- The largest sector in the Asia investment universe is being disrupted and digitally re-imagined by a wave of new competition challenging legacy business models.
- This revolution is being driven by regulation and technology. We believe these drivers of change are secular and likely to produce lasting change.
- This change is yet to be reflected in benchmark composition and presents an opportunity for active investors.
- A new breed of winners marked by strong customer intelligence and lower overheads will capture potentially bigger profit pools and higher total shareholder returns.
- Despite the considerable advantages they enjoy, incumbents have most to lose from a failure to adapt business models. Investors will have to allocate capital wisely as financials face their own 'Big Bang' moment, akin to the FANGs.
- Consumers will have abundant choice, notably lower costs and an altogether more personalised experience – they will be the clear winners.
Banks reside at the core of the Asia investment universe. Unlike developed market financials which perform in line with monetary policy, Asia’s financial sector has been an apt proxy to rising consumption, shifting demographics and reform potential. This has resulted in a pre-eminent position among investible indices and now the sector is being digitally re-imagined by a wave of new competition.
Figure 1: Twin forces of regulation and technology splicing up the opportunity
Source: Investec Asset Management as at 31 August 2019.
Regulation and technology are both driving change in equal measure across Asian markets. A host of new digital banking licences have been awarded by regulators across Asia. This new generation of banks deliver services through internet-enabled, mobile-optimised channels. This has allowed nimble new entrants without physical branch infrastructure to disrupt the industry and its incumbents. Most of these new virtual banking licences have been given to the digital arms of existing banks and insurers as well as some of the biggest technology or telecom companies.
The scope for consumers to take up virtual banking is significant in Asia. Developing countries in Asia are home to vast numbers of under-banked consumers. Financial inclusion is an important part of the social agenda for many of these governments. Virtual banks are an enabler of inclusion for underbanked individuals while also plugging the credit funding gap faced by small and medium enterprises (SMEs).
At the same time, technology has transformed the delivery of financial services. The convergence of mobile, analytics and artificial intelligence is accelerating the pace of disruption. The competitive landscape is being reshaped by nimble Fintech disruptors – born in the Cloud – especially in China. These companies are armed with many smart people with good ideas and abundant venture capital funding, which enables them to disrupt incumbents and improve the industry. The biggest technology companies are even more disruptive by embedding financial services in the daily lives of their customers.
While banks finance themselves on debt and remain highly levered entities in a capital-intensive industry, the disruptors, in particular Big Tech, are highly cash generative and profitable enterprises with strong balance sheets. In light of this, where are the biggest threats and opportunities?
Over a long-term horizon, we expect the disruption in Asia’s financial services industry to lead to significant profit dispersion, with the winners successfully boosting their return-on-equity (ROEs) and the laggards falling further behind. What will define this new breed of winners?
In our view, the future of banking will be very different to the past given the rapidly evolving landscape. Inevitably, the rate of change will vary markedly by country in Asia’s diverse economies. Investors will have to astutely evaluate the profound impact of these changes over the next decade.
General risks: The value of investments, and any income generated from them, can fall as well as rise. Past performance is not a reliable indicator of future results.