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Banking in emerging markets: seizing opportunities, overcoming challenges

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Where is growth expected? What products do customers want? What investments should be made to compete successfully? How are other banks responding to opportunities and challenges? These are just some of the questions banks have about emerging markets.

To better understand these issues, EY surveyed executives from 50 major institutions in rapid-growth markets for their perspectives. The conversations focused on the next wave of developing markets beyond the BRICs.

Our study of these 10 rapid-growth markets, or RGMs, (Chile, Colombia, Egypt, Indonesia, Malaysia, Mexico, Nigeria, South Africa, Turkey and Vietnam) includes two reports: an overview and a closer look at the 10 RGMs.

Bullish themes

More than 80% of bankers surveyed in RGMs believe bank performance will improve over the next year due to strong consumer demand. By comparison, only 37% of their European counterparts predicted similar success.

Forecasts for these markets are not uniform. The strongest growth (6-7% per year by 2015) is expected for Vietnam, Nigeria, Indonesia and Egypt; other countries will see 3-5% growth rates.

Retail growth

More than two-thirds of respondents anticipate retail customer demand in RGMs for deposit, savings and credit products to increase significantly during the next five years.

As customers in emerging growth markets are becoming more multi-banked, banks will need to take steps to improve loyalty and service among their existing customers so they can successfully cross-sell and increase revenues.

Capturing deposits from poorer and more rural customers also will be crucial to improving bank profitability. This will require significant investment in technology, infrastructure and human resources.

Wealth management services

With more billionaires now coming from emerging economies than European ones (see chart), the demand for wealth management services is a key trend for RGMs. In that regard, bankers from Asian RGMs expressed the most optimism about private banking and wealth management growth during the next year; Egypt and Colombia had a gloomier outlook.

The rise of the wealthy

Source: Forbes data, Ernst & Young analysis

Because the wealthiest investors are likely to favor established global brands, the mass-affluent segment presents the largest opportunity to local emerging market banks.

The industry may see partnerships develop between local and global banks that benefit both. Such arrangements would combine the distribution and market knowledge of local banks with the more substantial capital footprint of global ones.

Financing growth

With demand for corporate and commercial lending in RGMs expected to increase, local banks will need to expand their investment banking capabilities -- or risk losing business to global competitors. Banks looking to expand must add sophisticated treasury services, hedging products and advanced risk management capabilities, as well as the staff with the skills to deliver these services.

Many companies that seek capital market funding are too small to interest the bulge bracket investment banks. Local banking institutions play a leading role in financing these small- and medium-sized clients.

If local banks can adapt their products and services to match what the bulge bracket banks offer, while maintaining customer relationships and in-market expertise, they will be ideal partners when their customers expand into new markets.

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The rise of the wealthy

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Source: Forbes data, Ernst & Young analysis