Banks in the Asia-Pacific region must reinvent themselves and brace for possible consolidation amid weakening macroeconomic expansion, says a McKinsey report which also noted that less efficient lenders will disappear.
According to McKinsey's Asia-Pacific banking review, most banks in the region are set to face an existential choice - unlock the potential of scale to boost productivity, optimise capital and pursue strategic growth or prepare to be acquired.
"As storm clouds continue to darken over the region's banking industry, with weakening macroeconomic expansion, continued compression of banking margins and rising capital and risk costs, banks must reinvent themselves as digital-first, data-driven organisations and brace themselves for change or possible consolidation," it said.
The report added that less efficient banks will disappear.
The findings from the survey for India said that return on average equity dropped from 11.3 per cent in 2014 to -2.0 per cent in 2018.
"The impact of lower margins, higher risk cost and weaker cost efficiency has been tempered by lower taxes," it added.
The report further said that the top four largest players in India have less than 35 per cent market share, suggesting the potential for consolidation.
Jacob Dahl, Senior Partner, McKinsey & Company said, "to emerge successfully from a period of potential consolidation, banks must reinvent themselves or risk disappearing. The region's banks need urgently to redouble their efforts to boost productivity, optimise capital and pursue strategic growth. Bracing for consolidation will get banks in shape to forge ahead through the coming storm."
Banks can prepare for the battles ahead and strengthen their businesses by first attacking costs and seeking to achieve market-leading efficiency ratios, it said.
Those that develop best-in-class digital and analytics capabilities will also be in a position to capture significant new revenue in four fast-growing businesses: wealth management, retail lending, small and medium enterprise lending (SME) and transaction banking.
Bank lending to SMEs in Asia-Pacific is expected to grow 9.1 per cent annually to $23 trillion in 2025.
The report further added that capturing these opportunities requires banks to develop a customer-centric, data-driven culture combining top talent, agile technology, and excellence in partnerships, mergers, and acquisitions.