E7 Banking Markets to Overtake G7 by 2050

3 July 2007 — The banking sector will grow significantly faster than GDP in the ‘E7’ emerging economies of China, India, Brazil, Russia, Indonesia, Mexico and Turkey, according to new projections by PricewaterhouseCoopers. Total profits from domestic banking in the E7 could be around half those in the G7 (US, Japan, Germany, UK, France, Italy and Canada) by 2025 and larger than in the G7 before 2050.

In a previous report, ‘The World in 2050’, published in March 2006, PricewaterhouseCoopers economists predicted that by the year 2050, the ‘E7’ economies will have outstripped the current G7 by around 25% when comparing GDP using market exchange rates and around 75% when using purchasing power parity (PPP) exchange rates.

The new report by PricewaterhouseCoopers, ‘Banking in 2050: How big will the emerging markets get?’, examines the possible changes in the scale of the banking sector between now and 2050 and highlights the pace of change, while providing some measure of the size of the opportunity and challenge for banks. The projections are based on an analysis of developments in G7 and E7 banking markets since the 1950s, which highlights the tendency of the banking sector to grow faster than GDP as economies develop.

The new projections for the banking market, using projected market exchange rates, suggest that total domestic credit in China could overtake the UK and Germany by 2010, Japan by 2025 and the US before 2050. India could also rise from relatively low levels today to emerge as the third largest domestic banking market in the world by 2040 and, in the long run, could grow faster than China.

Brazil, Indonesia, Mexico, Russia and Turkey are also strong candidates for a rapid expansion of their banking sectors over time, driven in particular by strong growth in retail banking (mortgages, consumer credit) that is already becoming apparent today and has much further to go as economic development proceeds. These territories all have the potential to develop banking sectors of comparable scale to major European economies such as France and Italy before 2050.

The strategic implications of the rise of the E7 banking markets include strong growth in M&A activity both within the E7 countries (due to consolidation of often fragmented banking sectors at present) and across borders. Restructuring of the E7 economies should also create major opportunities for private equity firms. Leading E7 banks will also expand outwards and become major competitors in the global ‘war for talent’, a trend that is already underway with Russian, Chinese and Indian banks attracting staff with experience of G7 institutions. As the E7 banks leverage the knowledge of these staff, their competitiveness in both domestic and global markets will increase.

Notes to editor

1. The original ‘World in 2050’ report on the projected future size of the E7 economies is available for download from our website.
2. A summary of PricewaterhouseCoopers projections for total domestic credit in the E7 banking markets relative to the G7, and of recent trends in and key future drivers of the E7 banking markets is provided in the table below. Details of the projections and methodology are provided in the full report.

3. Key trends and prospects for E7 banking markets

   Country	Domestic credit in 2004 ($trillion)	Projected domestic credit in 2050 ($trn: at constant 2004 prices)	Recent trends and key market drivers
   China	2.8	45	Sale of major state banks with progress on reducing non-performing loans Profitability starting to rise from low base Large increase in foreign bank investment Rapid growth in retail banking from low base, with huge potential in mortgage and consumer credit markets as incomes rise
   India	0.4	23	Major financial sector reforms since 1991 Public sector banks still dominant but private/foreign banks gaining market share Entry barriers being eased gradually but still significant for foreign banks Middle class growing strongly in cities
   Brazil	0.3	8	More stable economy in recent years High profitability and automation in banking Foreign banks entering via acquisition Relatively underleveraged corporate sector
   Mexico	0.2	6	Economy has stabilised recently after financial and banking crises of 1990s Improved bank regulation and accounting standards, helped by significant entry of foreign banks Low share of banking sector in GDP gives scope for strong future growth if economic and political stability can be maintained
   Russia	0.2	5	Largest two state banks still dominant; most of the banking sector still fragmented Regulatory regime gradually progressing on banking reforms Heavy banks focus on major cities, but now going to regions Buoyant energy sector, but economy needs to become more diversified in long run, including stronger banking sector Recent focus on and growth in retail segment
   Turkey	0.2	4	Macroeconomic environment much improved since late 1990s (lower inflation) European banks increasing active in Turkey New Banking Law strengthened banking supervision/regulation Strong consumer lending growth potential
   Indonesia	0.1	7	Still a relatively low income country but with good long-term scope for growth if political situation remains relatively stable Crisis of late-1990s stimulated banking reform and restructuring Growing foreign investment in domestic commercial banks and shift from corporate to consumer lending since late 1990s
   Е7 total	4.2	98	High growth, with potential to mitigate high individual risks through portfolio approach
   G7 total	30	83	Moderate growth but lower risk

   Source: IMF data on domestic credit in 2004, PricewaterhouseCoopers projections for 2050 and commentary

4. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.