Navigating uncertain timesPaths to profitable growth for Asia’s banks

Banking

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Contents

The quest for growth ..................................................................................................................... 3

About the research .......................................................................................................................... 4

The Asian growth conundrum ........................................................................................................ 6

Facing uncertainty with a clear vision ........................................................................................... 10

Transforming vision into practice ................................................................................................... 12

Increasing certainty ......................................................................................................................... 18

Riding the tides of growth .............................................................................................................. 20

About the Authors .......................................................................................................................... 22

Appendix: Research methodology .................................................................................................. 23

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While the global economy remains volatile, one long-term trend is certain: economic power, capital inflows and trade activity continue to shift to Asia. Within Asia itself, the banking industry is being reshaped by powerful regional trends including increasing domestic consumption, higher intra-regional trade, rapid urbanization and the remarkably fast uptake of mobile technologies that are bringing financial services to millions of people.

That’s the good news. The bad news is that Asia’s relatively strong growth prospects vis-à-vis the rest of the global economy means the region is quickly becoming a hot bed of competition. Domestic banks are using their home-grown knowledge and relationships to fend off global banks, who are hoping to offset their poor performance elsewhere by aggressively targeting new revenue streams in Asia. As a result, while growth in Asia may in theory, appear easily attainable, it is far from a given for any bank.

The aim of this paper is to set out the various strategic options banks in Asia should assess when determining on which paths to growth will foster long term, sustainable revenue generation. The key challenge is expanding revenue while maintaining profitability. It is not about growth at any cost. A focus on profitable revenue growth is a key driver for increasing future value and thus enterprise value.

Whether a bank's vision is to expand their geographic footprint, bring customers to the centre of their business, or focus on non-capital intensive growth opportunities, banks in Asia need to be prepared to evaluate multiple growth paths in order to be able to respond with agility. Pursuing one single path to growth may not be enough. Our findings indicate banks need to prepare for future growth by pursuing a combination of innovation, expansion and mastery across the banking value chain.

The opportunities in Asia for banks that can achieve clarity of purpose are significant. With a clear vision, banks with growth expectations built into their share prices can maintain and further increase their value; whilst those banks whose valuations are largely based on current operations can earn a growth premium.

The quest for growth

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About the research

To assess the growth potential of Asian banks, Accenture conducted an extensive performance analysis of 78 banks across 12 countries representing three regional markets: Advanced Asia, Maturing Asia and Emerging Asia. Accenture categorizes the Asia Pacific banking industry into Advanced, Maturing and Emerging Asia, based on penetration of services and GDP per capita:

• Advanced Asia – Australia, Hong Kong, Japan and Singapore. These economies have the highest levels of affluence and penetration of banking services and GDP per capita of more than US$30,000 per year.

• Maturing Asia – Korea, Malaysia, Taiwan and Thailand. These countries have varying levels of affluence, moderate to high penetration of banking services, and a history of growth and industry development. GDP per capita is between US$10,000 and US$30,000 per year.

• Emerging Asia – China, India, Indonesia and the Philippines. These markets have the lowest average affluence levels and moderate penetration of banking services, but present the most significant growth opportunities. GDP per capita is about US$5,000 per year.

Most Advanced Asia geographies present limited opportunities for customer growth, increased product penetration, and some expect growth to be undermined by ongoing de-leveraging. However, the substantial growth of high net worth individuals (HNWIs) is increasing demand for financial and wealth management services throughout Advanced Asia.

Maturing and Emerging Asia present significant potential to develop sophisticated products for their emerging middle-class and wealthy populations. China, India and Indonesia have the greatest growth potential due to low banking branch penetration.

Stellar growth rates and an emerging middle class are also propelling demand for innovations in mobile banking, microfinance and insurance, particularly in South Asia and Southeast Asia. New ‘mobile wallet’ technology, for instance, may enable banks to offer services to the previously unbanked population in Emerging Asia - those people who lack access to formal financial institutions.

In Malaysia and Indonesia, banks are focusing on developing localized offerings, most notably Islamic banking. This trend is highlighted by the large number of new entrants, especially in takaful (Islamic insurance).

