Banks in emerging markets face tougher regulation, rising costs and intensifying competition

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  •  In Malaysia, banks concerned with loan pricing competition, increased operational costs and building capital

Kuala Lumpur, July 7, 2014Emerging markets have been the principal driver of global growth in the last five years and are expected to continue growing at twice the rate of developed markets. As a result, banks in emerging markets expect improved financial performance, despite facing challenges of tougher regulatory burdens, rising costs and intensifying competition, finds a new EY report, Banking in emerging markets: Investing for success.

The study, which surveyed more than 50 leading financial services institutions and over 9,000 retail banking customers in emerging markets, identifies three challenges for banks looking to emerging markets as a growth opportunity:

  • Tougher regulation: Regulators in the emerging markets are moving to catch up with, or in some cases get ahead of, regulators in developed markets. This has impacted growth opportunities for global and local banks in terms of cost of entry and increased regulatory burden respectively. For example, all the respondents in Indonesia expect the regulatory compliance burden to increase in the next 12 months – given that Indonesian banks must get used to working with its new regulator as micro-prudential regulation was transferred from Bank Indonesia to the Indonesia Financial Services Authority.
  • Increasing costs: The average operating expense for 50 leading emerging market banks has risen 81% in last four to five years from US$3.6b in 2009 to US$6.5b in 2013, driven by increased funding, labor and investment costs. IT spend will rise by 14% over the next four years with the most rapid growth expected to be felt in the emerging markets.
  • Intensifying competition: New entrants to the market, including foreign banks and non-banks, are intensifying levels of competition. Unsurprisingly, 67% of Malaysian respondents see banks in neighboring countries as a threat, while European banks are on the radar of 47% of Vietnam respondents; and Japanese banks represent a significant threat for all Indonesia respondents.

Jan Bellens, EY’s Global Banking & Capital Markets Emerging Markets Leader, says,

“Success in these emerging markets is not straightforward, but there is great potential for those banks that get it right. In order to be successful in the long term, banks must focus on designing the right business model and developing strong execution capabilities – learning and adapting from what banks have done well and not-so-well in both developed and other emerging countries.”

According to Chan Hooi Lam, Partner, Financial Services and Country Leader of Financial Accounting Advisory Services, EY, Malaysia, “Malaysia is categorized as an “established Rapid Growth Market (RGM)”, where capital markets continue to develop and businesses seek longer-term, more complex financing and risk management products. Competition on loan pricing is typically most acute in established RGMs. For instance, Malaysian banks reported average Net Interest Margin (NIM) of 2.5%, and expect price competition on loans to both retail and business sectors to be an industry-wide challenge in the next year.”

“Building capital is also a particular concern for Asian banks, with all Malaysian banks expecting it to be a challenge as they move towards meeting the global standards set out under Basel III,” he added

Nevertheless, Malaysia remains optimistic about growth prospects where most respondents expected the economy to improve. This is against a backdrop of evaporated optimism across established markets which see current account deficits and rapid credit growth. Apart from focusing on building their domestic presence, Malaysian banks are also considering expanding across ASEAN.

Hooi Lam says, “With the recent announcement by Prime Minister, YAB Datuk Seri Najib Tun Razak on further capital market liberalization measures which are set to take effect in 2017, this will further boost competition, increase product offerings in the market and drive regional integration in the sector, all of which looks to provide significant growth opportunities to both local and foreign banks.”

To overcome the challenges and leverage on opportunities successfully, banks must think beyond immediate fixes and plan to invest in the following three areas:  

  • Technology: EY estimates that bank credit to the private sector in the 11 markets studied will grow from around US$3.5t in 2013 to US$5.1t in 2018, triggering a need for significant investment in technology across emerging markets. Banks must invest in IT to provide new, low-cost ways to reach customers in markets with limited infrastructure, better assess credit risks, build enduring customer relationships and improve operations.
  • People: Despite the growing cost pressure, the war on talent in the emerging markets continues, with 44% of bankers expecting headcount to grow, especially in business lines that are experiencing especially high growth or involve more intensive levels of customer service, such as premium and private banking.
  • Partnerships: Banks can plug skills and capacity gaps through collaboration with companies in other industries such as telecoms and technology, as well as other financial institutions. This will be essential for banks looking to expand rapidly into new markets, products and services. 

According to Steven Lewis, Global Banking & Capital Markets Lead Analyst at EY,

“Domestic banks in these markets are already starting to strengthen risk management and improve capital and business efficiency, which will underpin profitable growth. However, if they want to keep pace with the growth of their customers, as businesses expand overseas and personal wealth in these markets increases, they will need to find ways to overcome skill and capability gaps or risk losing these customers to larger global players.” 


Notes to editors

Read the full report to understand how banks can seize the opportunities that emerging markets present and take a closer look at the trends outlined in the survey by visiting

About the EY Global Banking & Capital Markets Center

In today's globally competitive and highly regulated environment, managing risk effectively while satisfying an array of divergent stakeholders is a key goal of banks and securities firms. EY brings together worldwide teams of professionals to help you achieve your potential – teams with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately, it enables us to help you meet your goals and compete more effectively. It's how EY makes a difference.

About the markets surveyed

The report focuses on 11 rapid growth markets defined as being at either a frontier, established or transitional stage of maturity. The report defines the three stages of maturity as:

 Frontier: Per capita GDP below US$2,000, the point at which deposit and savings products appear. Nascent capital markets with depth under 50% of GDP. (Kenya, Nigeria, Vietnam)

Transitional: These markets lie between the other two groups. At least 30% of the population typically has bank accounts and the capital markets are further developed. (Colombia, Egypt, Indonesia)

Established: These markets have exceeded US$8,000 per capita GDP, the point at which credit products become established. Capital market depth of over 125% of GDP. (Chile, Malaysia, Mexico, Turkey, South Africa)

Each market presents its own unique challenges, but there are specific areas that international, regional and domestic banks can address now through strategic investments.

About EY

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