banks compete more
efficiently for affluent urban customers who are increasingly
demanding higher-touch service and improved products.
Banks in frontier and transitional RGMs will be more
focused on developing low-cost, basic services for rural and
poorer customers, such as point-of-sale and simple mobile
technology. These can be effective substitutes for branches,
but as their economies grow, these countries too will have
to deliver higher-quality and more tailored services.
The ever-increasing competition for customers, the need to
improve service levels and the need to invest in technology all
risk sparking a war for talent. Interviewees expect their banks to
increase headcount in high-growth areas, especially retail, SME
and commercial banking (Figure 8). Competition for front office
talent will be fierce, and two-thirds of interviewees expect retaining
staff to be a challenge over the next 12 months. Malaysian banks
are also worried about staff shortages in Islamic banking.
Figure 8: Headcount
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Percentage of respondents answering “don’t know” is not displayed; 21% expected
headcount to stay the same
* Percentage of all who say they expect headcount to increase
É;geh]lalagf^gjlYd]floaddZ]Õ]j[]È
retaining key staff will be increasingly
challenging over the next 12 months.”
Although interviewees generally expect reductions in staff in head
office functions, it is clear that there will be recruitment in key
back office roles such as IT. Respondents from Egypt, Malaysia and
South Africa all highlighted plans to invest in technology. Resource
challenges are only likely to intensify, and in some cases, banks
may be underestimating the need for key staff in these areas. More
banks will need to review and, in some cases, develop employee
retention plans to ensure they do not lose key talent to rivals.
;&AehY[lg^\ge]kla[Yf\afl]jfYlagfYd
j]_mdYlgjq[`Yf_]k
The cost of managing regulatory change is a major challenge
for banks in all markets, and the 10 in this report are no
exception. A clear majority of interviewees expect the
regulatory burden to increase over the next year, with
clear implications for bank profitability (Figure 9).
Figure 9: Levels of regulation affecting banking
<gqgm]ph][ll`]d]n]dg^j]_mdYlagfY^^][laf_ZYfcaf_afqgmj[gmfljqlg
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15
In addition to new global standards, banks are grappling with a raft
of domestic regulatory changes. In Nigeria, banks are managing the
move to IFRS accounting standards. They will also face an increased
focus on consumer protection initiatives following the establishment
of a Customer and Financial Protection Department. In South Africa,
banks will need to reshape their approach to compliance as the
regulator moves to a twin-peaks model over the next two years.4
The introduction of the Financial Services Bill in Malaysia will reform
the ownership structure of financial institutions. At the same time
that banks are having to comply with Basel III global standards,
or at least stricter local capital requirements, there are also
extraterritorial regulations such as FATCA to consider. The impact
of the introduction of a financial transaction tax in Europe will also
have to be determined. Some of our RGMs, such as Indonesia,
Chile and Turkey, already have their own taxes on securities
transactions, but they may be adapted if a new global standard
emerges. The cost of compliance is already a major burden in
Europe and the US and will become an increasing one in RGMs too.
The introduction of new capital standards is also increasing
the cost of funding. Some markets, such as Vietnam, are still
transitioning to Basel II, but many are already plotting the shift
to Basel III. Colombia has introduced new capital rules that come
into effect in August 2013 and will lay the foundations for banks
to achieve Basel III. The Nigerian central bank has revised risk
weights on certain exposures across the industry. Raising additional
capital will be expensive for banks. As their sovereign ratings
are generally lower than those of developed markets, and these
banks’ own debt is typically priced off their sovereign rate, it is
more expensive for them to achieve funding through the capital
markets than it is for their European or US peers. Furthermore,
higher risk weightings are attached to holding their sovereign
bonds for liquidity purposes. While capital adequacy will improve
the resilience of the financial sector, it is unlikely to enable banks
to compensate for margin compression by expanding lending, as it
reduces banks’ risk appetite and the availability of credit (Figure 10).
Regulation can pose different challenges for foreign banks
operating in these markets. In some cases, the regulatory systems
are still in an early stage of development and therefore rules are
unclear. In other cases, the challenge is excessive complexity
and bureaucracy. As with many developed markets, more local
regulators in these markets are demanding foreign banks establish
subsidiaries instead of operating under a branch structure, and
while many of our markets, such as Turkey, are increasingly open
to foreign entrants, this can swiftly change. In Indonesia, regulators
are becoming much more selective about foreign ownership.
L`]\jan]^gj]^Õ[a]f[qafl]fkaÕ]k
The impact of margin compression, regulatory costs and
competitive pressures are forcing banks to focus on efficiency
much more than may have been necessary in the past. The
top four change activities interviewees are focused on are
related to efficiency, risk and cost reduction (Figure 11).
