Management consulting firm McKinsey & Company said that banks in Asia-Pacific must have to go through radical reforms and cut their costs, otherwise they will not be left with any other option but to put themselves up for sale, as banking sector is being transformed by technology firms that are rapidly increasing the competition while moving into the banking industry.
Average return on equity (ROE), a tool used to measure profitability of a company, of the Asian banks dropped to 10.1 % last year which was 12.4% in 2010 and that is likely to be dropping to as low as 6.4% in 2023 if new digital banks become successful to scale up rapidly, taking significant amount of market share from the players currently holding the market, the consultancy highlighted in its report published on Tuesday.
Slow-down of economic growth in many markets around the world, increasing number of non-performing loans followed by extension in over-landing period, satisfaction of lenders for not cutting the costs to the extent rivals done, and increasing number of digital players in the market are factors bringing the profits of banks down, McKinsey said in the report, to which the head of its Financial Services Practice in Asia, Jacob Dahl was co-author.
The report came following decision of the Monetary Authority of Singapore on Friday to issue maximum of five licenses to digital banks, setting off the action of regulators across the region that are making changes in rules to smoothen the establishment process of online-only banks, operated by the technology firms in most of the cases.
Eight virtual banks, as they name it, are ready to start operating by the end of this year in Hong Kong, where in last month, five largest banks including HSBC Holdings PLC came on slashing their minimum balance fees, a decision accredited to increasing competition by the analysts.
China, Japan and Vietnam are the markets, according to the report, that are more likely expose to consolidation.