Janine Crisanto, research analyst at The Asian Banker, shares the findings from the Excellence in Retail Financial Services Programme on the income outlook for Asia Pacific in 2017/2018 and the challenges banks are facing across 11 key markets in the region.
Here is the transcript of the video:
Good afternoon and welcome to another round of TAB Live session, which is the online broadcasting platform of The Asian Banker. In this session, we will be sharing the outlook for retail financial services in Asia Pacific.
These findings are based on our recently concluded Excellence in International Retail Financial Services Programme, a benchmarking exercise that identifies not only the best player in retail banking, but also the key developments and issues each of the markets under coverage are facing.
As you may be aware the coverage of the Excellence programme spans across Asia Pacific, Middle East and Africa and evaluates more than 150 players in retail banking.
We will first start to present the overall income outlook until 2020 for the region and then put some spotlights on two major regions, India and China.
We will also present a more selected in-depth outlook for a couple of countries in the region including Australia, Singapore, Hong Kong, Korea, Indonesia, Thailand and Vietnam.
Going forward, for Asia Pacific, we expect the region to grow at a compounded annual growth rate of 8% between 2016 and 2020. This compares to 10-11% in the period from 2012 to 2015.
Banks are increasingly challenged to generate top line revenue growth in traditional business segments, and the industry has been facing rising regulatory and compliance costs, as well as new competition. Those market challenges are often exacerbated by economic weaknesses.
We expect that gross retail banking income for the entire region will grow by 8% by the end of 2017 after showing a year-on-year growth of 7.5% in 2016 and 10% in 2015.
2017 will be a slightly improved outlook as countries such as Indonesia, Thailand, Korea and Hong Kong will be coming in with better growth rates.
Currently, China’s retail financial services industry alone generates 43% to total regional income, followed by India at 14% and Australia at 13%. Southeast Asia’s share stood at 10%.
There are however stark variances in growth rates between mature and emerging markets. Korea, Hong Kong, Australia, Japan, Taiwan and Singapore are expected to grow on average by 4.5% in 2017 while the rest of the emerging markets will grow at a rate of 12% in 2017.
The fastest growing markets up to 2013 were Thailand, Indonesia and China which experienced annual growth of over 20%. Those markets have been slowing down in line with wider economic woes and we expect retail financial services in these markets in the next few years to grow at a slower pace.
Philippines, India and Vietnam are currently the leading growth markets for retail banking and we expect these countries will lead the rest until 2020. The operating environment for Chinese banks will remain challenging in 2017, driven by a slowing economy and more regulatory tightening.
Growth of residential mortgage will slow in 2017. Chinese banks have aggressively extended residential mortgage lending in 2016. Property curbs have been imposed to cool the overheated property markets. There is a growing concerns over soaring housing prices and the surge in loans to property developers and home buyers.
Also, Chinese banks are expected to face higher funding costs. Liquidity conditions will continue to tighten, as the Fed is expected to raise interest rates further in 2017.
Banks may raise deposit rates to compete for low cost core deposits due to the interest rate liberalisation, which in turn will lead to higher funding cost and narrower interest rate spread. This has impacted profitability.
In 2017, Chinese banks will see a decreasing demand for wealth management products. Exposure to the shadow banking segment has increased as banks have tried to diversify their income structure. However, the People’s Bank of China and the China Banking Regulatory Commission have been stepping up efforts to control the rapid growth – and we expect new regulations coming in place in 2017, which will further impact income generation from this segment.
While India is the second best growth play in Asia for 2016 and 2017, the retail financial services industry struggles to find its growth engines. Consumer finance via credit cards or direct loans has been the only business gaining momentum and banks have built up a sizeable unsecured loan business. All other important retail banking lines such as cards, mortgages, automobile lending are continuing to trend downwards or sideways in growth.
For the period April 2016 to March 2017, India’s retail financial services industry saw a retail income growth of 14.5% on average.
We expect that on average the industry’s retail income will grow between 14 to 15% again for the period of April 20117 to March 2018 with the top private banks ranging between 18 to 22%.
For the period between 2016 and 2020, we expect a compounded annual growth rate (CGAR) of 13% compared to 15% during the period from 2012 to 2015. Recent initiatives to lower lending rates, subsidised housing themes and a rise in non-cash payments may well support retail income growth in the low to mid single digits.
