FINANCE

Banking in 2050

Wednesday 15 June 2011, 7:27AM
By PwC
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  • Value of emerging market bank assets: US$144 trillion by 2050 
  • China's banking market to overtake US by 2023 
  • India to become world's third largest banking market 
  • US$300 trillion in banking assets globally by 2050 
     

Banking markets of the world’s seven leading emerging economies (E7) are forecast to outgrow their G7 counterparts by as much as 50 per cent by 2050. 

Sustained and strong GDP growth (4 per cent or more), population increases, and currency appreciation are the expected drivers of domestic banking sector expansion across E7, according to PwC’s ‘Banking in 2050’ report. 

The E7 economies include Brazil, Russia, India, China, Mexico, Indonesia and Turkey. G7 comprises US, UK, Germany, France, Canada, Japan and Italy. 

PwC’s New Zealand Financial Services Partner, Sam Shuttleworth, believes the eventual shift in global financial and economic power to the developing world presents opportunities for New Zealand’s banks. 

"The growth of the E7 economies and their underlying banking sectors, in particular China and India, will mean good news for New Zealand Inc and our local banks.  As our trade partners grow so will our export market.” 

"With the forecast growth in the banking markets of the emerging economies, the establishment and growth of E7 banks in New Zealand cannot be ruled out. For the Australian parents of our New Zealand banks, this report also confirms the size of the opportunity and hence the potential returns from sensible investment in emerging banking markets.” 

“The eventual ascendancy of the E7’s banking markets over its G7 peers may not be a surprise, but the real revelation has to be the speed and the extent to which this is forecasted to occur,” says Mr Shuttleworth. 

This year’s report predicts the E7 will outgrow the G7 by 2036 – a decade earlier than PwC’s 2007 analysis.  This updated forecast reflects how the GFC impacted the G7 far more severely than for the E7. 

Mr Shuttleworth adds, “Obviously we all have to take such long-term forecasts with a very healthy dose of scepticism.   We know though that the GFC accelerated the shift towards emerging economies, and also that banking growth is a key consequence of economic development. This means the emerging banking markets will outperform the traditional markets for a very long time.”   

“These shifts will have far-reaching consequences. Some will welcome more balance between the international financial centres, others will see this contributing to further investment risk and uncertainty,” he says. 

Mega growth for the E7 

The report states the value of E7 banking assets will swell 16-fold to a staggering US$144.7 trillion by 2050. By this time the E7 will control nearly half of the world’s projected US$300 trillion banking market. 

In addition, the E7’s collective net interest income is projected to grow nearly nine-fold to US$4.4 trillion as these economies capture a far greater share of global banking profits.   

China and India future banking giants 

According to the report, China could overtake the US to become the world’s largest domestic banking provider by 2023.  The report forecasts the value of China’s domestic banking assets could exceed US$72 trillion, comprising more than a fifth (22.9 per cent) of the global total. 

India is predicted to overtake Japan to become the third largest banking market by 2035 should it continue to pursue growth friendly policies.  In practice this means investing in infrastructure, opening up markets to increased competition, reducing budget deficits and increasing rural education. The report says India’s domestic banking assets are forecast to grow 40 times to reach US$38.48 trillion by 2050. 

John Hawksworth, chief economist, PwC UK, says, “We are only about 15 years away from China overtaking the US to become the world’s biggest banking economy.   

“Three of the largest banks in the world by market capitalisation are Chinese and other leaders have heavy emerging market exposure, where they can capitalise on large, unbanked populations and booming demand for financial products. With populations of well over a billion each, access to markets like China and India is critical for growth.   
        
“There are a range of M&A options available to both emerging and developed market banks and we can expect to see a mix of consolidation, foreign banks entering emerging markets and banks from the E7 expanding overseas. The E7 doesn’t need the G7 for capital, decision making or consumers so the established economies will have to make a strong case to convince new economy policy makers of the benefits of inviting foreign competition in. 

“Socioeconomic issues such as ageing populations and increasing demand for natural resources will also have an impact on borrowing and lending requirements. The banks also need to factor the profound impact of regulation into their scenario planning,” he says.


This analysis is based on GDP projections, domestic banking projections and banking profitability projections and assumes governments follow broadly growth-friendly policies and that no catastrophic events throw growth permanently off-track. 

*A table ranking domestic banking assets by country in 2009 and projections for 2030 and 2050 can be found on page 19 of the report. 

Dates at which E7 economies overtake G7 in terms of the size of their domestic banking assets

Country pairs Overtaking year (2011 analysis) Overtaking year (2007 analysis)
E7 overtakes G7
2036
2046
China overtakes US
2023
2043
India overtakes Japan
2033
2041
Brazil overtakes Italy
2045
Beyond 2050
Russia overtakes Italy
2039
2047
Mexico overtakes in Italy
2048
2038
Turkey overtakes Canada
2045
Beyond 2050