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Attractive marketsMost Asian economies are continuing to experience strong economic growth, which is having a major impact on asset growth and quality in the banking industries. Accenture expects increased direct investment into Asia, due to higher medium-term growth prospects, stronger policy fundamentals, sound fiscal positions and expanding local capital markets.

Confidence in Asia’s economic position will be strengthened by private consumption growth, supported by improved labor market conditions and continued policy efforts to raise household disposable income. Some 85 per cent of the growth in the global middle class – which is set to increase from 1.8 billion people in 2010 to 3.2 billion by 2020 and to 4.9 billion by 2030 – is expected to be in Asia.1 As Figure 1 illustrates, the financial services sector is expected to experience a surge in growth in emerging markets especially as households become wealthier and

build up assets, and large portions of some of the biggest and fastest growing markets become more accessible.2

Differing shareholder expectations Despite the attractiveness of Asian banking markets, an analysis of the valuations of banks from across Asia shows that investors hold widely varying views about the potential for the region’s banking institutions to generate future value. (Accenture defines future value as the difference between the banks’ market value and value of current operations. Value of current operations is defined as sum of the post tax residual income in perpetuity and total shareholders’ equity.)

For banks in Advanced Asia, such as Australia and select banks in Emerging and Maturing Asia, finding new sources of growth is critical if these banks are to sustain investor

confidence. They must demonstrate an ability to grow beyond the value delivered by their current operations and expected GDP growth. For banks in markets such as Singapore, Hong Kong and China, the challenge lies in strengthening investor confidence by demonstrating a commitment to either new growth sources or to creating significant efficiencies in their current operations.

For all banks, the ability to grow ahead of expected GDP growth will be the key to improving enterprise value. There is one imperative for these banks: revenue growth is a must, not a choice.

Revenue growth is critical for two reasons: First, it is one of the most important factors investors use in determining the future stock price of a company. Second, it is important for generating future cash flows. Appropriate levels of strategic investments need to be made to sustain future cash flow expansion.

The Asian growth conundrum

Bank

bra

nch

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Real GDP growth (%) 2011-15E

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Size: GDP 2010

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Peer average 5.1%

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High potential markets

Korea

Source: International Monetary Fund (IMF), World Economic Outlook (April 2011), Asia Banker 2010

33.3%

66.7%

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AustraliaJapan

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Source: Accenture Analysis1. Market Value: as of December 31, 20102. Country and market averages for future and current value are based on USD currency values.

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Figure 1: Attractiveness of Asian banking markets

Figure 2: Future value and current value composition of banks in Asia (by country and market)

Advanced Asia Maturing Asia Emerging Asia

Source: Accenture Analysis1. Performance at FY09, (Circle Equals Level of Net Revenue – USD)2. Regional peer weighted averages for both residual income spread and net revenue growth are in USD. Country averages are in local currency.

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Figure 3: Value generation industry positioning

Many banks across Asia are at the tipping point of quality revenue expansion, particularly in China – revenue innovation will be necessary to enhance shareholder value in the long term (Figure 3). On the other hand, some Maturing (i.e., South Korea) and Advanced Asia (i.e., Japan) banks are facing declining revenues, and will need to adopt multiple growth paths in parallel as they attempt to sustain investor confidence.

Sources of continued uncertaintyFor the majority of countries across Asia, revenue growth from retail banking – a major component of banks’ profits – is under pressure. Retail growth prospects remain uncertain due to market forces such as:

• The higher cost of funding for banks in Australia and Malaysia.

• Market saturation and fierce retail competition for banks in Japan, Singapore, South Korea and Taiwan.

• A volatile interest rate environment, including rising interest rates in Hong Kong and China.

Profits are also under pressure from increasing competition and low interest rates in the lending market. Further, banks in Advanced Asia and Maturing Asia still face the challenge of returning to pre-GFC return on equity (ROE) levels. Accenture research indicates Emerging Asia had the highest pre-tax ROE of 22.7 per cent, while Advanced and Maturing Asia have achieved 10.2 per cent and 9.6 per cent in 2009 respectively.

