www.pwc.co.uk/financialservices                             Banking in 2050How the financial crisishas affected the long t...
Contents1. Executive Summary                   32. Approach                            63. How large will the emerging   e...
1. Executive                                                              Summary                                         ...
Our long-term projections for the E7 andFigure 1: Projections of domestic banking assets in the E7 and G7                 ...
What questions does                           •	 	                                                 How will new regulatory...
2. Approach                              Overview                              In this section we present an overview of o...
We included the following 22 countries        We also combined these GDP projections        In our 2007 report we used ret...
3. How large will the                               emerging economies                               become?              ...
Figure 3: GDP projections for the G7 and the E7 to 2050                         120,000                         100,000GDP...
Table 2 Components of projected potential GDP growth (% pa average, 2010-50)Country                        Contribution   ...
There are several important points to note                     3. The emerging economies’ marketfrom these GDP projections...
4. Domestic banking                                                              assets – historic                        ...
• South Korea is an interesting exampleFigure 4: Ratio of domestic banking assets to GDP in                               ...
• From the limited data we have forFigure 6: Ratio of domestic banking assets to GDP in newly                             ...
5. Projections of                             banking assets and                             profits to 2050Projections of...
It’s worth noting that the changes inFigure 8: Projected ratio of domestic banking assets to GDP                          ...
Figure 10 shows the projected trends forTable 3: Comparison of previous results with updated results:                     ...
We present in declining size order theFigure 11: Share of total global banking assets                                     ...
Table 4 Global leader board of domestic banking assets in 2009, 2030 and 2050Country                        Domestic      ...
• Developed economies’ financialFigure 12: Average annual real growth rates of domestic banking          systems came unde...
In our model the level of the quantityFigure 13: Net interest margin by country (2008)                               of ba...
Banking in 2050 by PwC
Banking in 2050 by PwC
Banking in 2050 by PwC
Banking in 2050 by PwC
Banking in 2050 by PwC
Banking in 2050 by PwC
Banking in 2050 by PwC
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Banking in 2050 by PwC

  1. 1. www.pwc.co.uk/financialservices Banking in 2050How the financial crisishas affected the long termoutlook for the globalbanking industry.May 2011
  2. 2. Contents1. Executive Summary 32. Approach 63. How large will the emerging economies become? 84. Domestic banking assets – 12 historic trends5. Projections of banking assets and 15 profits to 20506. Conclusion and key questions 23Annex: Methodology and data 25
  3. 3. 1. Executive Summary The accelerating shift in industry. In this report we present updated projections on how large we economic power from the expect the banking industry to become developed to emerging in the world’s largest economies over economies is dramatically the next 40 years, building on our changing the banking 2007 report on this same topic that was produced prior to the onset of the industry across the world. financial crisis,1 and our updated GDP projections published earlier this year.2 Leaders of financial institutions need Our key findings are that: to take advantage of the growth opportunities this change is creating. • The emerging economies’ banking This report provides projections of the sectors are expected to outgrow those long-term trends of the banking sector in the developed economies by an based on the underlying macro-economic even greater margin than we projected trends, from now until 2050 for the before the financial crisis. world’s leading economies. • By 2050 the leading ‘E7’ emerging PwC* have prepared this report to help economies could have domestic organisations develop their long-term banking assets and profits that exceed strategy and plans. Our analysis quantifies those in the G7 by around 50%. the projected size and growth of the • China could overtake the US in terms banking sectors for different economies. of the size of their domestic banking We identify the projected timing of sectors by around 2023. the key transitions when the emerging economies become leading players. And • India has particularly strong long-term* “PwC” refers to the network of member firms of crucially, we demonstrate these changes growth potential and our projections PricewaterhouseCoopers International Limited (PwCIL), have accelerated since the period prior to suggest it could become the third or, as the context requires, individual member firms of the PwC network. the global financial crisis, placing greater largest domestic banking sector by1 “Banking in 2050: How big will the emerging markets demands on industry leaders to respond 2050 after China and the US, but get?”, June 2007, http://www.pwc.com/gx/en/ effectively to these opportunities. ahead of Japan, the UK and Germany. world-2050/banking-sector.jhtml Brazil could also rise strongly up2 “The World in 2050, The accelerating shift of global The recent global financial crisis shook the global banking league table economic power: challenges and opportunities”, the world economy and set in motion January 2011, http://www.pwc.com/gx/en/world-2050/ over this period. the-accelerating-shift-of-global-economic-power.jhtml significant changes to the banking Banking in 2050, May 2011 3
