McKinsey’s flagship regional banking report warns APAC Banks to brace for consolidation

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Published on 2 July 2019
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McKinsey’s flagship regional banking report warns APAC Banks to brace for consolidation

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McKinsey’s latest Asia-Pacific Banking Review warns that most banks in the region are set to face an existential choice: unlock the potential of scale to boost productivity, optimize capital, and pursue strategic growth or prepare to be acquired.

As storm clouds continue to darken over the region’s banking industry, with weakening macroeconomic expansion, continued compression of banking margins, rising capital and risk costs, and increasing digital disruption, banks mustreinvent themselves as digital-first, data-driven organisations and brace themselves for change or possible consolidation. Less efficient banks will disappear.

Key findings from the survey for Singapore include:

ROAE in Singapore has been stable across 2014 (11.8%) to 2018 (12.1%).
Banks with greater scale tend to have better ROEs, given that the difference of ROE between 1^st quartile and 4^th quartile is 160 bps.
Banks have wide variation in market share (top four largest players in Singapore have 55% market share), suggesting the potential for consolidation.
Banks need to attack costs more aggressively as the first step to increase productivity, given that the difference of cost to asset ratio between 1^st quartile and 4^th quartile is 129 bps.

But there is hope. Banks can prepare for the battles ahead and strengthen their businesses by first attacking costs and seeking to achieve market-leading efficiency ratios. Those that develop best-in-class digital and analytics capabilities will also be in a position to capture significant new revenue in four fast-growing businesses: wealth management, retail lending, small and medium enterprise lending (SME), and transaction banking. There is a $100 billion annual opportunity for new revenue spread across these areas. Bank lending to SMEs in Asia-Pacific is expected to grow 9.1% annually to $23 trillion in 2025. Capturing these opportunities requires banks to develop a customer-centric, data-driven culture combining top talent, agile technology and operating model, and excellence in partnerships, mergers, and acquisitions.

Jacob Dahl, Senior Partner at McKinsey & Company, said: “To emerge successfully from a period of potential consolidation, banks must reinvent themselves or risk disappearing. The region’s banks need urgently to redouble their efforts to boost productivity, optimize capital and pursue strategic growth. Bracing for consolidation will get banks in shape to forge ahead through the coming storm.”

Joydeep Sengupta, Senior Partner at McKinsey & Company based in Singapore, said: “For many organizations, the building blocks for a data-driven, customer-centric digital banking business are already in place. With the Monetary Authority of Singapore recently announcing the issuance of digital bank licenses, incumbents must react and adopt new ways of working by building up their data and analytics capabilities and developing a plan for acquiring new talent.”

Re-disseminated by The Asian Banker