Operating margins across Asia in 2009 were 37.2 per cent, and much lower in Maturing Asia (26.6 per cent). Advanced Asia continued to suffer a high cost base, as indicated

by a cost-to-income ratio of 56.2 per cent. Emerging Asia enjoyed both the highest operating margins and lowest cost-to-income performance. Asset turnover ratio was 2.6 per cent on average in 2009 across the region, and lowest in Advanced Asia due to weak net interest margins. Advanced Asia also remained a leader in the highest leverage position compared to its counterparts in Maturing Asia that were least leveraged.

Another factor is inflation, which will continue to increase in the medium term across much of Emerging Asia and is projected to average 6 per cent in 2011. Particularly in India, inflation is projected to remain high at an average of 7 per cent in 2011.3 In China, price pressures have broadened to non-food products such as real estate. This trend is not universal to all countries, with Japan still experiencing deflation.

Source: Accenture Analysis1. Net revenue growth (%) and pre-tax ROE (%) growth rates are based on local currency values.2. Net revenue growth represents operating income growth.3. Current business performance at FY09

Advanced Asia Maturing Asia

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Banks in Japan, Korea and Taiwan also face substantial capital pressures. Most of Japan’s major banks raised common equity in 2010, but the banking industry still needs to increase average core capitalization to more satisfactory levels. To meet the Basel III standards, banks in Taiwan will need to raise their capital by more than US$6.25 billion.4

Finally, banks operating across the Asian region face a multitude of regulatory requirements, increasing the urgency for improved information transparency, risk visibility, compliance documentation and reporting.5

It is without doubt that banks in Asia are at an important junction (Figure 4). For example, while China, India and Indonesia are outperforming the market in terms of profitability (pre-tax ROE), the banks in these markets will need to accelerate their

revenue growth efforts. In contrast, banks in the Philippines and Japan where revenue growth is healthy will need to address profitability challenges. Most notably, a majority of banking markets in Asia (including Hong Kong, Thailand, Malaysia, Australia, Singapore, Taiwan and South Korea) need to conquer a dual challenge of improving both revenue and profitability. The time to identify the right paths to growth is now.

Figure 4: Current business performance of banks in Asia Pacific regional markets

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Facing uncertainty with a clear visionGiven that banks are starting from vastly different positions, what is critical in times of uncertainty is a clear vision for the future. Accenture believes to re-ignite revenue growth, banks in Asia need to decide which vision will be at the centre of their future. We have identified three distinct visions banks in Asia may wish to consider when analyzing their paths to growth:

1. Developing their geographic footprint Growth through geographic extension is critical for banks with a limited regional footprint and have the capacity to scale their capabilities in high growth markets at speed.

This requires banks to concentrate on new markets close to home and as well as on less familiar regional and international markets. It is characterized by:

• Targeting high growth markets.

• Pursuing acquisitions.

• Adopting standardised ‘Model Bank’ approaches.

• Simplifying offerings.

• Carefully managing cost and capital allocations.

2. Bringing customers to the centre of their business Deeper customer relationships will be a dominant focus of banks operating in high potential but saturated domestic markets. Increasingly, ‘intimacy’ in customer relationships will influence competitive dynamics. This type of growth requires banks to concentrate on strengthening share of wallet and increasing the value of each customer relationship.

This vision is particularly relevant to banks operating in Australia and Singapore. For example, banks in Australia can deepen customer relationships and improve customer loyalty and cross-selling as they strive

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to reduce their reliance on lending. Banks in Singapore can target the growing SME sector with more focus by tailoring service offerings and experience propositions.

Here, we can expect to see banks:

• Focusing on targeted customer segments.

• Leveraging customer knowledge and insight.

• Building customer cross-sell, and non-financial sales.

• Focusing on high-cost human relationship management in the short term.

• Focusing on offering, pricing and customer experience management in the long term.

3. Exploiting non-capital intensive growth opportunities A key component of future bank competitiveness, especially after Basel III, will be the ability to maximize the use of capital.

Maintaining capital or cost efficiencies and deriving additional revenue is critical for banking markets in Japan, South Korea, Taiwan and Thailand. These banks have the opportunity of increasing reliance on fee-based products from investment banking, wealth or funds management and private banking, and by encouraging savings behavior of customers in retail banking.

For many banks in Asia, this requires a greater focus on pursuing non-capital intensive growth and will be characterized by:

• Restricting dilutive lending activities.