A number of banks in these markets have already initiated cost
reduction strategies. In some cases, this has involved partnering
with a technology provider to create a customer-centric banking
model that also delivers a lower efficiency ratio. Others are
planning multibillion-dollar investments in their commercial
networks and technology infrastructures to achieve improved
operational efficiency. Nigerian banks are focusing on reducing
costs through branch rationalization and headcount reduction.
As profitability continues to come under pressure, more
banks will need to pursue aggressive efficiency strategies.
Figure 10: Basel III
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However, banks in these markets face a dilemma. They must
balance the drive to reduce costs with the need for targeted
investment in growth. With only 12% of interviewees seeing
reducing their product range as important, it is clear that they
understand the need to develop a variety of offerings to win
customers in an increasingly competitive environment. But these
banks must not seek to differentiate themselves at any cost.
They must avoid product proliferation, and it will be the ability of
banks to differentiate effectively that will determine success.
“The top four change activities are
j]dYl]\lg]^Õ[a]f[q$jakcYf\
cost reduction.”
As profitability is challenged, and as talent becomes increasingly
scarce and more expensive, banks that are developing robust
operating models will have a clear advantage over those that
maintain old, less efficient systems and processes. There may
also be opportunities for collaboration between global banks with
more expansive, easily exportable product sets and domestic
banks that have wide distribution networks or a dominant
position serving particular customer segments. Those that have
invested in strengthening credit risks assessment will be better
placed to expand into higher-risk segments. Investments must
be targeted but, as ever, it will be those banks whose operations
are underpinned by efficient processes and technology that will
be best placed to succeed in ever more competitive markets.
Figure 11: Managing change
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17
18
www.ey.com/banking
Section two
Serving individuals:
capturing burgeoning demand
The gateway product to retail financial services is the transactional
deposit account. Ernst & Young analysis suggests that by the
time a country’s per capita GDP exceeds about US$2,000,
approximately 30% of the population have transactional bank
accounts. The requirement for this type of account is soon followed
by demand for other financial products, such as savings products,
credit cards and linked credit products such as vehicle or payroll
loans. These credit products are often provided by both banks and
non-banks. By the time per capita GDP reaches US$8,000, formal
bank loans become common.
In the next five years, these RGMs will cross a number of these
“thresholds of demand” (see page 4), creating new opportunities for
financial services institutions in these markets. Consistent with this,
more than two-thirds of our interviewees expect increased customer
demand for deposit, savings and credit products (Figure 12).
Afn]klaf_lg[Yhlmj]\]hgkalk
Demand for deposits will be strongest in frontier and transitional
economies. All respondents from Vietnam, where per capita GDP
is expected to rise from US$1,200 in 2010 to US$2,200 in 2017,
expect demand for savings and deposits to grow. Similarly, all
respondents from Indonesia, which is under-banked relative to
peers, expect increased demand for deposit products. Surprisingly,
given existing account penetration rates, Egyptian respondents
are split on whether demand for savings and deposit products will
increase or decrease. However, this only serves to highlight the
potential impact of political upheaval on emerging economies.
Even in more established RGMs, there is still scope to grow the
deposit base. The potential for growth from urban, affluent
customers is limited, but many individuals in these markets still
do not have a bank account because it costs too much to operate
an account, or they live so far from a bank that the cost of getting
to one erodes the value of having an account. According to the
World Bank, cost is the reason why more than 45% of the financially
excluded in Mexico, Chile and Colombia do not have an account. A
similar number of individuals in South Africa, Nigeria and Indonesia
also cited cost as a problem.5 More than a quarter of individuals
without a bank account in Indonesia, Malaysia, Nigeria and
South Africa consider the physical distance to a bank as a barrier
to inclusion.
Figure 12: Product demand — retail banking
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5
Asli Demirguc-Kunt and Leora Klapper, “Measuring Financial Inclusion: The Global Findex Database,” World Bank Policy Research Paper 6025, 2012.
19
Islamic banking also offers a relatively untapped pool of deposits.
Although few individuals cite religious reasons for their lack of
participation in financial services, the introduction of Shariacompliant products is a major opportunity for institutions operating
in a number of RGMs. Currently, several core Islamic finance
markets lack regulatory clarity, but recent initiatives by the Islamic
Development Bank could see more jurisdictions introducing Islamic
banking legislation and regulatory frameworks. Recent political
change in Egypt is likely to lead that country to become a core
market for Islamic banking. In Malaysia, the market is dominated
by conventional banks, but if there were consolidation among the
numerous small Islamic banks, they could improve their efficiency
and build their capacity locally.
