Asia’s Banks Must Brace for Worsening Storm, McKinsey Says

(Bloomberg) -- The days of a “free lunch'' are over for Asia's banks, which face an intensifying threat from slowing economic growth and competition with technology firms, according to McKinsey & Co.

After years of rapid expansion, banks in the region are now seeing their revenue and profit growth slow and global market share shrink, the New York-based consultancy wrote in a report. Tighter margins, declining asset quality and rising capital costs are putting pressure on lenders to partner or merge to boost productivity and scale.

“Many banks will struggle as the storm worsens,” McKinsey wrote. “The road ahead is difficult, and less efficient banks will disappear.''

Banks will need to use technology to improve efficiency and fend off the threat from “digital attackers'' such as Alibaba and Google, according to the report. Fintech companies may extend their ability to collect deposits and make loans, further eroding the market share of the region's banks, it said.

Such firms are also squeezing margins of traditional lenders because they don't have to manage costly brick-and-mortar branches, said Joydeep Sengupta, one of the report's authors and a senior partner at McKinsey in Singapore.

He gave the example of WeBank, an online consumer lender that's backed by Chinese social media giant Tencent Holdings Ltd. WeBank has built a loan portfolio of more than $40 billion and has a return on equity exceeding 24%, Sengupta said in a phone interview.

Asia-Pacific banks generated 37% of global pretax industry profit last year, down from 49% in 2012, the report showed. It attributed the decline to slower growth and a recovery in other regions following the global economic crisis.

Lenders that adapt quickly to the changing industry could reap rewards, according to McKinsey. It identified four areas where such banks can capture $100 billion in new revenue annually if they adopt the right digital strategies: wealth management, retail banking, small-business lending and transaction banking.

“To pursue these opportunities, banks must beat the attackers at their own game” by developing digital platforms and analytics that track customers' decisions in real time, it said.

Recent innovations in automation, artificial intelligence and analytics may also give banks room to slash as much as 40% from operating costs, the consultancy said. Such productivity gains are needed because of the region's slower economic growth, it said.

“Multiple trends show clearly that the days of a free lunch and fast growth -- especially for banks in emerging markets -- are behind us.''

To contact the reporter on this story: Russell Ward in Tokyo at rward16@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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