• Chasing deposits and liquidity and changing savings behaviours.

• Focusing on non-lending growth by pursuing fee income and non-financial sales.

• Growing wealth management and transaction businesses.

The ability to realize these visions will depend on banks’ starting positions, and whether they can act with agility to capture growth opportunities in a timely manner.

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Paths to profitable growthGuided by a focused vision, Accenture expects banks in Asia will then need to consider a combination of growth paths across both their core and adjacent businesses as they pursue profitable revenue expansion.

Figure 5 presents a proprietary framework to assist banks identify growth options. The framework was developed based on two growth strategies: using their core business, and by moving along the industry value chain. In turn, we identify three catalysts to achieve growth: innovation, expansion and mastery.

These growth strategies and catalysts offer 6 potential growth paths. Each path needs to be evaluated in the context of current market conditions and capabilities each bank possesses today, and are summarised below:

1. Core business innovationInnovate via the development of products, services, channels and pricing in businesses where a stronghold exists to increase net interest income, fees and commissions, or assets under management.

2. Value chain innovationInnovate in adjacent businesses such as wealth management and insurance that are within the banking value chain to increase cross-sell.

3. Core business expansionGrow existing business in domestic markets or cross borders to increase market share in new customer segments.

4. Value chain expansionGrow non-core, adjacent businesses in domestic markets or cross borders to increase market share in new customer segments.

5. Core business masteryImprove operational efficiencies in the core business (i.e., cost containment), manage capital with greater diligence, and improve liquidity to support future pre-tax income growth in businesses where a stronghold exists.

6. Value chain masteryImprove operational efficiencies across adjacent businesses (i.e., through multi channel integration), and seek portfolio-wide opportunities (i.e., pricing optimization) to support future revenue growth in existing customer segments.

While growth paths 1, 2, 4 and 5 are based on the assumption banks need to grow revenues primarily by improving and rebalancing revenue sources (interest income, non-interest income), growth paths 3 and 6 emphasize the need for operational efficiencies to ensure improved operating profit (e.g., Japan, Taiwan, South Korea).

Transforming vision into practice

Source: Accenture Analysis

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Source: Accenture Analysis1. Base values for revenue growth potential and pre-tax income growth are in USD. The % impact shown here takes into account cumulative impact of all growth catalysts i.e. innovation, expansion and mastery on both revenue growth and pre-tax income.2. Base values considered for future revenue and pre-tax income growth estimation are as at 2009

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Figure 5: Banking industry growth path framework

Figure 6: Cumulative impact of growth initiatives on revenue and pre-tax income growth

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The impact of the target growth paths on potential revenue growth and uplift in pre-tax income is depicted in Figure 6. For example, banks in Malaysia that pursue growth paths 2 and 5 can target revenue growth of 16% while achieving an uplift in pre-tax income of 47%.

In most instances, it is expected banks will evaluate a combination of multiple paths in parallel to achieve a higher level of revenue expansion. The following examples illustrate 6 possible combinations of growth paths banks should consider.

1. Value chain innovation + core business innovation Banks in India have the most potential to grow revenue by adopting innovation strategies in their core business. Specifically, banks in India need to develop new business models to profitably serve the nation’s unbanked rural and low income population, and to derive greater income from non-interest products. This requires development of simple, low priced products and services that can be widely distributed using easily accessible channels in often remote rural areas. Some banks have already started to position themselves in this way.

2. Value chain expansion + core business innovation Banks in Indonesia need to accelerate their revenue growth efforts to return to pre-crisis levels of profitability. To achieve sustainable growth, these banks need to focus on strengthening their lending business. This can be accomplished by deriving additional sources of interest income from personal financing products such as auto finance and mortgages.

In addition, banks in Indonesia need to pursue expansion into adjacent businesses across the value chain in order to derive additional income from products and services. (e.g., credit cards and Islamic banking)

Axis BankAxis Bank in India has restructured its business into two key segments: mass-market customers and affluent (wealth and private banking) customers. Axis bank has also set up a microfinance institution to provide financial services to poor and vulnerable clients. It delivers services using a traditional bricks-and-mortar model as well as a branch-less information and communication technology-driven model, using business facilitators and correspondents to connect with customers in unbanked areas. The bank aims to extend its footprint in cities with populations between 10,000 and 50,000. In 2010, Axis Bank increased its agriculture advances by 40 per cent to Rs. 11,534 crores (approximately US$2.36 billion), constituting 12.5 per cent of its domestic advances.

