McKinsey raises alarm for Asia-Pacific banks

By: |
Mumbai | Published: June 22, 2016 6:11:05 AM

In the report, McKinsey identifies three major threats – slowing economic growth, disruption by technology and weakening balance sheets – to banks in the region and expects these to “come together in a powerful storm with the potential to cripple RoEs by 2018”.

The golden decade that banks in the Asia-Pacific enjoyed between 2005 and 2015, during which their share in global banking profits rose from 28% to 46%, might be over, according to a report titled ‘Weathering the Storm’ by consulting firm McKinsey.

“The momentum from this golden decade is already fading, with margins and returns on equity (RoE), to cite just two matrices, moving lower. We are seeing the beginning of a decline, with RoE in the Asia-Pacific falling from 15% in 2013 to 14% in 2014,” the report said.

In the report, McKinsey identifies three major threats – slowing economic growth, disruption by technology and weakening balance sheets – to banks in the region and expects these to “come together in a powerful storm with the potential to cripple RoEs by 2018”.

On India, the report notes that driven by deterioration of net interest margins (NIMs) – the difference between interest earned and interest expended – margin compression has taken its toll on RoEs, which have dropped from 20% in 2005 to 11% in 2014. The report also notes that non-performing assets (NPAs) of Indian banks have been increasing at an unprecedented pace, which has taken a toll on their profitability. “The Reserve Bank of India (RBI) has asked the banks to clean up their balance sheets by first quarter 2017, which will translate into huge capital requirements for banks given their weak profitability and insufficient provisioning,” it adds.

Concerned about the NPA crisis in the region as a whole, the report notes that stressed assets – NPAs and restructured loans – in India, China, Japan and Indonesia have reached $400 billion, having grown at 6.9% between 2011 and 2015 as compared to just 0.1% between 2007 and 2011.

“To cover losses from non-performing loans while maintaining current capital adequacy ratios, which include a buffer to Basel III capital requirements, banks in Asia will likely need to raise $400 billion to $600 billion in additional capital by 2020,” the report said and added that raising this additional capital won’t be easy given that banks, as a result of their recent weakness, have become less attractive for investors.

McKinsey, however, has also provided a recipe for banks in the region to not only tide over the upcoming storm but also emerge stronger from it. For that, the consulting firm advises banks to focus on the unbanked, under-banked and the emerging middle class for growth; adopt digitisation to manage costs; strengthen their balance sheets; and adapt to the new environment by building partnerships with fintechs, while also being flexible enough to bring out new products and services.

“It (the coming storm) may also provide the kind of significant industry disruption that creates opportunity for those that recognise it. The most aggressive banks will not merely survive the turbulence; they will be strengthened by it.”

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition