Despite volatility in the global economy, one long-term trend is certain: economic power, capital inflows and trade activity continue to shift to Asia. Within Asia itself, the banking industry is being reshaped by powerful regional trends including increasing domestic consumption, higher intraregional trade, rapid urbanization and the remarkably fast uptake of mobile technologies that are bringing financial services to millions of people.
Whilst that’s good news, the bad news is that Asia’s relatively strong growth prospects vis-à-vis the rest of the global economy means the region is quickly becoming a hot bed of competition. Domestic banks are using their home-grown knowledge and relationships to fend off global banks, who are hoping to offset their poor performance elsewhere by aggressively targeting new revenue streams in Asia.
As a result, while growth in Asia may in theory, appear easily attainable, it is far from a given for any bank. The aim of this paper is to set out the various strategic options banks in Asia should assess when determining on which paths to growth will foster long term, sustainable revenue generation. The key challenge is expanding revenue while maintaining profitability. It is not about growth at any cost. A focus on profitable revenue growth is a key driver for increasing future value and thus enterprise value.
Whether a bank's vision is to expand their geographic footprint, bring customers to the centre of their business, or focus on non-capital intensive growth opportunities, banks in Asia need to be prepared to evaluate multiple growth paths in order to be able to respond with agility. Pursuing one single path to growth may not be enough. Our findings indicate banks need to prepare for future growth by pursuing a combination of innovation, expansion and mastery across the banking value chain.
Most Asian economies are continuing to experience strong economic growth, which is having a major impact on asset growth and quality in the banking industries. Accenture expects increased direct investment into Asia, due to higher medium-term growth prospects, stronger policy fundamentals, sound fiscal positions and expanding local capital markets.
Confidence in Asia’s economic position will be strengthened by private consumption growth, supported by improved labor market conditions and continued policy efforts to raise household disposable income. Some 85 per cent of the growth in the global middle class – which is set to increase from 1.8 billion people in 2010 to 3.2 billion by 2020 and to 4.9 billion by 2030 – is expected to be in Asia.1
Differing shareholder expectations
Despite the attractiveness of Asian banking markets, an analysis of the valuations of banks from across Asia shows that investors hold widely varying views about the potential for the region’s banking institutions to generate future value.
For banks in Advanced Asia, such as Australia and select banks in Emerging and Maturing Asia, finding new sources of growth is critical if these banks are to sustain investor confidence. They must demonstrate an ability to grow beyond the value delivered by their current operations and expected GDP growth. For banks in markets such as Singapore, Hong Kong and China, the challenge lies in strengthening investor confidence by demonstrating a commitment to either new growth sources or to creating significant efficiencies in their current operations.
For all banks, the ability to grow ahead of expected GDP growth will be the key to improving enterprise value. There is one imperative for these banks: revenue growth is a must, not a choice.
Revenue growth is critical for two reasons: First, it is one of the most important factors investors use in determining the future stock price of a company. Second, it is important for generating future cash flows. Appropriate levels of strategic investments need to be made to sustain future cash flow expansion
The opportunities in Asia for banks that can achieve clarity of purpose are significant. With a clear vision, banks with growth expectations built into their share prices can maintain and further increase their value; whilst those banks whose valuations are largely based on current operations can earn a growth premium.
Andrew Pitcher, Asia Pacific Banking Managing Director, Accenture
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Andrew Pitcher is the managing director of the Accenture Banking practice in Asia Pacific, as well as the lead for Accenture Payment Services for the region.