Retail banking is showing impressive growth and demand from emerging markets means there is vast potential for more.
Where are banks’ revenues and growth coming from and where are they heading? The tale of the tortoise and the hare is often used to describe the solid, steady profits from retail banking compared with the racier, more volatile returns from investment banking. Interestingly, at present the tortoise appears to be gaining speed.
Retail is not only surging ahead among the world’s biggest banks but it is also showing dramatic growth in emerging markets. And in a period of tightening overall margins, the retail sector can usually offer a little more fat and flexibility than corporate and other sectors.
In Brazil, Russia, India and China, for example, loans to individuals for consumer spending more than tripled from 2001 to 2005 from $145bn to $477bn, according to a recent Standard & Poor’s report. And given that total loans to households range from 4% to 14% of GDP in these countries, compared with more than 60% in Germany and 100% in the US, the potential for massive growth in emerging markets is quite incredible.
Expansion on cards
Where is this likely to happen? In Brazil and India, for example, only 30% of the population, at best, have bank accounts. And mortgages are only in their infancy, growing by 19% in China in the first three quarters of 2005 and likely to expand further as interest rates stabilise. Turkey and Russia have only just introduced new mortgage laws. As globalisation takes root, emerging economies will want to develop the range of financial services available elsewhere and retail will provide the prime source of growth.
Value in retail
Large banks also see value in retail. BNP Paribas achieved 29% growth in its emerging markets business in 2005 and as a policy maintains retail as a majority 55% of its revenues. Wells Fargo, the fourth largest US bank with a heavy focus on retail, earned $11.5bn – 95% of the pre-tax profits of third-ranked JPMorgan Chase in 2005 with just 40% of the assets.
With many more market drivers, retail is no longer a dull word but a prime engine of growth. The tortoise has moved up a gear.
