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Asia-Pacific banks must make radical changes to survive the coming slump, as late-stage economic cycle looms

South China Morning Post

發布於 2019年10月22日03:10 • Chad Bray chadwick.bray@scmp.com
  • Nonbank players putting 'significant pressure' on business models for lenders in Asia, according to McKinsey
  • Asian lenders 'ripe for consolidation' as they seek scale, McKinsey says
The atmosphere in Glodok, Jakarta's Chinatown, on September 2, 2019.Photo: Agoes Rudianto
The atmosphere in Glodok, Jakarta's Chinatown, on September 2, 2019.Photo: Agoes Rudianto

Banks, particularly those in the Asia-Pacific region, must think hard about "radical" moves to reshape their businesses as the global economic cycle reaches a late stage and central banks become more dovish, according to a new report by the consulting firm McKinsey & Company.

Globally, only about 40 per cent of lenders are generating returns below their cost of equity, while the remaining 60 per cent are destroying value, McKinsey said. A prolonged economic downturn, with banks navigating low to negative interest rates, "could wreak further havoc," the firm said.

"In the last cycle the banks made a lot of effort to shore up their capital base to improve their productivity," said McKinsey's senior partner in Singapore Joydeep Sengupta, a co-author of the report. "We are in the late cycle. It implies that if you have much lower growth moving forward, the time that you need to reinvent is rapidly running out."

The International Monetary Fund (IMF) cut its outlook last week for 2019 global economic growth to 3 per cent, the slowest pace since the global financial crisis a decade ago. The IMF said growth has weakened because of "rising trade barriers and increasing geopolitical tensions", including a trade war between the world's two biggest economies that has raged for more than a year.

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"Heightened trade and geopolitical tensions including Brexit-related risks, could further disrupt economic activity, and derail an already fragile recovery in emerging market economies and the euro area," the IMF said. "This could lead to an abrupt shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging market economies. In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future, limiting its effectiveness."

US President Donald Trump has placed tariffs on some US$380 billion of Chinese-made goods as part of an effort to force Beijing to change decades of trade and industrial policy, with China responding its own retaliatory tariffs.

On October 11, Trump said the two sides had reached a "substantial phase-one deal" following two days of negotiations in Washington DC, but analysts and economists remain concerned the tensions could linger for some time, weighing on business sentiment and growth.

There's a one-in-three chance of a mild global recession in the next 18 months, asset manager Aviva Investors said last week in its fourth-quarter outlook.

"We expect all major economies to be growing below potential in 2020, with unemployment likely to rise modestly and wage and inflation pressures set to remain muted," Aviva said. "Given the uncertainty around how businesses and households will react to the imposition of further tariffs, as well as the use of non-tariff measures, we judge that the risks to growth are to the downside."

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Banks, often under regulatory pressure, have moved to increase the capital they hold and lower the level of risk in their lending portfolios since the global financial crisis.

Despite risk costs being at all-time lows, banks need to consider more dramatic steps, ranging from disrupting their internal cost structures to further consolidation, to improve their returns, according to McKinsey.

"Even for banks that are in a good position, it's quite important to reinvest in innovation and further scale," Sengupta said. "Even staying ahead requires a fair amount of work."'

Sengupta said that margins have been particularly under pressure in Asia, falling by 42 basis points in the past five years, compared with seven basis points in the rest of the world.

"We've seen risk costs in Asia go up much faster than the rest of the developed world, where risk costs are frankly at all-time lows," Sengupta said. "In Asia, as we enter the late cycle, we would see that trend continuing. On top of all of that, the productivity gains many of banks have started to work on haven't been sufficient enough to compensate for some of these other factors."

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Lenders in Asia are facing "significant pressure" on their business model from nonbank players, particularly technology companies offering financial products, Sengupta said. That will cause banks to need to reinvent their cost structures and models.

The need for scale also is likely to drive deal making in the industry in Asia, a region that is "ripe for consolidation', Sengupta said.

"In-market consolidation " whether it be Indonesia, which is quite fragmented, India or China " these are markets in particular where we see opportunities for consolidation," Sengupta said. "We think that will happen. It is inevitable. You need a certain degree of scale to begin to get the efficiencies on the cost side."

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.

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