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Banking & Finance

McKinsey banking report identifies key findings

Released at: 17:04, 02/07/2019

McKinsey banking report identifies key findings

Photo: Viet Tuan (inllustration)

Three findings for local banks in Asia-Pacific Banking Review released on July 2.

by Doanh Doanh

Three key findings for Vietnam’s banks have been identified in the Asia-Pacific Banking Review released on July 2 by global management consultants McKinsey & Company.

The first finding is that the impact of higher margins (2.9 per cent), lower risk cost (1.7 per cent) and capital (1.9 per cent) has been the main reason for increasing returns of average equity (ROAE) from 7.3 per cent in 2014 to 12.2 per cent in 2018.

The second finding is that banks have wide variations in market share, with the top four largest players holding 56 per cent, suggesting potential for consolidation.

The third is that working capital financing for SMEs is largely underserved and only 24 per cent is currently from banks.

“For many organizations, the building blocks for a data-driven, customer-centric digital banking business are already in place,” said Mr. Bruce Delteil, Partner at McKinsey & Company and based in Hanoi. “In order to carry through with the transformation and survive in this fast-paced digital landscape, however, banks must shift to a more flexible technology architecture and a new way of working, build up their data and analytics capabilities, and develop a plan for acquiring and developing the new talent required for the workforce of the future.”

The survey 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 must reinvent themselves as digital-first, data-driven organizations and brace themselves for change or possible consolidation. Less efficient banks will disappear.

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, SME lending, 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 per cent annually to $23 trillion in 2025. Capturing these opportunities requires banks develop a customer-centric, data-driven culture combining top talent, agile technology and operating model, and excellence in partnerships, mergers, and acquisitions.

“To emerge successfully from a period of potential consolidation, banks must reinvent themselves or risk disappearing,” said Mr. Jacob Dahl, Senior Partner at McKinsey & Company. “The region’s banks urgently need 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.”

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