The gross retail banking income for the Asia Pacific region is expected to see a stable growth, while retail banking performance will continue to vary across the region. Banks in most markets have been facing downward pressure on their retail profitability amid the complex and constantly evolving operating environment.
April 05, 2017 | Wendy Weng
- Gross income from retail financial services for banks in Asia Pacific is expected to grow at a stable compound annual growth rate of 10% between 2016 and 2020.
- Most markets in the region will see flat or slightly declining retail banking income growth.
- New technologies, non-traditional competitors, heightened regulatory requirements, shifting customer expectations, and unfavourable economic conditions are the main factors that put banks’ retail profitability under pressure.
Asia Pacific’s retail banking industry continues to grow, albeit at a slightly slower pace. This is the result of the latest large-scale study of the Asian Banker Research on income generation in retail financial services the Asia Pacific region.
The gross retail banking income for the entire region expanded at a compound annual growth rate (CAGR) of approximately 10% in the past two years, as compared to 12% between 2012 and 2014. This growth is anticipated to remain stable at around 10% between 2016 and 2020.
Gross income from retail financial services for banks in Asia Pacific reached about $511 billion by 2016 (Figure 1).This includes income from retail deposits, mortgages, credit cards and/or unsecured lending, wealth management, and, wherever possible, small and medium enterprise (SME) banking. The ability to generate gross income in any market is a key indicator of wallet share and a determinant of a bank’s bench strength in retail financial services.
Gross retail banking income for the entire region is expected to grow at a CAGR of 10%
Retail banking performance varied significantly across the Asia Pacific region. China, India and Australia generated more retail banking income than other countries in the region. In fact, the aggregate income from their retail financial services made up around 70% of the region’s gross income in 2016 (Figure 1). And we expect the market share of these three countries to increase to 74% by 2020. However, Australia is expected to see a slight decrease in its share of retail banking income in gross income for the region, while China and India are expected to take up a bigger proportion.
Retail banking income from developing markets accounted for around 67% of the gross retail banking income of the region in 2016, increasing gradually from 60% in 2012. And we expect the upward trend to continue in the coming years, given the better growth prospects in developing markets. The retail banking income of developing markets is anticipated to represent around 73% of gross retail banking income of the region by 2020.
Indonesia’s retail financial services industry remains the most profitable in the region. Bank Mandiri in Indonesia continued its strong retail banking financial performance in 2015, with the highest retail profitability measured by the return on retail banking assets (Figure 2). In addition, Bank Negara Indonesia, Citibank in India and Union Bank of the Philippines also produced high return on retail banking assets at above 5%.
Average return on retail banking assets at the top four Indonesian banks stood at 6.6%
Overall, Asia Pacific banks have increasingly relied on the contribution of their retail banking business. In 2015, East West Bank Corporation in the Philippines, ING Australia and TISCO Bank in Thailand were the top banks in retail banking income contribution. Their retail banking income contributed more than 80% to total bank income (Figure 3). Banks in the Philippines and Thailand have relatively higher retail banking income contribution, while retail banking income contributes less to total bank income in China and Hong Kong.
Retail banking income contribution of top banks in major Asia Pacific countries ranged from 42% to 91%
Downward pressure on retail profitability
The complex and constantly evolving operating environment continues to challenge Asia Pacific’s retail financial services industry. New technologies, non-traditional competitors, heightened regulatory requirements, shifting customer expectations, and unfavourable economic conditions are the main factors that place downward pressure on banks’ retail profitability.
Most markets in the region will see flat or slightly declining retail banking income growth over the next four years (Figure 4), with the exception of Korea and Vietnam. Vietnam is expected to generate the fastest retail banking income growth at a CAGR of 25% between 2016 and 2020, as Vietnamese banks are shifting from corporate banking to retail banking. Retail banking income in mature markets is expected to grow at a stable CAGR of 5% over the next four years, while retail banking income in developing markets will expand at a CAGR of 12.1%, slower than 14.4% between 2012 and 2016 It is therefore imperative for banks to explore new sources of income and implement adequate control cost.
Overall, retail banking income growth in Asia Pacific is expected to decelerate
Banks are continuously exerting efforts to increase fee and commission income and put more focus on higher-yielding business segments such as wealth management and insurances, consumer finance, and small and medium enterprise (SME) banking. Meanwhile, banks are working to offer multiple products, improve sales force effectiveness, and optimise distribution networks to acquire market share, especially in developing markets. In the markets with relatively low banking penetration rates, banks are targeting underbanked and the unbanked population to seek new sources of income. In addition to tightening competition among banks, retail banks are also facing intensifying stiff challenges from non-bank players, particularly in the payments and consumer lending businesses. Currently, traditional banks’ market share has not been considerably eroded.
However, going forward, non-bank players are expected to take an increasingly number of customers from traditional banks. Banks are restricted by their own technology legacy systems and organisational structure and culture. Besides, regulatory compliance is also a barrier for banks to shape a more flexible and faster market response. Non-bank players are more agile and efficient, and are able to offer alternatives to banks’ products and services at competitive prices.
In the face of the mentioned challenges and threats, some banks have invested significantly in digital technologies. They are accelerating their development of digital capabilities, in order to drive efficiency and agility, reduce costs, and deliver better customer experiences. Multi-channel optimisation is also important for banks. Currently, a large component of direct retail sales is still focused on branches and digital channels contributed less than 10% of the retail banking revenue for 80% of the banks in Asia Pacific. These banks who are reshaping their strategies and transforming their business and operating models will turn the threats into opportunities.
Categories: Asia Pacific
, Industry Developments
, Retail Banking
, SME Banking
Keywords: Asia Pacific
, retail banking