Banks in emerging markets are on the verge of overtaking their developed market peers in terms of revenue and have “vast” potential given the relatively low level of customer penetration, but margins are likely to narrow, according to a survey by McKinsey,

Banks in emerging markets are on the verge of overtaking their developed market peers in terms of revenue and have “vast” potential given the relatively low level of customer penetration, but margins are likely to narrow and firms must adapt, according to a survey by McKinsey, the global consultancy.

In a report from the firm’s banking practice, entitled Banking In Emerging markets: Pathways To Sustainable Growth, it notes that at present, bank loans and deposits account for 237 per cent of gross domestic product, less than half of the same amount in developed markets.

The convergence in revenue as a share of GDP is driven by the much larger margins enjoyed by emerging market banks, the McKinsey report said, arguing that it predicts the margin of revenue to customer volume at 2.9 per cent in emerging markets, compared to 1.1 per cent in developed markets.

An important pre-condition for further growth are developments in China and other markets and evolution towards mature banking in countries such as Nigeria, Philippines and Columbia, the report said.

“Over the past decade, near double-digit rates of annual revenue growth have been the norm in almost all developing nations, and we expect the rate of revenue growth in 2020 to average around 8 per cent a year across these regions,” the report’s authors said. Or, to put it another way, emerging market banking will grow total revenue share to 55 per cent by 2020.

On present trends, by 2025, almost 60 per cent of households earning more than $20,000 a year will live in the developing world; most of the world’s micro, small and medium enterprises are in emerging markets and most of them are under-served by banks, highlighting a big opportunity for the latter.

The report, however, struck a cautionary note about some of the threats financial organisations in emerging markets face.

“Alongside the opportunities, however, the emerging markets banking sector faces significant risks – notably a contraction in margins, which today are more than double those in the developed world. Experience suggests that these can come down fast, driven by increased competition and stricter regulation. Emerging market banks will thus need to focus heavily on containing cost and improving efficiency, where they still lag developed markets. They will also need to tackle an increasingly serious shortage of talent and skills,” it said.

Among suggestions for future strategy were that firms in emerging markets should “focus on leading the digital and mobile revolution in banking”; productivity must be transformed and firms must learn from other business sectors; data-driven capabilities will become increasingly important, talent management is a more vital differentiator and banks must handle their risk-weighted assets more efficiently.