The bank now also offers sophisticated investment and advisory services to clients who entrust the bank with assets of more than Rs. 5 crores (about US$1.02 million) and additional acquisition of savings bank accounts. The new acquisitions and changes translated into an incremental asset value of Rs. 8,060 crores (approximately US$1.65 billion) in 2010.

Case study

Source: Accenture Analysis of company website and investor presentations 1. Currency exchange rate as 1 USD = 48.7900 INR, dated September 28, 2011, Source (www.xe.com)

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3. Value chain expansion + core business expansionWith their strong, profitable performance in the domestic markets, banks in Hong Kong and Malaysia have the potential to emerge as regional consolidators. However, these banks face downside risks of a volatile interest rate environment and higher funding costs.

To boost interest income growth, banks in Hong Kong need to pursue expansion of their core business by shifting into new customer segments, new higher risk and return products such as credit cards and personal financing, and into new geographic markets. Banks in Hong Kong have the

potential to widen their value chains, thus increasing non-interest sources of income from insurance, stock brokerage, bond finance and wealth management services.

Banks in Malaysia are also likely to expand across the region and increase non-interest sources of income from insurance, stock brokerage, bond finance, wealth management products and sukuks (Islamic bonds).

4. Core business innovation + value chain expansion + core business masteryBanks in the Philippines have high profitability potential which has been dampened by high cost inefficiencies. The cost-income level being at a high of 63.5 per cent in 2009, has been adversely impacting profitability. For banks in China, low asset turnover at 2.8 percent in 2009 is a reflection of margin challenges.

Thus banks in the Philippines and China need to master operational efficiencies by controlling costs or enacting improvements in asset turnover by improving margins (core business mastery). For example, banks in China need to more

Hang Seng BankHang Seng Bank, Hong Kong’s largest listed company by market capitalization, is tapping into mainland China’s wealth management pool. The bank established a new customer referral mechanism and has launched two special investment funds to capture more business from affluent mainland Chinese individuals seeking wealth management services in Hong Kong. As a result, the bank increased wealth management income by 9 per cent and investment services income by 9.8 per cent in 2010, driven largely by an 85.1 per cent growth in fee revenue from its investment fund business.

CIMB BankCIMB Bank has launched a new investment product called ‘Flexi Select NID-I’. This 10-year investment product is based on the sharia concept of restricted mudharabah. It combines innovative investment features with the flexibility to switch investment strategies. The bank is optimistic about the performance of this product, as economic growth is expected to be driven by private-sector demand.

Source: Accenture Analysis of company website and investor presentations

Case study

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aggressive in extending loans while maintaining credit quality. The low contribution of non-interest income (below 20 per cent) implies room to grow revenue further from high net worth individuals (HNWIs).

The quest for improved margins may entice banks to also expand their value chains to increase non-interest income such as investment banking, brokerage, wealth management, international business, private banking and insurance.

In addition, business transformation must be a priority for banks in these countries so they can re-focus on profitably serving customer segments that are currently unbanked. Business transformation will allow these institutions to innovate and refine their core businesses by developing differentiated business models.

After achieving a balance between business growth and profitability at home, these banks can seek to expand internationally.

5. Core business innovation + value chain masteryBanks in Australia have been facing increasing pressure on non-interest income contribution mostly in the wealth management and institutional banking business segments. They have also been facing pressure due to high costs of funding, slowing demand in retail lending and ’competition for the customer’.

Banks in Singapore have been facing declining profitability and flatter interest margins due to market saturation, low interest rates and intensifying competition.

Thus, banks in Australia and Singapore need to innovate their core business by adopting customer-centric strategies focused on improving service delivery and customer relationships. These banks need to invest in analytics to generate customer insight and segmentation, as well as in centralized applications that provide

a 360-degree view of each customer, enabling them to swiftly meet customer expectations and report on customer satisfaction levels.