As banks face increasing capital pressures, they will struggle to fulfill
the expected demand for credit, and deposits from rural and other
previously unbanked groups can provide a new source of funding.
We believe banks will be increasingly focused on finding innovative
ways to reach these customers, but they will have to invest now if
they want to capture the customer relationship at an early stage.
We expect that banks will rethink their existing channels, with
mobile banking being the most obvious way for banks to leapfrog
traditional branch structures.
The increasing ubiquity of mobile phones in emerging markets
offers banks the opportunity to deliver lower-cost financial services
without the traditional branch infrastructure. To date, around 167
mobile money services have been deployed across Asia, Latin
America and Africa, with a further 107 planned.6 Traditionally these
were focused on basic domestic peer-to-peer payments and airtime
top-ups, as a way to reach rural communities, but since 2010 there
has been rapid growth in other offerings, including bill payments
and point-of-sale payments. This is likely to remain the dominant
form of mobile banking in frontier markets, but a small and growing
number of providers are also starting to offer traditional banking
products, such as savings and loans, through mobile devices.
Governments can play a role in driving mobile money adoption by
using it for government-to-person (G2P) payments, but we believe
that the development of low-cost smartphones will be the most
transformative factor in mobile money usage.
The rapid growth in smartphone shipments to Asia, Latin America
and Africa bears witness to the rise in popularity of these devices,
but they still remain beyond the reach of most consumers in these
markets. As prices come down and smartphones become more
ubiquitous, they have the potential to radically change mobile
money offerings in transitional and established RGMs. However, to
fulfill this potential investment, there must be sufficient investment
in mobile broadband infrastructure. In many countries, mobile data
services are patchy and expensive. In South Africa, which has
a mobile penetration rate of over 120%, only 24% of people have
accessed the internet through their phone.7
We believe collaborations between mobile providers and banks
will be key to driving mobile banking adoption and developing new
mobile offerings. Banks, as licensed deposit-taking institutions with
advanced risk assessment capabilities, are also able to move mobile
money beyond payments to more complex savings and lending
products. Examples of collaboration are already evident. In addition
to the well-known example from Kenya, M-Pesa, where a mobile
money provider has entered into a partnership with a domestic
bank to offer micro-savings, micro-credit and micro-insurance
products, other examples are also emerging. Although a greater
share of the revenues from serving poorer, more rural customers
may initially go to the telecommunications partner, if banks can
build relationships with these individuals, they will be better placed
to serve them as their banking needs evolve.
Mobile money is not the only area in which banks should invest.
We believe there are opportunities for banks to attract and retain
customers through better use of existing market infrastructure and
redesign of products and services (Exhibit 3).8
We expect that technology will be a key area for investment
in all our RGMs as banks develop new distribution models and
redesign their products to attract more deposits and serve their
customers more efficiently. However, they must do this in a way
that adapts to the nuances of the local market and the needs of
different segments within those markets. Those banks that do so
successfully will not only capture deposits to ease funding concerns
but also develop new customer relationships and increase customer
satisfaction, which will provide greater opportunity to cross-sell new
products and services.
;jgkk%k]ddaf_Èaf[j]Ykaf_dq\]h]f\]flgf
k]jna[]d]n]dk
Interviewees expect demand for personal loans to increase in all
RGMs, but the nature of personal lending differs widely across
markets. The use of basic asset finance in the form of automotive
loans is particularly common in Asian markets, where 80% of
respondents expect demand for this form of finance to increase
over the next 12 months. Only 60% of respondents from Latin
America and 50% from Europe and Africa expect demand for this
form of finance to increase over the next year. Higher demand for
auto loans also reflects low vehicle penetration. For Vietnam, which
has an average of 1.3 vehicles per 100 people, all respondents
expect demand for loans to rise next year. For Mexico, which has
27.4 cars per 100 people, only 50% of respondents expect demand
for car loans to rise.
6
Mobile Money for the Unbanked Deployment Tracker, http://tinyurl.com/cbyxw43, accessed April 2013
7
World Development Indicators, The World Bank; “The New Wave” report, Indra de Lanerolle, http://tinyurl.com/bn76x4c
8
Opportunities in mobile money are touched on in this study but are covered in greater detail in Ernst & Young’s EgZad]ZYfcaf_2ÕfYf[aYdk]jna[]ke]]ll`]
electronic wallet, 2013
20
www.ey.com/banking
Exhibit 3
Leading banks are innovating
to reach new customers
Enhancing distribution
to reach new customers
efficiently
Utilizing existing
infrastructure and
capabilities
Expanding services
and offerings
:jYf[`]phYfkagf
EgZad][j]\alk[gjaf_
F]oYhhjgY[`]klgd]f\af_
To expand their reach, a number of Brazilian
banks have pioneered a new form of
mobile banking, installing bank branches
on vessels traveling the Amazon.
