Keith Waitt comments on the future for Eastern European banking
McKinsey has recently published an article about the future of banking in Eastern Europe (“What’s ahead for banking in Eastern Europe”), This article proved to be thought-provoking in unexpected ways, revealing some universal truths, and what I believe to be generic answers to global problems within the bank industry.
McKinsey points out that the region’s banks must do two things to take advantage of long term growth opportunities:
First, “they must acknowledge the lessons of the past, notably by tackling the problems of insufficient scale, inefficient operating models, and relatively weak risk and governance processes”
Second, “they must position themselves to confront a number of fresh challenges, including new regulations, higher funding and risk costs and changing customer behaviour”.
Sounds familiar? Where and when have we heard this before?
However, the interesting regional “performance paradox” arises on closer inspection of the operating models….and perhaps lack of cultural and regional commercial sensitivity? According to McKinsey, banking penetration in Eastern Europe (as measured by the ratio of lending volumes to GDP) has been below that of other emerging markets, such as Latin America or China, in several product categories. Along with low funding and risk costs, this gap created the conditions for a substantial increase in demand for banking services.
The banking operating model in the region, the article illustrates has surprisingly been one of low profitability. Most banks have pursued country-by-country entry strategies, in many cases creating a patchwork of subscale, fragmented operations. Governance focused mainly on country-level performance, allowing banks to extract only limited synergies from their portfolios. Are there not shortfalls in basic business skills here?
More optimistically, McKinsey states that the fundamentals are there for strong economic growth—rising consumption, trade, and investments. The growing concentration of consumption and wealth in a handful of cities and regions; the need for improved infrastructure; the rise of more affluent consumers; and other important trends will create an impressive economic tailwind to support the growth of banking revenues.
In order to take advantage of these growth opportunities, McKinsey is suggesting that “winning” banks must focus on four things:
- Build critical mass in select major markets to capture scale advantages
- Build regional, rather than local, governance and risk management models with standardized regional products, policies and products
- Identify and pursue target market opportunities, “to take advantage of selected product and customer segments that can serve as growth engines for the next decade.” According to McKinsey “Eastern Europe, with just 7 percent of the total population of emerging markets, already accounts for 41 percent of all middle-class households in such markets around the world.”
- Create and build innovative banking models that adapt to the “emerging market” nature of Eastern Europe, rather than copy banking models of Western Europe. Banks will need to have a lower operating cost base, with “greater centralization and the outsourcing of distribution and support”.
I would add the addition of strategic and commercial business skills to enhance the technical skills and to commercially interpret and leverage the banking models. In my view the opportunity is to develop strong local talent, and provide the strategic and entrepreneurial skills training to fully exploit the growth opportunities… in ALL emerging markets.
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