KUCHING: Emerging markets have been the principal driver of global growth in the last five years and are expected to continue growing at twice the rate of developed markets.
As a result, banks in emerging markets expect improved financial performance, despite facing challenges of tougher regulatory burdens, rising costs and intensifying competition, says Ernst and Young (EY) in a statement yesterday.
The study identifies three challenges for banks looking to emerging markets as a growth opportunity including tougher regulations, increasing costs, and intensifying competition.
Jan Bellens, EY’s Global Banking and Capital Markets Emerging Markets leader says,
“Success in these emerging markets is not straightforward, but there is great potential for those banks that get it right.
“In order to be successful in the long term, banks must focus on designing the right business model and developing strong execution capabilities – learning and adapting from what banks have done well and not-so-well in both developed and other emerging countries.”
Meanwhile, Chan Hooi Lam, partner and Financial Services and Country leader of Financial Accounting Advisory Services for EY Malaysia says, “Malaysia is categorised as an ‘established Rapid Growth Market (RGM)’ where capital markets continue to develop and businesses seek longer-term, more complex financing and risk management products.
“Competition on loan pricing is typically most acute in established RGMs. For instance, Malaysian banks reported average Net Interest Margin (NIM) of 2.5 per cent, and expect price competition on loans to both retail and business sectors to be an industry-wide challenge in the next year.
“Building capital is also a particular concern for Asian banks, with all Malaysian banks expecting it to be a challenge as they move towards meeting the global standards set out under Basel III,” he added
Nevertheless, Malaysia remains optimistic about growth prospects where most respondents expected the economy to improve. This is against a backdrop of evaporated optimism across established markets which see current account deficits and rapid credit growth.
“Apart from focusing on building their domestic presence, Malaysian banks are also considering expanding across Asean.
Hooi Lam added, “With the recent announcement by Prime Minister, Datuk Seri Najib Tun Razak on further capital market liberalisation measures which are set to take effect in 2017, this will further boost competition, increase product offerings in the market and drive regional integration in the sector, all of which looks to provide significant growth opportunities to both local and foreign banks.”
To overcome the challenges and leverage on opportunities successfully, banks must think beyond immediate fixes and plan to invest in the following three areas, namely technology, people and partnerships.
Domestic banks in these markets are already starting to strengthen risk management and improve capital and business efficiency, which will underpin profitable growth.
However, EY says if they want to keep pace with the growth of their customers, as businesses expand overseas and personal wealth in these markets increases, they will need to find ways to overcome skill and capability gaps or risk losing these customers to larger global players.