Companies have been developing behavioral
scoring tools based on analysis of mobile
(including pre-pay) usage data, including call
and text message patterns. One such company
has been running a trial of its platform in
Brazil and expects live deployment in 2013.
With limited credit data, lending to groups or
individuals must be based on analysis of character and
the cash flow of the borrower(s). This often requires a
loan officer who has better knowledge of an individual
or community than is common in most banks.
One Sri Lankan bank uses mobile banking
units that travel to strategic locations with high
consumer traffic, such as schools, marketplaces
and fairs, outside normal banking hours. Its
employees are able to collect small savings
through a small handheld device with online
connection to the bank through GPRS. In
Malaysia, low-cost no-frills branches have been
launched in densely populated urban centers.
While the expansion of mobile money gives banks
greater access to an emerging customer pool,
the development of such new and innovative
tools to understand customer behaviors will
enable banks to better assess risk and offer those
customers much more diverse, and appropriate,
products. The technology, however, is still relatively
new and untested, and success unproven.
9_]flZYfcaf_
Offering financial services through agent
or correspondent arrangements with nonfinancial firms, such as retailers, lottery
outlets or post offices, allows banks to extend
their reach without expanding their branch
networks. Agents are equipped by banks
to enable them to conduct transactions for
customers, taking the place of branch tellers.
Brazil has led the way with this banking model, with
a large network of correspondents offering financial
services through cards and point-of-sale terminals.
Other countries in Latin America have followed
suit, including Chile, Colombia and Mexico. Banks
either have a direct relationship with their agents
or the relationship is through a management
company. While a direct relationship with agents
may enable more effective data capture, an
institution may not have the capacity to manage
a wide network of agents. Using a management
company is likely to prove more expensive
and yield less control of the agent network.
Local regulations about who can act as an agent
can restrict the growth of this model. Banks
also need to consider whether they will have an
exclusive relationship with an agent. In Brazil
and Mexico, agents often represent more than
one institution, but this is rare in Colombia.
Mladaraf_mladala]k
The entry of one of Colombia’s utilities providers
into financial services illustrates how a wide range
of customer data can be used to assess credit risk.
The utility provider was able to supplement credit
reference agency data with its own customer
data, as well as use its existing billing and
payments infrastructure, to advertise, disburse
and collect loans.
Eight years after launching, it sold a stake in the
financial services business to a bank, which took
over responsibility for credit assessment and loan
monitoring and began offering existing customers
a range of new products. The utility company still
runs its own customer service, invoicing and loan
recovery operations.
Such partnership models enable banks to offer
services to a wider low-income segment, and also
allow many customers to establish a credit history
for the first time.
To make lending more cost-effective (small loans
to individuals are often insufficiently profitable),
institutions may lend to groups of individuals who
are jointly liable for the loan. In some instances,
borrowers will have to deposit compulsory savings
before receiving a loan to demonstrate a willingness
and ability to make repayments.
Products focused on specific needs are often more
valued than untargeted credit products. Rickshaw
loans — in effect a hire purchase agreement — to
rickshaw pullers in India are a good example
of this sort of targeted lending. Seasonal loan
repayments are another innovation that can
help expand access to credit. For example, a loan
by a fishermen’s cooperative in southern India
permits a specified number of repayment holidays
that correspond to the off season for fishing.
Restrictions on many micro-finance institutions taking
deposits make this a prime opportunity for banks
to expand into, or to partner with, micro-finance
institutions, using their network of loan officers.
>d]paZd]kYnaf_khjg\m[lk
There is significant demand for savings products in
our RGMs, but existing products are often not suited
to the needs of poorer customers. For example, flat
maintenance fees deducted directly from savings
accounts can lead to a total loss of the original amount
deposited. Alternative models, such as transaction
pricing, should be considered. Some South African
banks offer basic accounts with no minimum balance
and a low fee structure.
Institutions may also struggle to offer savings
products cost effectively to this customer segment,
where they must collect high volumes of low-value
transactions. We believe banks should take a longerterm view of these customers’ value. By offering
savings products, institutions are able to build a
better understanding of their customers to enhance
their risk management capabilities, and build a
customer base of borrowers to cross-sell products
to as they become wealthier. Savings accounts also
help facilitate and encourage repayment of credit.
In Thailand, a government-promoted initiative takes
savings efforts of individuals into account as part of
eligibility for micro-loans.