They also need to enhance their competitiveness by diversifying from traditional lending activity into non-interest income through improvement in customer loyalty and cross-sell efforts (value chain mastery). For Australia, it will be critical to increase the contribution of fee revenue to operating income in the value chain by increasing non-traditional sources of income such as fees from insurance and wealth management products.

Similar to their Australian counterparts, banks in Singapore are likely to pursue customer-centric strategies focused on innovation in their core business and mastery of the value chain, such as expanding into wealth management and private banking. Regional banks in Singapore can grow interest income back to 2007 levels by tailoring their service offerings for the growing SME sector.

DBS BankSingapore’s DBS Bank is focusing on boosting revenue by driving efficiencies in customer service. In 2010, DBS expanded its self-service banking network, adding more than 150 new ATMs and 60 cash acceptance machines (CAMs) and AXS Stations. This helped address retail banking customers’ complaints about long queues at bank branches and ATMs. DBS also piloted cash-only ATMs and launched mobile banking in April 2010. An agreement with public transit provider SMRT will enable DBS to place its ATMs and CAMs in all Circle Line train stations by 2011.

National Australia BankNational Australia Bank (NAB) has built a new operating model to improve its customers’ banking experience. In 2008, NAB launched UBank, a customer-driven brand anchored on its NextGen banking IT platform that allowed real-time online applications and verification, enabling customers to open accounts in just five minutes. It subsequently launched the USaver Reach savings account, targeting under-30s; a self-managed superannuation fund online deposit product; and a more efficient mortgage application and approval process.

As a result of these initiatives, NAB’s Personal Banking division increased net transaction account openings six-fold in 2010. In 2009, NAB also acquired the wealth

management firm Aviva for A$825 million, taking market leadership in life insurance with total funds under administration of more than A$50 billion.

CIMB Thai BankTo help maintain a stronger capital base, CIMB Thai Bank sold three subsidiaries and an associate to streamline its corporate structure and strengthen its core business.

To limit capital expenditure in its insurance business, the bank did not set up its own bancassurance units. Instead, it pursued a 10-year bancassurance deal with Thai Life Insurance to offer policies through its multi-channel banking services. As a result, the bank expects income from the bancassurance business to contribute 20 per cent to its fee income in 2011.

Case study

Source: Accenture Analysis of company website and investor presentations

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Source: Accenture Analysis1. Core Business Mastery initiatives (i.e., cost containment) are not shown here, as there is no impact on revenue growth but on profitability2. Base values considered for future revenue growth estimation, are in USD and are as at 2009

Advanced Asia Maturing Asia Emerging Asia

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Figure 7: Impact of dominant growth catalysts on revenue growth of Asian banking markets

6. Value chain mastery + core business masteryBanks in Japan, South Korea, Taiwan and Thailand need to activate revenue and cost levers in response to slowing growth. They must also try to satisfy new capital requirements. As a result, these banks are expected to exploit non-capital intensive growth opportunities.

Banks in Japan need to master their core business by decreasing costs and to master their value chains by increasing efficiencies in fee-based products. To improve their cross-selling efforts, banks need to focus on large Japanese corporations and HNWIs. This will help them increase the contribution of non-interest income across the value chain.

In South Korea, banks have the opportunity to increase non-interest income by marketing wealth

management and private banking services to HNWIs. In Taiwan, banks can improve profitability by prudently managing their operating costs.

Banks in both South Korea and Taiwan should also consider developing more off-balance-sheet investment products that are better aligned to customer needs. This will require transformational solutions, including process changes, technology renewal and organizational change.

Banks in Thailand need to master their core business by improving asset turnover and reducing costs, and master their value chains by increasing efficiencies in fee-based products across the value chain.

While banks in Asia are expected to consider multiple growth paths and combinations, we have identified the ‘dominant’ growth catalysts that are expected to have the most significant

revenue growth potential (Figure 7). For example, mastery will dominate the growth agenda of banks in Japan and Taiwan. In comparison, banks in Australia, and the majority of Emerging Asia will likely be focused on innovation across their core and adjacent businesses. Finally, banks in Hong Kong and Malaysia will most likely become the expansion leaders in the region.

