Southeast Asia banks in better position than peers, says McKinsey

12 January 2021 5 min. read

Despite challenges, banks in Southeast Asia are poised to recover from the Covid-19 crisis faster than their counterparts around the world. Analysis from McKinsey & Company reveals the barriers and imperatives for banking in the region.

The management consulting firm published a comprehensive report on the global banking industry early last month, accounting for changes to revenue, credit income and returns on equity (ROEs) as a result of Covid-19. For the near and medium term, the outlook is far from promising – marked by anticipated losses of around $4 trillion by 2024.

“Our research finds that in the months and years to come, the pandemic will present a two-stage problem for banks. First will come severe credit losses, likely through late 2021. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024,” explained Kevin Buehler, senior partner at McKinsey & Company New York.

Banking outlook up to 2024

The good news is that while banks might be in for a torrid time, most appear to have the reserves to see out the crisis. Unlike the great recession of 2008, Covid-19 is not a banking crisis per se, but a wider economic crisis that just happens to affect banks. With healthy capital reserves built up over a number of years, banks are equipped to withstand the heavy blows.

Southeast Asia story

And this appears to hold more true for Southeast Asian banks than their global peers. Senior Partner at McKinsey in Jakarta Guillaume de Gantès spoke to The Edge Malaysia Weekly, presenting banking insights specific to Southeast Asia.

De Gantès noted the strong performance of Southeast Asian banks in the lead up to the crisis. “Along with those in other emerging markets, they experienced substantially higher growth, their return on equity (ROE) on average was at least five points higher than those in mature markets (about 15% versus 9%), higher than the cost of capital.”

Against this backdrop, “banks in Southeast Asia are likely to emerge from the current crisis in comparatively stronger positions, due to higher rates providing more margins on deposits, more demand for sustainability loans and high digitisation momentum created by new customer habits formed during the pandemic.”

This is not to say that Southeast Asian banks are insulated from the crisis. Indeed, the economy’s impact on their performance will be just as intense and prolonged as it is around the world. In fact, banks in all of the Asia Pacific – barring China – will see declining profitability for the next four years.

Banks could lose $4 trillion by 2024

“In the short term, two-thirds of the drop in profitability will be attributed to the increase in risk costs, while the remaining 33% drop will come from minor decreases in margins and volumes,” said de Gantès. He added that in due course “risk costs will subside and our scenarios suggest that margin and volume erosion will accelerate.”

What results is a worrying outlook. “On average, growth will be reduced by two to three points a year between 2021 and 2024 in the region. That’s $250 billion in lost revenues, after risk, for APAC ex-China banking in 2024. Both margins and volume, about 50% each, will contribute to this ‘loss’.”

Staying the course

Still, Southeast Asian banks have it in them to ride out this wave, and could even emerge from the crisis stronger than ever if they pursue the right strategies. “This relative strength should not limit the appetite to transform. Banks should build more nimble organisations, build better scenario-planning for risk management, leverage new types of data and adopt a challenger mindset,” urged de Gantès.

Front and centre here is digital banking in Southeast Asia, which was already evolving at a rate of knots before the crisis – described by de Gantès as “fast, by any measure.” In fact, many banks in the region had emerged as world leaders in digital banking over the last three years.

That being said, if the pandemic has revealed anything, it is the capacity for change within a short timeframe. If digitalisation was fast before, it can be even faster now. “Banks have been able to make more decisions in a week than they used to make in a month.” And consumers are ready for a faster shift too.

Everything, from consumer activity to business operations moved online during the pandemic, displaying the speed at which consumer behaviour can change. The same can be said for the adoption of digital banking services. “Customer adoption has massively accelerated. In some parts of financial services, we have seen an acceleration of three to six years in the last six months alone.”

All that banks need to do, according to de Gantès, is keep up with this momentum. “We believe this pace of change can and needs to be kept after the current crisis, and banks can ‘hardwire’ the nimbleness they have acquired.”