FILE PHOTO: Bank Indonesia's logo is seen at Bank Indonesia headquarters in Jakarta, Indonesia, September 2, 2020. REUTERS/Ajeng Dinar Ulfiana/File Photo
JAKARTA: Banks in Indonesia and other countries of the region stand to gain from a stronger macroeconomic outlook, while European lenders face much bleaker prospects, according to McKinsey & Company, but emerging markets as a whole are no longer what they used to be.
Profitability in the banking industry reached a 14-year high in 2022 with expected return on equity (ROE) of 12% and revenue growth propelled by a sharp increase in net margins as interest rates rose, the management-consulting firm says in its Global Banking Annual Review 2022.
The projected increase in profit comes after a decade of more or less flat ROE at around 8%.
However, that worldwide figure hides stark differences based on location, as more than half of the world’s banks are reportedly struggling with profitability.
“The divergence between banks – depending on their geography and specialisation – is growing, but all banks everywhere can focus now on improving their short-term resilience and embracing longer-term opportunities,” states the report published last Thursday.
Opportunities, the firm says, lie in the “theme of sustainable finance as banks finance not just clean energy but a much broader array of transformational low-carbon projects across industry sectors”.
Specifically, the report notes, “debt-focused investment supporting the transition to net-zero could offer banks revenue potential of at least US$100bil (RM439bil) annually by 2030”.
A number of developed economies signed a deal last month to support Indonesia’s energy transition with US$20bil (RM88bil) and a programme called the Just Energy Transition Partnership.
While details of the programme are still to be worked out, the funds will support a shift from a heavy reliance on coal to greater use of renewable sources in the country’s energy mix.
Half of the funds are supposed to be sourced from the private sector with the help of a group of global investment banks coordinated under the Glasgow Financial Alliance for Net Zero.
The strong overall profitability of the industry contrasts with low valuations of banks globally, which McKinsey & Company attribute to a “lack of future growth” prospects. Just like profitability, the growth prospects also differ strongly based on region.
While all banks face a long-term growth slowdown, the analysis suggests that “the divergence between banks will widen further. Banks in Asia-Pacific may gain from a stronger macroeconomic outlook, whereas European banks face bleaker prospects.”
A global recession, according to the report, would likely lead to “a further concentration of growth in Emerging Asia, China, Latin America and the United States, which we expect to account for about 80% of the estimated US$1.3 trillion (RM5.7 trillion) in global banking-revenue growth between 2021 and 2025.” One aspect of this growing divergence, according to McKinsey & Company, is the death in banking of the notion of emerging markets, as the “group of countries to which this term refers is no longer monolithic”.
“Some of the best-performing and high-growth banks are to be found in Asia -- as are some of the worst-performing and lowest-growth ones. Banking profitability in 2022 was both strong in the US and Canada, as well as in India, Indonesia and Mexico,” the firm notes.
The impact of inflation and interest rates is likely to accentuate the regional divergence, according to the report, with the European economy being “particularly exposed to rising energy prices and a possible gross domestic product contraction that could heighten systemic risk and flatten demand for fresh credit”. - The Jakarta Post/ANN
