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Business news, 09.07.2007 16:01

Banks to Emerge From the Shadows

bank_door By Yekaterina Dranitsyna

Staff Writer

The banking sector in the emerging economies of China, India, Brazil, Russia, Indonesia, Mexico and Turkey will grow significantly faster than GDP, PricewaterhouseCoopers said in a report released Tuesday.

Total profits from domestic banking in the E7 could be around half that of the G7 (U.S., Japan, Germany, U.K., France, Italy and Canada) by 2025 and could exceed it before 2050.

“The banking world in 2050 will look radically different from the one we see today, with the E7 economies becoming at least as important as the G7. This reflects both the faster growth projected GDP in the E7 and the tendency of banking sectors to grow faster than GDP as economies develop,” said John Hawksworth, head of macroeconomics at PwC U.K.

Last year PwC predicted that by 2050 the seven emerging economies will have outstripped the current G7 by around 25 percent when comparing GDP using market exchange rates and around 75 percent when using purchasing power parity exchange rates.

In the new report PwC suggests that total domestic credit in China could overtake the UK and Germany by 2010, Japan by 2025 and the US before 2050.

India could emerge as the third largest domestic banking market in the world by 2040 and in the long run grow faster than China.

PwC also expects a rapid expansion of banking sectors in Russia, Brazil, Indonesia, Mexico and Turkey, driven by strong growth in retail banking.

“Before 2050, these countries all have the potential to develop banking sectors of comparable scale to major European economies such as France and Italy,” PwC said in the statement.

The development of banking will stimulate M&A activities. “Restructuring the E7 economies should create major opportunities for private equity firms. Leading E7 banks will also expand outwards and become major competitors in the global ‘war for talent,’ a trend that is already underway as Russian, Chinese and Indian banks attract staff with experience in G7 institutions,” PwC said.

In Russia, domestic credit accounted for $0.2 trillion in 2004. By 2050 it would reach $5 trillion, PwC said. However by that time Russia will fall behind all E7 economies with the exception of Turkey. For example, in China domestic credit is expected to reach $45 trillion by 2050, in India to reach $23 trillion.

In Russia the two largest state banks dominate the industry. Most of the banking sector is fragmented. The largest banks focus on major cities and then move into the regions. Among other recent trends according to PwC is a focus on the retail sector.

The Russian economy benefits from the buoyant energy sector, but needs in the long run to become more diversified, a prerequisite of which is a stronger banking sector, PwC said.

Igor Zhigunov, deputy chairman of City Mortgage Bank, forecast that Russian retail banking would double or triple over the next two years. In the long run, volumes could increase ten times over.

However he doubted the exact figures indicated in the PwC report. “The growth of profitability in the banking industry depends on too many factors including the social and economic environment, macroeconomic figures, legislation, the system of regulation, the level of integration of the nation’s banking industry in the world market and its correspondence to international standards,” Zhigunov said.

“Last year retail banking more than tripled in size. In the future growth is expected in all segments, especially in the issue of bank cards, project financing, consumer and mortgage loans and the investment activities of banks,” he said.

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