Banking for the future: Divining what’s in store in 40 years

Posted on June 29, 2011 11:30:18 PM


Taxwise Or Otherwise -- By Blesilda A. Pestaño

Banking for the future: Divining what's in store in 40 years

'The accelerating shift in economic power from the developed to emerging economies is dramatically changing the banking industry across the world.'
-- PwC, from the report, 'Banking in 2050'

Talks about a shift in global powers produce a sense of anxiety, while giving hope to others of finally being able to realize their potential in the world stage.
Similarly, it cannot be helped that talks about the banking industry and its outlook will bring about a feeling of apprehension, coupled with anticipation -- and then you throw in the global financial crisis into the mix.

The world of banking and the players in the international corridors of power are expected to undergo a major shake-up in the next 40 years.

When the global financial crisis hit, not a few raised concerns on how it will affect the industry in the long term.

A report released this month by the global professional services firm PricewaterhouseCoopers (PwC), titled "Banking in 2050," said such concerns may very well affect the profile of the world's leading economies.

Coming from its 2007 report on the same topic, PwC presented updated projections on the size and growth of the banking sectors in the world's different economies and how soon the shift in "power" from the developed to the emerging economies may happen.

A total of 22 countries were included in the PwC analysis -- covering both developed (G7 and other countries such as Australia, Republic of Korea and Spain) and emerging (E7 and newly emerging) economies.

PwC combined gross domestic product (GDP) projections with estimated future domestic banking assets based on a historic upward trend in the ratio of domestic banking assets to GDP and projected banking profits from the net interest margin on these banking assets.

The key findings put forward by the PwC report were:

• The gap between the growth of the emerging economies' banking sectors over those of the developed economies will be greater than what was initially projected prior to the financial crisis;

• In 40 years, the G7 economies' domestic banking assets and profits would be exceeded by the leading E7 emerging economies by around 50%;

• By 2023, China may surpass the size of the US' domestic banking sector; and

• India, with its strong long-term growth potential, is expected to overtake almost everyone else -- including Japan, the UK and Germany -- on its way to becoming the third largest domestic banking sector by 2050, behind China and the US.

The broad finding is that the E7 economies will overtake those of the G7 earlier than PwC's original projections of 2046 in its 2007 report.

The E7, as a group, is likely to surpass the domestic banking assets of the G7 by around 2036.

PwC further reported that E7 banking assets and profits are projected to surpass those of the G7 sometime in the latter half of the 2030s, with the E7 higher than the G7 by around 50% come 2050.

Again, the expectation is that the shift in the power from developed to emerging economies would probably happen earlier than had previously been expected.

This and the rest of PwC's analysis raise some questions:

• Which economies and what areas show the greatest potential for growth and competitive advantage?

• In view of this shifting global landscape, what growth strategies are available to and would best be adopted by businesses?

• How will banks evolve to match the global financial system's evolution?

• How will these changes affect regulatory capital and other requirements and vice versa? And with the prospective growth expected to exceed the industry's capital generation capacity from retained earnings, where will the additional capital come from?

• Will the growth in Asian banks create a new "elite" circle of banks that will dominate global markets?

And, on a general level, why is the shift coming earlier than expected?
PwC reported that it is mainly because of the short- and long-term effects of the global financial crisis.

The crisis, at its peak, effectively stalled the growth of most developed economies and recovery is taking a long time.

While projections for emerging economies' expansion have remained fairly on track, the financial crisis resulted in a downward revision of their growth prospects.

In the aftermath of the global financial crisis, a lot of questions have been asked by people from all walks of life -- Are we in the clear? Are banks safe again? Can we move on?

More than these questions and without having to delve into the morality and other social repercussions of the recent crisis, the information and resulting questions posed by the PwC report should provide organizations with relevant, useful information to help them develop their long-term strategies and plans.
The author is an Assurance Partner of Isla Lipana & Co., the Philippine member firm of PwC (PricewaterhouseCoopers) global network.


Readers may send feedback via e-mail to blesilda.pestano@ph.pwc.com.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co.

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