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Adopting the growth paths discussed in the previous section will enable banks to increase certainty of revenue expansion beyond the projected market rate, particularly in Emerging and Advanced Asia (see Figure 8).

Taking these growth path scenarios into consideration, banks will be in a stronger position to improve their ROE levels within each of their markets. Most notably, banks in Emerging Asia have the highest potential to return ROE to pre-crisis levels.

Banks in the Philippines and China can do so through growth strategies such as core business innovation, value chain expansion and core business mastery. To recover ROE to pre-crisis levels, banks in Indonesia and India would need to adopt value chain innovation or expansion and core business innovation growth strategies (see Figure 9).

There is a strong correlation between revenue growth and an uplift in pre-tax ROE performance for Advanced and Maturing Asia. In Emerging Asia, profitability uplift is less dependent on revenue growth due to the relatively strong starting position (except in the Philippines where the cost base is very high). On the contrary, Indonesian banks will require aggressive revenue growth targets in order to secure strong profitability uplift in the future.

Increasing certainty

Source: Accenture Analysis, International Monetary Fund, World Economic Outlook (April 2011)1. Projected net revenue growth (%) is based on USD currency values and base values considered for future revenue growth estimation are as at FY09

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Source: Accenture Analysis1. Improved ROE is on account of estimated growth initiatives by business model. 2. Analysis on ROE is based on USD values.3. Base values considered for projected revenue growth and ROE estimation are as at 2009

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Figure 8: Projected revenue growth compared to projected GDP growth

Figure 9: Projected revenue growth compared to projected Return on Equity (ROE)

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Riding the tides of growthThe growth paths discussed in this paper indicate that future revenue expansion will depend on each bank's ability to innovate and expand the core business; to master or expand their value chain; by developing a more diverse portfolio of offerings and businesses. Mastery of the value chain means improving efficiencies across non-core businesses (i.e., outside of core retail banking) and expansion of the value chain means growing non-core business in the domestic market or across border to improve market share.

• Innovating in the core business will be critical for banks aiming to grow their market share within existing segments in high-growth markets (India, Indonesia and China). These banks will need to re-balance their product portfolios to increase proliferation of interest products in existing segments such as microfinance, while innovating or expanding across their value chain by strengthening key non-interest products. They will need to target initiatives at accelerating revenue growth, which can be achieved by standardizing product development to improve speed to market and focusing on new, simplified offerings for target mass-market segments. Banks pursuing this growth path will need to carefully manage costs

as they increase scale in their home markets, as well as pricing to prevent margin erosion.

• Innovating in the core business and mastering the value chain will be critical for banks in the Advanced Asia markets of Australia and Singapore that are operating in saturated and highly competitive domestic markets. These banks seek to grow organically by focusing on existing customer relationships across their entire business portfolio. They will place greater emphasis on developing an advice-based model, which is expected to increase costs in the short term. A sharp focus on target segments will be the key, underpinned by investments in marketing and sales capabilities, such

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as multi-channel integration and customer experience management; product bundling; and strategic alliances that will help build cross-sell and non-financial sales across the value chain. While they will direct their short-term focus at domestic markets, banks in Singapore and Australia need to prepare for regional expansion to secure long-term revenue growth.

• Expanding the core business will be a feasible growth path for banks with a strong starting position and ability to increase their domestic footprint, and across the region (Hong Kong and Malaysia). Expansion strategies could include entering new customer segments and offering new products in their domestic markets, as well as expanding into new markets across the region. They will need to target investments at developing a regional business portfolio to support organic growth in new segments and markets, and allocate the capital

necessary to pursue cross-border acquisitions. Having a strong regional platform underpinned by a business model that helps these banks to assimilate into new markets will be critical to enable future expansion.

• Banks with capital constraints or profitability challenges will need to master either their core business (the Philippines and Taiwan) or their value chain with greater focus (Japan, South Korea and Thailand). These banks need to rebalance their income structure while managing costs prudently, such as by growing deposits and strengthening liquidity. Other banks will expand their portfolios into other parts of the value chain, such as wealth management and transaction services as they seek to restrict dilutive lending activities and re-focus on non-lending growth from fee income and non-financial sales. They will need to direct their investments towards improving

service (to reduce cost to serve ratios and improve employee productivity) and optimizing pricing. Long-term operating performance will depend on these banks’ ability to rationalize their products and streamline their processes through technology investments.

