E7 Banking Markets to overtake G7 by 2050

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.

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.

Jairaj Purandare, executive director, PricewaterhouseCoopers, said:

“Interestingly, this analysis suggests that India is likely to be the fastest growing of the E7 economies in the long run. The model also suggests that while China will continue to grow somewhat faster than India over the next 5-10 years but, after that, Chinese growth will be held back by its rapidly ageing population (due in large part to its one child policy) and diminishing returns to its investment-led strategy. In contrast, India and other emerging economies have much younger populations with faster-growing labour forces.”

The E7 banking markets will become ever more important in the global banking sector and institutions that do not develop strong positions in these markets will find it difficult to maintain the same growth rates of assets and profits as those that do. Continued high levels of deal activity in the E7 markets is expected, albeit with the normal short-to-medium-term cyclical variations over time. M&A will encompass consolidation activity ‘in-market’ as local banks acquire one another, foreign banks enter the E7 markets, and banks from the E7 expand internationally through acquisitions.

The banking world in 2050 will look radically different from the one we see today, with the E7 economies becoming at least as important as the G7. This reflects both faster projected GDP growth in the E7 and the systematic tendency of banking sectors to grow faster than GDP as economies develop. The E7 markets are relatively high risk, but our analysis suggests the potential to mitigate these risks through making long-term investments in a broad portfolio of emerging banking markets.

ENDS

Notes to editor
1. 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.
2. 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; rest of banking sector quite fragmented · Regulatory regime has been weak with only gradual progress on banking reforms · Heavy bank focus on major cities · Buoyant energy sector, but economy needs to become more diversified in long run, including stronger banking sector
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
E7 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

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