In Focus
MARKETS, RETAIL BANKING | Staff Reporter, Singapore

Asian banks could be wasting their digital potential

Going digital does not equal better cost benefits, and developed markets are most at risk, says Morgan Stanley.

Although going digital is the way forward for Asian banks to survive and thrive in the future, minimal investments and poor execution discipline could lead lenders to miss estimates and lag behind digital leaders by 2025, reports Morgan Stanley.

An overwhelming majority of banks expect digitalisation to deliver cost benefits, with potential cost savings possibly adding up to 0.7% return on equity (ROE), the report noted. However, these estimated savings are only equivalent to between 12 to 78% of the cost savings that banks forecasted.

In particular, banks in South Korea, Thailand, and Singapore are more at risk from failing to meet their cost savings estimates. On the other hand, banks in China, India, and Malaysia are more aligned to enjoy these potential digitalisation benefits.

Furthermore, there is a gap between the digital services banks currently offer and the expectations of small and medium enterprises (SMEs). A 2017 survey by Oliver Wyman revealed that more than 50% of SMEs are already looking for new credit lines via digital channels, but only 20% of SMEs are able to complete the process for a loan application online.

In particular, SMEs in Hong Kong, Singapore and India are most likely to experience this, Morgan Stanley found.

This presents a large wasted potential for banks, and Morgan Stanley says that this should be an area of focus for banks in Asia—especially with the rise of digital bank license holders and other digital entrants.

“We estimate that up to 26% of SMEs could be introduced to banking as a result of digitalisation, with the greatest increase in penetration in Indonesia, India and Malaysia. We expect this could add up to ~0.3ppts to ROE, and this and incremental unsecured personal lending will be the most important driver of these incremental revenues necessary to partially offset fee and NIM pressures elsewhere,” the report said.

“We believe Indian and Indonesian banks are best positioned to take advantage of this, with Bank BRI, Bank Central Asia (BCA) and HDFC Bank most exposed to SME, whilst BRI is also positioned to benefit from increased unsecured personal lending,” it added.

Wealth is no saving grace
Morgan Stanly further warned of Asian banks pinning their hopes in wealth management, as fees in the segment are expected to come under pressure.

Wealth management is named as a possible key driver of growth for Asian bank, and is expected to drive a 9% compound annual growth rate (CAGR) in Asian wealth assets over the next five years. Digitalisation will further drive gains as robo-advice and the distribution of small-ticket products can increase penetration.

However, fees will also come under pressure as new entrants could charge as much as 50% lower fees than incumbents. Most fee pressure will come from developed markets—such as Singapore, Thailand, and Malaysia, and potentially Hong Kong—and less from emerging markets.

On the upside, Hong Kong banks have a wider opportunity for growth thanks to the Greater Bay Area.

Amongst markets, Singaporean and Thai banks are less exposed to the positive drivers of digitalisation compared with others; whilst Indian banks could benefit the most. Large private banks in India are expected to do well, as they are at the forefront of various digitalisation initiatives.

Furthermore, the banks move in a way that will further improve their market share in relatively high margin loans such as retail and SME loans and improve costs rations, added Morgan Stanley.

Amongst the mid-ranked economies, Korea and Hong Kong are expected to com out slightly worse than China, Malaysia and Indonesia.

In Singapore and Thailand, Bangkok Bank, DBS, and UOB come out as the possible net beneficiaries in of digitalisation. However, the gap between the leaders and laggards is small. Amongst banks in Thailand, KASIKORN BANK has the potential to be the most negatively impacted in, the report noted.

In China, digitalisation will help lead to further differentiation amongst lenders, says Morgan Stanley. More market-oriented banks such as Ping An Bank and China Merchants Bank will be able to gain market share and improve profitability.

Other major banks face market share loss and may have to pass on the cost savings to borrowers, Morgan Stanley warned.

Malaysia faces the same potential caused benefits in digitalisation, although increased competition from new entrants in the form of fee compression. There won’t be a large digitalisation gap between CIMB, Maybank and Public Bank; however, CIMB and Maybank may be able to realise digital benefits earlier than Public Bank due to their earlier investments in technology.

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