By evaluating these growth paths, and improving change readiness, banks across Asia will be able to increase certainty of future growth and sustain investor confidence. They will also improve their ability to increase enterprise value by focusing investments on activities that foster revenue expansion well above expected market rates.

Asian banks need to be able to navigate the uncertain times they are facing today, while preparing to act with agility on their chosen path(s). Certainty therefore lies in acting today for the sake of a more promising future beyond tomorrow.

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About the Authors

Andrew PitcherAndrew Pitcher is a Senior Executive and Managing Director of Accenture’s Asia Pacific Banking Industry program. Andrew has over 19 years’ experience across all aspects of financial services, from consumer and commercial banking through to program delivery, technology line management and transformation. Andrew commenced his career as a line banker, and has functional experience in CRM, lending, loan servicing and collections.

Pascal GautheronPascal Gautheron is a Financial Services Senior Executive and leads Accenture’s Australian strategy practice. Throughout his career with Accenture, Pascal has worked with financial services clients across the Asia Pacific region. Pascal's work and research is focused on transforming client’s banking franchises, having led clients through strategy definition to execution of large scale change programs.

Dr. Vedrana SavicVedrana Savic is head of research at the Accenture Management Consulting Innovation Centre in Singapore. She leads key thought leadership initiatives focused on market and industry trends in Asia Pacific. Vedrana has extensive experience in strategy consulting in the financial services sector, including market assessment and positioning, strategy definition, business and operating model design, and value realization.

Manisha SahniManisha Sahni is a Manager in the Accenture Management Consulting Innovation Centre, where she has led several thought leadership initiatives primarily for the Banking industry. Her management consulting and industry experience spans across the areas of Business Strategy, Investment Management, and M&A.

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This paper employed a rigorous methodology involving value assessment and financial modeling to determine the impact of the six potential growth scenarios on revenue growth potential and likely impact on future value. Using key assumptions and financial targets for each market, we modified financial levers to reflect the recommended growth directions. Specifically:

• For banks facing a high cost base, such as those in Japan, South Korea, Taiwan and Thailand, we applied a reduction in operating costs to effect changes in the cost-to-income ratio.

• For banks facing margin pressures, such as those in Australia and Singapore, we adjusted revenues to reflect a new focus on business segments (such as fee-based products) that would drive margins higher.

• We increased the loans base supporting future growth for banks in Hong Kong and Malaysia, as these banks have pursued expansionary business models.

The model also took into account historical ROE levels. In markets such as the Philippines and China, where ROE levels are yet to recover to pre-global financial crisis levels, we increased revenue to achieve desirable ROEs.

For each growth scenario, we estimated specific revenue sources and cost drivers. For example:

• We considered value chain innovation in countries where the current contribution of non-interest income to overall operating income is more than 30 per cent.

• We considered value chain expansion for countries where the current contribution of non-interest income to total operating income is less than 30 per cent.

• We considered value chain mastery in countries where non-interest income forms a substantial part of the overall income, but where margins have been declining.

Appendix: Research methodology

About Accenture Management Consulting Innovation CenterThe Management Consulting Innovation Center brings Accenture’s thought leadership and ideas to life through highly interactive and facilitated workshop experience that help organizations explore solutions and develop a course of action for their most important business issues that will differentiate high performers from their peers. The Center also serves as a research hub where industry experts debate, develop and publish insights with specific relevance to the Asia Pacific region to help organizations innovate and outperform their competition. For more information, visit www.accenture.com/mcic.

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with approximately 236,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011. Its home page is www.accenture.com.

Copyright © 2011 AccentureAll rights reserved.

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1 H. Kharas, “The emerging middle class in developing countries,” OECD Working Paper No. 285, January 2010.

2 Vanessa Rossi, “The Southern surge: Prospects for insurance and financial services in India and South East Asia,” Chartered Insurance Institute, July 2010.

3 IMF, April 2011.

4 Source: China Economic News Services, September 2010.

5 Source: IDC Financial Insights, 2011.

Reference