Asia-Pacific banks face “a powerful storm” which will probably hurt profit growth in an industry that earned half a trillion dollars last year, according to McKinsey & Co.

A triple threat of slowing economic growth, technology disruption and weaker balance sheets could come together to “cripple” returns on equity by 2018, the New York-based consultancy said in an analysis of 328 banks in the region. Profit growth may slow to below 4 percent annually between 2016-2021, down from about 10 percent in 2011-2014, said Joydeep Sengupta, one of the report’s authors.

The region’s slowdown has led to weaker lending growth and surging loan defaults, sending stressed assets in China, India, Indonesia and Japan to almost $400 billion last year, according to McKinsey. Since the 2008 global financial crisis, lenders have been grappling with tighter regulatory and capital requirements that have curtailed their ability to dole out credit.

Banks in the region have “seen extraordinary growth” over the past decade, Sengupta, a senior partner in McKinsey’s Singapore office, said in a phone interview. “At this point in time, we would say we’re at the end of the golden era. There is a trinity of threats which we are seeing.”

Asia-Pacific banks have accounted for almost half of global banking profits each year since 2009, according to the report. In 2015, the region’s lenders represented 46 percent of the $1.1 trillion in after-tax earnings generated by the industry worldwide, the report showed.

The McKinsey study showed that ROE for the Asia-Pacific lenders had fallen to 14 percent in 2014 from 15 percent the previous year. That figure may fall to “single digits” if banks don’t take action, Sengupta said.

The consultancy is calling on banks to build their digital capabilities to fend off rising competition from technology start-ups and more established digital companies including Alibaba Group Holding Ltd. and Tencent Holdings Ltd., which are offering financial services from mortgages to payment systems. A customer-focused digital strategy would foster loyalty, as well as cut costs, according to McKinsey.

“In surveys, banking customers in Asia-Pacific frequently list limited digital financial offerings and unsatisfactory service as major sources of frustration,” the report said. “A well-designed digital bank could address these disappointments.”

To ease the impact of slowing economies, McKinsey recommended banks to tap into “growth pockets” in the region: the 1.1 billion individuals with no formal banking relationships, the region’s affluent middle class, and small to mid-sized businesses.

“The reality is that doing things the way you do will create significant challenges,” Sengupta said. By addressing these, “there are opportunities which are hitherto untapped, but significant and large, that banks can pursue,” he said.

Source:
courtesy of BLOOMBERG

by Darren Boey

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