:Yfcaf_af]e]j_af_eYjc]lk
21
Demand for payroll loans is higher in frontier and transitional
economies, such as Vietnam and Indonesia. These types of loans
are an efficient product for managing credit risk in these markets
where credit histories are limited and, perhaps as a result of this,
some banks in our transitional markets are not as concerned
with strengthening credit risk management as their frontier RGM
counterparts. But as affluence increases, we expect customers
to look for alternative credit products — formal bank loans and
mortgages are much more popular in established RGMs — and
managing credit risk will become a key area of future investment.
Interviewees clearly see cross-selling products to existing customers
as key to their bank’s expansion (Figure 13). Established customers
should be easier to sell products and services to than new
customers, but improving penetration rates with existing customers
will not be easy. Ernst & Young’s 2012 Global Consumer Banking
Survey revealed that more customers are becoming multi-banked.
In South Africa, although 78% of consumers held savings accounts
with their main bank, just 49% had loans and 39% mortgages
with the same provider. In Colombia, while 70% had their savings
account at their main bank, just 49% held their personal loan and
52% a credit card with the same provider. Other markets told a
similar story: in Indonesia, 87% of customers bank with two or more
providers; in Malaysia it is 91%.
Banks should take steps to improve customer loyalty to ensure
that if they hold a customer’s transactional account, they will also
provide their savings, lending or mortgage products. Satisfaction
with branch experience and service quality in RGMs often ranks
below that of customers in developed markets. With high fees being
the main driver of attrition in these markets, banks are already
looking for ways to serve customers more efficiently. Over 80%
of our interviewees see developing new customer channels such
as online and mobile as important. However, improving customer
service will also be crucial and may differentiate providers in those
markets where consumers remain dissatisfied with the quality of
service from their banks.
O]YdlèYfY_]e]fl2\]n]dghaf_f]o
hjg\m[lk$Zmad\af_kcaddkYf\[j]Ylaf_
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There are now more emerging market billionaires than European
ones. In the decade to 2012, the number of billionaires in our 10
RGMs grew from just 29 to 108, and their net worth grew from
US$66 billion to US$386 billion (Figure 14). Beyond this new
class of super-rich, there are growing numbers of high-net-worth
and mass affluent individuals that are driving demand for wealth
management services in these economies. The outlook for wealth
management is a derivative of broader views on the economic
prospects, so it’s not surprising that respondents from Egypt
and Colombia predict deterioration in the outlook for wealth
management. Fifty percent of interviewees are optimistic about
the outlook for private banking and wealth management in their
markets over the next 12 months, and 49% expect demand for
wealth products at their bank to increase.
However, meeting this demand may prove challenging for local
banks. The wealthiest investors are likely to favor trusted and
proven products that are managed by world-class investment
managers with long-term track records. They are also likely to favor
institutions that have a global reach and international banking
network — in short, established global wealth management brands.
However, due to the cost of establishing a branch network, these
institutions are likely to focus on providing flagship products to only
the wealthiest individuals. They are unlikely to target customers
further down the wealth spectrum.
It is the mass affluent segment that presents the greatest
opportunity to local banks, but customer service will become
increasingly important if they are to capture, nurture and retain
increasingly wealthy customers. More banks will need to follow the
example of those that have invested in dedicated branches, bettertrained staff and a broader range of products and services. We’re
already seeing some examples of this in our established RGMs — for
example, in Mexico and Malaysia.
Figure 13: Expansion
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22
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As well as developing their propositions, local banks will also need
to develop relationship models that enable them to keep customers
whose growing wealth takes them beyond the mass affluent and
into the high-net-worth segment. In Malaysia, with one of the
highest per capita GDPs of these markets, banks are already looking
to recruit wealth management staff. Competition for relationship
managers is likely to increase as these economies expand further.
Many global banks already have successful offerings in this
premium banking space, but as the number of wealthy customers
increases, we also expect to see partnerships between global
and local banks develop. Such partnerships would enable global
banks to distribute exportable mass market offerings through
established in-country institutions without the cost of establishing
a distribution network. This would also give global banks access to
domestic institutions’ local market knowledge as more high-networth individuals look to invest domestically. Local institutions
would benefit through their association with the products of a
trusted global brand with a recognized track record. They would
gain technical know-how in the products and services the wealthy
require. If local institutions are able to mobilize greater domestic
investment by wealthy individuals, instead of the funds flowing
offshore, they may also support the growth of their banks’ capital
markets businesses.
though they only expect to expand into other African countries.
Intra-regional expansion is also being considered by Malaysian, and
even Colombian and Vietnamese, banks. We expect this trend to
continue as banks with strong balance sheets consider cross-border
expansion, once they’ve reached the limits of easy growth in their
own countries. Where this is already happening, institutions are
being highly selective in their investment decisions and focusing on
markets with which they have a strong affinity — having, perhaps,
learned some lessons from the experience of international banks.
