Taking the lead: Banks in emerging markets see improved performance

But hurdles still abound.

Emerging markets in Asia and other parts of the world have driven global growth over the last five years and will continue to be the drivers as long as challenges are faced head on, according to a report by Ernst & Young.

Indonesia is expecting increased regulatory compliance burden within the next 12 months as it continues to be threatened by intensifying competition from Japanese banks, while Vietnam and Malaysia are preparing for the entry of European banks and banks from neighbouring countries, respectively.

Aside from tougher regulation and intensifying competiton, banks in emerging markets also have to deal with increasing costs, due to increased funding, labor and investment costs. IT maintenance costs in the Asia Pacific region will increase to 21% by 2016, and will be exacerbated where political objectives push regulators to restrict charges on customers for using key banking infrastructure. From spending USD19.2 billion on new investment for IT in 2013, Asian banks will spend around USD21.2 billion in 2016, and maintenance will increase by around USD9 billion.

Here’s more from the report:

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.”

To overcome the challenges 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.