Digitalization Saves Banks From Falling Rates Drag

Oct 14, 2020

Facing revenue headwinds, digital leaders can enjoy a higher ROE than slow adopters in the next five years, says a new Morgan Stanley and Oliver Wyman report

HONG KONG, October 14, 2020 – Minimal investment and poor execution discipline in digital transformation could lead to a four to five percent gap in return on equity (ROE) between digital leader banks and slow adopters in Asia by 2025, according to a new report by Morgan Stanley and Oliver Wyman. With the ongoing COVID-19 crisis putting the resilience to test, banks should act now to secure competitive success and shareholder returns.

Asian banking growth and profitability were strong in the years leading up to 2020. This success, however, may not be a good guide to the future. The joint report, titled Asia Banking 2025: Digitalization to Redefine the New Normal, expects the low interest rates will continue to put material pressure on bank returns even after the pandemic subsides. As a result, Asian banks’ ROE in 2025 is expected below 2019 levels, except for India, led by credit cost normalization. Falls are particularly meaningful for banks in Korea, Singapore, Hong Kong, and Thailand.

“Digitalization has emerged as one of the highest priority strategies for Asian banks looking to recover and return to growth,” said Dan Jones, co-author of the report and a Partner at Oliver Wyman. “Yet our research finds that the large driver of incremental returns from digitalization and potential cost savings may not be sufficient to hold up returns, especially in developed markets. In the face of expected revenue headwinds, not only will banks need to deliver on these digitalization gains, but they will also need to deliver further streamlining to meet market expectations.”

The report quantifies the impact on returns by three key pillars: Growth, Efficiency, and Resilience, among of which Efficiency has been potentially the most significant contributor as banks can enjoy bigger benefit from lower costs. Banks could add up to 0.7 percent to ROE from Efficiency digitalization gains, and banks in India, Indonesia, and China could see the most benefit, according to the analysis.

The digital leaders of tomorrow can deliver up to four to five percent higher ROEs than slow adopters, according to the report. “But this will require concerted efforts to scale and accelerate the transformation roadmap, upgrade digital capabilities, and capture emerging growth opportunities,” said Marc Entwistle, co-author of the report and a Principal at Oliver Wyman. “Meanwhile, slow adopters face a complex, multi-year digital transformation journey, risking an increasing gap in ROE compared to the digital leaders and a rapid deterioration in shareholder value.”