We also expect these banks to learn the governance lessons of
success and failure from those that have already made the leap into
new markets: the danger of overreaching, the importance of strong
control and oversight, and the need for clear lines of sight between
local functions and corporate headquarters.
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While most respondents are keen to exploit opportunities in
their own markets, a third feel that expansion into new markets
is important (Figure 15). More than 80% of South African
respondents expect cross-border expansion in the next 12 months,
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answer on how they would expand.
*Percentage of all who say they are likely to increase the number of countries in which their banks operate
23
24
www.ey.com/banking
Section three
Financing businesses
and corporations
Bankers in our RGMs anticipate significant growth in demand
for loans from businesses over the next year (Figure 16). We
expect the balance sheets of domestic banks will struggle
to meet this demand. Institutions will have to invest in the
staff and technologies to support alternative financing
options or risk losing ground to global and regional banks.
evolve, high-quality infrastructure becomes increasingly important
to attract investment. In Indonesia, where investment plans in this
sector were outlined in the Government’s 2011-2015 Masterplan
and include the development of the Kalibaru port in Jakarta and the
Trans-Java toll road and railway, all respondents expect a significant
increase in lending. All respondents from Turkey, where authorities
have been implementing numerous infrastructure projects through
public-private partnerships (PPP), also expect lending to this sector
to increase. Similarly, all contacts in South Africa and Mexico
expect lending to the infrastructure sector to increase. Although
the scale of investment in infrastructure in frontier markets does
not quite match that of transitional and established RGMs, all
respondents in Nigeria expect lending to this sector to increase.
Three-quarters of respondents in our study expect lending
to infrastructure projects to increase over the next 12
months, reflecting government investment in infrastructure
programs across these markets as they try to attract foreign
investment and improve standards of living (Figure 16).
Lending for infrastructure is particularly important in transitional
and established RGMs such as Indonesia and Turkey. As economies
Figure 16: Lending levels
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Construction
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Note: Percentage of respondents answering “don’t know” or not answering is not displayed
25
Demand for credit will also be high in the IT sector, but reasons
for this vary across different economies, with all respondents in
Turkey, Vietnam, Indonesia and Mexico anticipating growth. In
Turkey, this is driven by the government, but in Vietnam, Indonesia
and Mexico it is driven by technology companies seeking lowercost locations to outsource manufacturing or services. A series
of technology manufacturers have opened factories in Vietnam,
while Indonesia has attracted investment in the e-commerce
sector and is increasingly being seen as a new IT outsourcing
location. Mexico is also growing as an IT outsourcing hub for those
US companies preferring solutions closer to home than Asia.
Demand for corporate loans and project and trade finance
reflects the growth and the increasingly globalized nature of
these economies. It also highlights an opportunity for domestic
institutions to fill a gap left by some developed market banks
that have been cutting back on project and trade finance as
they shrink their balance sheets. However, other global banks
from markets such as Japan are stepping in, and it is also an
opportunity for strong regional banks. Domestic institutions, more
familiar with vanilla lending, will have to act swiftly to address any
capability gaps if they are to capitalize on their home advantage.
=f`Yf[]\jakceYfY_]e]fllgeYl[`
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We also expect to see a significant increase in demand from the
SME sector. As emerging economies monetize, and incomes rise,
the unofficial (shadow) economy is displaced by a more formal SME
sector. According to interviewees, the greatest demand will be in
frontier markets, where this displacement is occurring most swiftly.
Assessing the viability of loans to the credit-hungry SME sector is
challenging, as there is often little credit data associated with these
companies. Many of them may not have held bank accounts for very
long, or their company accounts may in practice have been personal
accounts. Furthermore, their financial accounts may be limited and
opaque. Banks focusing on this sector need both local knowledge
of businesses and communities and advanced risk management
capabilities to be able to assess lending to emerging companies.
Only 39% of interviewees expect to increase loan loss provisions
over the next year, suggesting a majority feel that continued
economic growth will outweigh the risk of bad loans (Figure 17).
However, with lending levels expected to grow, it is inevitable that
some loans will fall into arrears and default, if only because asset
quality cannot be sustained. Banks must monitor lending closely
to avoid being caught out if the economy swiftly deteriorates.
Fortunately, a focus on credit risk is evident in most countries,
with 69% of interviewees stressing its importance. There is an
even greater emphasis on credit risk in frontier economies, where
demand for SME lending will be greatest; 90% of interviewees
in these markets think strengthening credit risk is critical.
