The retail banking industry has enjoyed fierce revenue growth across emerging markets over the past decade, averaging a CAGR of 18%. Market dynamics are becoming more challenging however, as competition for low hanging fruit cuts into margins, and focus shifts to more sophisticated product offerings. Revenue growth to 2020 is forecasted to remain robust however – adding an additional $450 billion in turnover across the major emerging market economies.
A new report by management consultancy Oliver Wyman explores trends in the development of the emerging market retail banking sector. The report is based on 12 emerging markets (EM12) – Thailand, Indonesia, Columbia, Mexico, Turkey, India, Malaysia, Brazil, China, Chile, Saudi Arabia and South Africa. Collectively they account for 80% of total emerging market revenue and for two-thirds of the global revenue growth in retail banking over the last five years.
Bank account saturation
The research notes a number of broad trends between the nascent market group and the retail emergence group, in terms of percentage of the populations with a bank account. In the former, banking is primarily for a small wealth class; however following improved economic growth and stability, banking emergence sees services rapidly expanded to cherry picked low risk consumers – resulting in the growth spurts seen in, among others, Indonesia, India and Mexico. The average for emerging markets considered in the group stands at 54% of total people above the age of 15.
Retail maturation, which typically occurs when GDP per capital (PPP) hits between $10,000 to $25,000, boosts bank accounts to an average of 68% of the regional population. In ‘retail sophistication’ people with bank accounts hits more than 95% of the total – in the UK, for instance, this is 99%.
Net interest margins
As markets mature, the research also notes a tendency for net interest margins (NIM) to trend downwards, as they represent a broad indicator of market efficiency and competitive intensity. While countries in the stage of retail emergence have an average NIM of 9%, there is a relatively broad spread between countries: Mexico has the highest NIM, at 18%, followed by Columbia on 12%, while China and India have NIMs more closely aligned to that of sophisticated retail banking markets, at 3% and 5% respectively.
Shift to fee income as wealth rises
One aspect of the change from retail emergence to retail maturation is related to a move from more basic products, such as bank accounts and mortgages, as they reach relative saturation, to more sophisticated, cross-selling and advisory services – whereby income tends to shift from interest to fees.
Income from fees across the six retail emergence market players stand at an average of 29%, while in retail maturation segment, the average stands at 34% – with countries such as South Africa and Turkey generating close to 45% of their total revenue from fee income.
Across the coming five years, retail banking revenue for the EM12 is projected to see an additional $450 billion added to its base, with financial services reaching around 250 million households, while around 90 million people transition into the mass-affluent (Income $10,000 - $35,000) market segment in the respective countries.
By 2020 China will see a 10% growth in its number of mass-affluent, and a 2% growth in the affluent segment, while India will too face a considerable shift from the poor/vulnerable to mass-market. Turkey will see a slight uptick in the number of affluent, with fewer than ever projected to be on low incomes.
Retail revenue potential
According to the firm’s analysis, the rapid shift from nascent to emergence to maturation has resulted in rapid revenue growth across the EM12, increases averaging 18% per year over the past decade. The growth was, in particular, fuelled by growing household incomes and strong macroeconomic conditions, among other factors. Over the past five years, revenue growth slowed to 14% across the markets, as particularly the most recent years saw economic factors, such as slowdowns across major markets, increasing volatility in currency markets, and changing credit cycles, come to bite.
Given that retail sophistication remains relatively far off for many of the markets, while growth fundamentals in terms of increasing incomes – which affect retail banking product appetite – remain relatively robust, the consultancy firm projects a revenue growth of around 9% CAGR across all markets for the coming five years.
China in particular however, will see a slowdown, although continuing to enjoy double digit growth, while Mexico is projected to see a considerable slowdown from around 13% over the past five years to around 5% in the coming five years. Turkey, which is likely to see the number of affluent grow considerable, will enjoy robust growth in the period.
“The nature of retail banking growth in EM12 is undergoing a major change,” says Oliver Wyman partner Michael Wagner. “With slower growth rates, banks need long-term, cohesive strategies, which will allow them to grow faster and create clear separation between winners and laggards.”