Asian banking industry assets breaches $50 trillion barrier, top 30 banks

19 April 2017 Consultancy.uk

Banks in Asia have, since the start of the decade, enjoyed steady growth to their assets. Banks in China for instance enjoyed a nominal CAGR of 15% since 2010, while Vietnam's banking sector booked a 12% CAGR. In total the region saw its share of the global banking market increase for 27% to 40%, while total assets increased from around $37 trillion in 2010 to almost $55 trillion last year. Keeping the momentum may be more difficult in the current climate however, as various headwinds come to affect growth prospects, from economic slowdown to transparency concerns.

The Asian banking sector has enjoyed strong growth since the start of the decade, finds a new report from Oliver Wyman. The report, titled ‘Asia Banking Agenda 2017’, explores recent trends across the industry in the region, as well as likely challenges that are arising in the industry.

Growth of Asian banking market

The report finds that growth rates between 2010 and 2013 hit 10.5% CAGR, before slowing somewhat to CAGR 6.9% between 2013 and 2016. In absolute value terms, the market grew from around $37 trillion in 2010 to almost $55 trillion in 2016. The region’s banking sector now accounts for 40% of the global market, up from 27% in 2009.

The market grew at relatively different rates. The Chinese market saw the most rapid growth, up 15% in nominal CAGR between 2010 and 2016, with total market value up from just over $21 trillion to almost $40 trillion. Vietnam come second, the market was up 12%. followed by Vietnam at 12%.

Japan was the only banking market to see contraction in the region, at -2% growth. As a comparison, the Eurozone banking market fell by -4% while the US market was up 5%.

Top 20 banks in Asia by total assets

In terms of the largest regional banks, ICBC is by far the largest with assets totalling $3.47 trillion. The China Construction Bank comes second, with total assets of around $3 trillion. The Agricultural bank of China and the Bank of China follow, with assets of $2.82 and $2.61 trillion each. The top five banks by assets in the region is rounded off by Mitsubishi UFJ, whose total assets come in at $2.59 trillion.

The top 20 banks in the region is heavily weighted in favour of China, which accounts for 13 in total. Japan comes in second with six entries, while India has one entry at number 17.

Mapping the Top 30 Asian banks by asset growth

The research also finds that the top 30 banks across the region have, aside from enjoying steady growth between 2010 and 2016, also enjoyed strong return on equity. Some of China’s banks, such as Ping An Bank, Bank of Beijing and Bank of Shanghai, have seen asset CAGR of more than 20% over the period. Chinese banks in general are centred around the region’s average 15% growth rate, with few banks in the country growing below 10%.

Returns on equity has been relatively strong across the region, with almost all Chinese banks offering returns above 12%, with the Industrial Bank hitting returns above 17%. Japanese banks, even with stagnation and contraction in asset CAGR, have managed to generate positive RoE over 2016, at around 5% for Nomura Holdings and around 10% for Resona Holdings.

Growth of regional debts as % of GDP

The report finds that various forms of debt have grown steadily as a % of GDP. Public debt, as a % of GDP has remained relatively stable in most Asian countries considered, growing most prominently in Japan, to almost 250% of GDP, as well as in Singapore over the past two years. Corporate loans as a % of GDP have, however, increased markedly in Vietnam, to more than 120% of GDP, while for most countries in the region a relatively stable profile is noted.

Household loans as a % of GDP has, in most of the countries in the region, seen steady increases. Particularly Vietnam, China and Hong Kong have seen increases, while the many of the rest of the households across the region have racked up slightly more debt than in 2010.

Five engines for future momentum

The region’s strong track record for growth over the decade to date is, according to the firm, under treat from a number of factors. One are of concern is past growth pushing debt-to-GRP ratios into critical territory across the region, while the number of non-performing loans too has increased. Macroeconomic conditions across the region, particularly the slowdown in the Chinese market, is also creating additional avenues of concern. Global trade and capital flows are being challenged, the consulting firm notes, by a strong US dollar and potential protectionism, while digital disruption is creating a host of threats to the region’s traditional financial services business models.

These challenges can, according to the authors of the report, be tacked through, “... five engines of future momentum that Asian banks should focus on in 2017. These engines feature a total of 22 specific actions. Of course, not all engines and actions are equally relevant for all banks, and every institution’s specific agenda is unique. Yet, across the region we sense that this Asia Banking Agenda will be decisive in maintaining strong growth and value creation.”

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The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.