Given the anticipated demand for SME finance, we expect some
banks — particularly in frontier and transitional markets — to
specialize in this sector, focusing on those smaller businesses
making the transition into the formal economy. The investment
needed to target this segment can be high, but it also
offers higher margins than corporate lending. We believe
institutions serving SMEs in these markets will have to hire
highly trained staff with local knowledge, and to strengthen
their credit risk technology to support lending to the sector.
We also expect more banks to look beyond vanilla lending and
to invest in the technology and skilled staff required to provide
support and advice to both rapidly expanding SMEs and larger
businesses. As these businesses evolve, they will need banks
to offer increasingly sophisticated additional products and
services, such as hedging products and treasury services.
F]o^gjekg^ÕfYf[af_lge]]l
_jgoaf_\]eYf\
Companies in our RGMs are currently heavily reliant on bank
lending to meet their financing needs. With demand for lending
expected to increase dramatically (and with ever higher capital
requirements for lending), we expect banks will struggle to meet
this demand (Figure 18). There is a high risk that growth could
be constrained in markets where banks do not have the balance
sheets required to finance the needs of larger companies looking
Figure 17: Provisions against loan losses
Gn]jl`]f]pl)*egfl`k$\gqgm]ph][lqgmjZYfcÌklglYdhjgnakagfkY_YafkldgYf
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+,
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./
+0
+1
++
Note: Percentage of respondents answering “don’t know” or not answering is not displayed. Responses have been analyzed against
interviewees’ expectations for the overall economy.
26
www.ey.com/banking
Figure 18: Business banking products
Lgo`Yl]pl]fl$a^YlYdd$\gqgm]ph][l[mklge]j\]eYf\^gjl`]^gddgoaf_[gee]j[aYd
Yf\[gjhgjYl]hjg\m[lkYlqgmjZYfclg[`Yf_]gn]jl`]f]pl)*egfl`k7
;gjhgjYl]dgYfk
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Project finance
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=imalqakkmYf[]gjafalaYd
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Note: Percentage of respondents answering “don’t know” or not answering is not displayed
to expand either domestically or internationally. We believe
domestic banks must find new ways to finance companies and
encourage their customers to look beyond bank loans. Banks
may be able to alleviate balance sheet pressure either by seeking
new forms of funding, or by forming alliances with foreign banks
with stronger balance sheets and more developed investment
banking capabilities. A few may build their own investment
banking divisions to expand their product and service universe.
Some local banks will be able to raise funding in the capital
markets, though this option will generally be more expensive
for domestic banks than for international ones. As a result, even
banks that can access market financing must find ways to free
up their balance sheets, or risk being displaced as the principal
funders of corporations by regional or global banks with stronger
balance sheets. Syndicated loans will also offer local banks an
opportunity to retain some of the business without all of the risk.
However, following the global financial crisis, these alliances
have become less frequent. International banks have become
more hesitant to participate in regional syndicates and have
sought greater interest rates on loans. This increases the
burden on domestic banks and means they must look for
other ways to help companies raise funds, such as through
the capital markets. For example, underwriting bonds to
fund long-term public-private infrastructure initiatives may
be one way to do this. It would also support the growth of
wealth management by matching long-term pension liabilities
to the revenues from long-term infrastructure projects.
A structural shift to capital markets financing will not be
straightforward. At present the outlook for investment
banking services reflects both the immaturity of the capital
markets in some countries and the dominance of global
investment banks among the biggest debt and equity
issuances, with fewer than half our respondents expecting
demand for issuance and advisory services to increase.
The outlook for issuance is least positive in Nigeria, Vietnam and
Egypt — the countries with the least-developed capital markets. A
key issue here is the corporate governance of organizations, which
will need strengthening if investors are to be encouraged to fund
high-growth companies through the capital markets. Some of these
countries are beginning to take steps to address this. For example,
in Nigeria the Securities and Exchange Commission has initiated
a review of corporate governance practices by public companies.
Nevertheless, it would be wrong to write off local institutions
as underwriters and advisors. These banks play a leading
role in SME finance and the provision of hedging products.
The demand for, and complexity of, these products is likely
to grow as domestic companies expand internationally
and seek to manage currency and inflation risk.
We also anticipate increasing intra-regional trade between
emerging markets. These companies will need support and
advice from banks that understand the regions into which they
are expanding. Local banks that have already expanded into
neighboring markets will have the local knowledge to offer them
this advice. Banks from our RGMs that want to support clients
with aspirations to expand across their region must anticipate
the financial needs of these businesses. They should consider
the example of Chinese banks, which have developed a range of
products, including export credit and overseas project finance
to support Chinese businesses that are “going global.”
