Digitization & Disruption: The Future of Banking

Malaysia has an unprecedented opportunity to digitalize its banking services with new lenders poised to enter the market. S&P Global Ratings doesn't expect an immediate shakeup to the competitive landscape; instead, incremental changes are likely to lead to a more dynamic, diversified industry.

But not all players will benefit equally. Of the eight local banking groups and a handful of foreign banks that dominate the market, the two largest appear best placed to fend off the new competition.

That's because Malayan Banking Bhd. (Maybank) and CIMB Group Holdings Bhd. already have established digital infrastructure, diversified earnings profiles, and large customer bases.

Even as signs of normalization from the coronavirus-caused economic downturn sprout across countries, the pandemic is pressuring global banking sectors as they balance declining asset quality & creditworthiness with increasing demand for lending.

Banks in Central and Eastern Europe (CEE) are progressing well in digitalizing their business models, but disruption risks are uneven between the countries and within the banking industry.

The key factors behind the digital push differ across markets between demanding customers, regulatory pressure, or the availability of new technology used to offer innovative product solutions.

For UniCredit SpA, central and Eastern Europe has been a key growth market in recent years. But countries in the region, particularly Hungary, Poland and the Czech Republic, have been in the grip of a particularly devastating third wave of COVID-19 infections so far in 2021, resulting in new lockdowns.

Industry observers say that while the situation is bleak, the economies of the CEE region should be relatively resilient in the face of lockdowns thanks to their low reliance on the services sector compared to other European countries. Because of this, UniCredit is unlikely to suffer a high level of defaults, even though it currently has a large number of loans under moratoriums.

Over the past year, the CEE region has accounted for almost as much of UniCredit's net interest income as its home market, Italy. In the fourth quarter of 2020, the CEE business reported €540 million of net interest income to Italy's €674 million. Before the pandemic hit, the CEE region had been showing considerable resilience to the economic slowdown that hit Western Europe.

Despite an opening up of China's wealth management industry, estimated to be worth at least U.S. $17 trillion, foreign managers continue to have a problem: entrenched local players with much wider distribution networks and loyal customers oftentimes lured by promises of unrealistically high returns.

The question of how best to tap into China's growing wealth has been brought to the fore again, after HSBC Holdings PLC and Citigroup Inc. recently unveiled plans to beef up their wealth management operations in the world's second-largest economy, as they seek stronger fee-income growth in Asia-Pacific to mitigate the slowdown in the U.S. and Europe.

Partnering with a Chinese bank, wealth manager or online fintech platform remains an attractive, perhaps realistic, strategy for foreign wealth managers, even though the Chinese government has allowed them to establish wholly owned onshore operations since April 2020 as part of the nation's financial-market opening, experts say.

HSBC Holdings PLC is looking to use extra capital for acquisitions to boost its wealth management capabilities, according to CEO Noel Quinn.

The U.K.-based bank's primary focus within its wealth and personal banking business is to grow the wealth part of the division, Quinn said on an April 27 earnings call, noting that the group is on the lookout for both organic and bolt-on inorganic opportunities to drive that growth. "We will look at opportunities as they emerge," said Quinn.

HSBC is particularly considering acquisitions that will boost its product or distribution capabilities in wealth management, insurance and private banking, and deals would largely be in Asia, where Quinn is looking to move the heart of the business in a bid to chase higher returns. Adjusted revenue at the group's wealth division reached $2.38 billion in the first quarter, up 65% from $1.45 billion in the same period a year ago. Meanwhile, adjusted revenue at HSBC's commercial banking arm fell 14% on a yearly basis to $3.33 billion, which Quinn attributed mainly to the impact of low interest rates on global liquidity and cash management.

The Office of the Comptroller of the Currency on April 23 conditionally approved Paxos Trust Co.'s application to form Paxos National Trust, a de novo national trust bank.

Paxos is the first cryptocurrency-focused company to receive approval to form a de novo national trust bank following a string of applications in the final months of 2020. Two other companies, Anchorage Trust Co. and Protego Trust Co., have already received approval to convert their state charters to national trust bank charters.

The greener investment strategies of Nordic banks' asset management units compared with their lending businesses underscores a sustainability gap that lenders will want to close to meet their climate targets and to manage reputational risk.

As investors, analysts, regulators and the public increasingly prioritize environmental, social and governance issues, major Nordic banks have signed up to the Principles for Responsible Banking and have committed to bringing their financing in line with the Paris Agreement on climate change, which among other things requires carbon dioxide emissions to reach "net zero" by 2050.