We believe that a focused business model, a strong low cost core deposit franchise, risk management capabilities and needs based customer service will be key determinants of success in this market.
As for the best income - the strongest banks for the period up to March 2017 were HDFC Bank and Axis Bank for the first tier and Indusind, Yes Bank, Kotak Mahindra and Syndicate Bank for the second and third tier banks.
In absolute income terms, SBI and HDFC Bank have the leading share in the retail banking income market in India.
Operating income will be improving in most markets and we will see improved growth in 2017 for Indonesia, Thailand, Malaysia, Hong Kong and Korea.
Vietnam's fragmented banking sector has undergone major reforms in the past few years, with stricter lending and debt classification, forced takeovers, numerous fraud investigations, and the formation of a state-run asset management company to support commercial lenders.
The central bank is serious about cleaning up the sector and achieving a better reputation for the industry. During our programme, executives expressed full commitment to building a full scale universal retail banking franchises until 2020.
While total industry loan growth was 18% year-on-year in 2016, retail is exploding in particular on the unsecured side. Retail loan growth averaged 26% year-on-year in 2016. Banks hav been readying their infrastructure and will see a similar high growth rate for 2017. Banks focus on unsecured lending, credit cards and building their wealth management business but the real income driver is unsecured lending, which doubled or tripled for most banks in 2016. We expect that mortgages will increasingly contribute to income in the years ahead given the countries demand for housing and mortgage credit penetration.
Australia will see a moderation in retail banking income growth in 2017. This is based in the context of softer economics, weaker wage growth and consumer spending and an increasing household debt. Demand for retail loans will be weak in 2017 with the exception of mortgages and home loans.
Singapore has seen since 2010 its best annual retail income growth rate in 2016. This was not only due to better than expected economic growth but also due to rigorous cost management and lower impairment charges from banks. The retail financial services industry has grown its income by about 7% year-on-year in 2016 and will return to above 7% growth in 2017 if the economy continuous to improve. However, taking into account the continues weak operating environment in mortgage banking, consumer loans remain depressed by property-market weaknesses.
In Indonesia, banks have been struggling with a slowdown in retail loans since 2010 and the sector has never really recovered. Retail loans make up 26% of total on average for the industry. Retail income has seen an 8% increase annually in 2016 in line with what we have seen in retail loan growth. But during period from January to March 2017 mortgages and car loans have grown on average 10%. So, 2017 may well see some improvements as retail loans have been picking up.
As for Thailand, we believe that CAGR for retail revenue between 2016 to 2020 will be slower than the period from 2011 to 2015. This has to do a lot with the economic downturn but also with low product innovation, already high retail fee income levels, and the challenge how to further monetise digital banking services.
Retail income growth stood at 6% year-on-year in 2016 for the industry and we may only see a slight recovery in 2017. Retail banking income growth is expected to come in at 7.5% in fiscal year 2017 on the base of lower loan loss provisions. We expect banks will return to full retail financial services growth only by 2018. This will benefit however mostly larger banks and which strong exposure to SME banking.
Korea and Hong Kong likely will swing to positive growth in 2017.
In 2016, Hong Kong’s retail financial services market was affected by the China mainland downturn and a weakening Renminbi. This affected in particular the banks wealth management business which contributes a large part to retail banking income. In addition, growth in outstanding mortgage loans has been slowing down since 2010 to low single digits. At the same time, income from retail banking in the last years was also weighted down by a series of prudential measures introduced by HKMA.
As a reaction to the slowdown in the market, banks in retail banking have become increasingly competitive in Hong Kong on both loan pricing and product promotions to attract new customer.
In 2017, Hong Kong will record positive growth from retail banking on the back of an improved economy, and we expect a close to 2% year-on-year growth.
As for Korea, it was the worst affected market in regards to income generation in the last years in Asia with most banks recording stagnating or negative income growth.
The anaemic housing market and associated regulatory changes have materially impacted the mortgage business in the last years. Regulations require Korean banks to take over registration fees for mortgages, lowering switching costs for customers, and to meet a quota on fixed rate mortgage origination.
Authorities in Korea have been concerned for some time about the high debt-to-income burden of Korean consumers.
We see for 2017 a tepid turnaround in the retail financial services market – despite a continues challenging economic and operating environment, banks have been crawling slowly out of their situation by downsizing and restructuring their operations and moving to lower cost digital channels.
To sum up the key take aways for this TABLive session.