27
Many local banks already have strong existing relationships
with fast-growing domestic companies that should enable these
financial institutions to expand with them. Although major global
banks dominate the largest deals in these markets, domestic
banks are involved in a significant number of smaller deals. Over
the last decade, they have been involved in underwriting 68%
of all equity issues and 53% of bond issues (Figure 19, Figure
20). That these constituted, respectively, just 35% and 27%
of deals by value indicates a long tail of companies seeking
capital market funding that are too small to be of interest to
the bulge bracket investment banks. We expect that as debt
and equity issuance become more common, local banks will
play a greater role in larger deals, collaborating with global
investment banks. This will offer them opportunities to build
the capabilities of their staff and plug any skills gaps.
9fla[ahYlaf_Yf\]f[gmjY_af_\]eYf\
Banks that invest early to develop the products and capabilities
their clients will need will be able to capture increased demand
when it arises. Some banks are already beginning to make these
investments, but our survey results indicate that this approach is
far from universal. Banks in frontier markets expect the greatest
increase in demand for hedging and cash management services,
and they are also the institutions most focused on developing new
products and services for clients. If these banks can broaden their
products and services beyond plain vanilla offerings and make
the most of their existing customer relationships and regional
“Current RGM business models and
returns are being challenged by
margin compression, competition
and the ever-expanding
regulatory burden.”
28
www.ey.com/banking
expertise, they can still position themselves as partners of choice
when their existing customers are looking to expand geographically.
The RGMs we have looked at offer a wealth of opportunities
to banks; local, regional and international. From basic deposit
products in frontier markets to retail loans in established
RGMs, from the financing of businesses to helping them
hedge risk, customer demand for financial services is
growing across all these markets. But margin compression,
competition and the ever-expanding regulatory burden
are challenging current business models and returns.
Domestic banks that want to capture demand must invest in
technology, in customer service and in developing new products
and offerings. They must invest in the skills and capabilities of
their staff. And they must look for ways to grow beyond the
constraints of their balance sheets. International and regional
banks, with stronger balance sheets and greater technical knowhow, may be well placed to expand into these markets, but to be
successful they must have differentiated products and services
to offer customers. In some markets they must balance the
short-term challenges of entering them, or remaining in them,
against their long-term potential — or risk missing out. We expect
to see more collaboration between domestic and international
banks as they struggle to overcome these challenges.
All banks looking to be successful in these markets must
be more selective than they may have been previously,
focusing on specific business lines and customer segments
rather than trying to be all things to all customers.
Figure 19: Major global banks dominate large-value debt issuance in RGMs
\]Ydkafngdnaf_eYbgj_dgZYdZYfck ZqnYdm]!
\]Ydkafngdnaf_\ge]kla[ZYfck ZqnYdm]!
\]Ydkafngdnaf_eYbgj_dgZYdZYfck ZqfmeZ]j!
\]Ydkafngdnaf_\ge]kla[ZYfck ZqfmeZ]j!
1(
0(
/(
.(
-(
,(
+(
*(
)(
(
*((+
*((,
*((-
*((.
*((/
*((0
*((1
*()(
*())
*()*
*())
*()*
Source: ThomsonOne data, Ernst & Young analysis
Figure 20: Local banks underwrite a long tail of smaller equity issuance
\]Ydkafngdnaf_eYbgj_dgZYdZYfck ZqnYdm]!
\]Ydkafngdnaf_\ge]kla[ZYfck ZqnYdm]!
\]Ydkafngdnaf_eYbgj_dgZYdZYfck ZqfmeZ]j!
\]Ydkafngdnaf_\ge]kla[ZYfck ZqfmeZ]j!
1(
0(
/(
.(
-(
,(
+(
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*((+
*((,
*((-
*((.
*((/
*((0
*((1
*()(
Source: ThomsonOne data, Ernst & Young analysis
29
Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
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About Ernst & Young’s Global Banking & Capital
Markets Center
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effectively while satisfying an array of divergent
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Markets Center brings together a worldwide
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All Rights Reserved.
EYG No. EK0145
1301-1001637 BOS
This publication contains information in summary form and is
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ED 0114
Contacts
Bill Schlich
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[email protected]
+1 212 773 3233
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London
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+44 20 7951 2152
Janet Truncale
Americas Banking &
Capital Markets Co-leader
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+1 212 773 8651
Steven Lewis
Lead Analyst
Global Banking &
Capital Markets Center
London
[email protected]
+44 20 7951 9471
Steve Ferguson
9kaYHY[aÕ[:Yfcaf_
Sydney
[email protected]
+61 2 9248 4518
Robert Cubbage
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Noboru Miura
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+81 3 3503 1115

Banking in emerging markets

Transcrição

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