  4. 4. Our long-term projections for the E7 andFigure 1: Projections of domestic banking assets in the E7 and G7 G7 domestic banking assets are displayed in Figure 1. Over the projection period we expect the E7’s domestic banking assets 350,000 grow at a faster rate than those of the G7 resulting in the E7 overtaking the G7 around 2036.Domestic credit ($bn 2009 prices) 300,000 Table 1 presents the years in which 250,000 we project the emerging economies to overtake the developed economies. We 200,000 compare these projections with those 150,000 from our 2007 analysis, and broadly we find that the emerging economies 100,000 overtake the developed economies earlier than in our original projections. 50,000 This suggests that the financial crisis has brought about an acceleration in the shift 0 in economic power from the developed to 2009 2014 2019 2024 2029 2034 2039 2044 2049 the emerging economies. n G7 n E7 n WorldSource: PwC analysis, IMFTable 1: Dates at which E7 economies overtake G7 in terms of thesize of their domestic banking assets Overtaking year Overtaking yearCountry pairs (2011 analysis) (2007 analysis)E7 overtakes G7 2036 2046China overtakes US 2023 2043India overtakes Japan 2033 2041Brazil overtakes UK 2045 -Russia overtakes Italy 2039 2047Mexico overtakes Italy 2048 2038Turkey overtakes Canada 2045 -Source: PwC model projections (where no date is shown this indicates overtaking dates beyond 2050)4 Banking in 2050, May 2011
  5. 5. What questions does • How will new regulatory capital and other requirements impact thesethis analysis raise? growth trends globally and withinThe analysis in this report can help geographies where implementationbanks, other financial corporations and may be more or less restrictive? Howpolicy-makers to identify the key long- will the use of securitisations impactterm macroeconomic trends likely to these growth trends?affect banking over the next 40 years. • he pace of prospective growth in TThis should help to stimulate strategic global banking assets is likely todiscussions and identify key opportunities exceed the sector’s capital generationand threats relating to the emerging from retained earnings raising themarkets in particular. question: where will the capital toParticular questions your organisation support the growth in banking assetsmay want to consider are: come from?• Which economies have the greatest • o what extent will non-bank T future potential for growth and investors such as funds and insurance investment? What are the areas of companies be able to access the greatest competitive advantage for our lending markets across the world organisation? directly (as lenders) or indirectly (through securitisations)?• What growth strategies are open to our business to compete in this • ill the asset growth in Asian banks W shifting global landscape? create a new cadre of international Will competition become more banks that will come to dominate intense? Is greater consolidation the global markets and feature an effective strategy? How should prominently in banking M&A? What opportunities be valued given these threat could this pose to the current growth expectations? leading banks and could this lead to a defensively inspired phase of banking• hat types of banks will we see W consolidation? developing in the emerging economies (e.g. universal high street banks or more specialised or localised players) and how will they integrate with and shape the future evolution of the global financial system (e.g. as regards dominant currencies)? Banking in 2050, May 2011 5
  6. 6. 2. Approach Overview In this section we present an overview of our methodology. We follow broadly the same approach that we used in our 2007 analysis, as summarised in Figure 2. Starting from GDP projections (as reported in the latest update of our “World in 2050” report in January 20113), we then developed projections for the amount of domestic banking assets in each economy. We investigated banking profits by applying a country specific net interest margin to the domestic assets. The technical details of this approach are given in the Annex. Figure 2: Global banking projections model structure GDP GDP & GDP/Capita model assumptions projections from PwC model to 2050 Banking assets to GDP ratio Banking assets Regression trend analysis (charts) projections analysis Return on assets trend Banking profit Expert analysis projections judgement Note: all projections done by country then aggregated to global level Source: PwC model 3 “The World in 2050, the accelerating shift of global economic power: challenges and opportunities”, January 2011, http://www.pwc.com/gx/en/world-2050/the-accelerating-shift-of-global-economic-power.jhtml 4 Note that these five countries were not included in our 2007 ‘Banking in 2050’ report, but are included here as they have long-term potential and were included in the latest update of our ‘World in 2050’ GDP projections.6 Banking in 2050, May 2011 5 We concentrate on domestic lending only as this allows for the greatest consistency in data between countries.
  7. 7. We included the following 22 countries We also combined these GDP projections In our 2007 report we used return onin the analysis on the basis that, based on with UN population projections to assets (RoA) as our measure of bankingearlier model projections, we expect them determine GDP per capita trends. profitability. However, we decided not toto have the largest economies in the world From previous research, we know this use this measure in this updated analysisby 2050: per capita income measure is a useful because it has become much more volatile indicator of the state of development over the course of the financial crisisG7 countries: US, Japan, Germany, of each economy, which is a key driver and so less reliable as a starting pointUK, France, Italy, Canada of the size of an economy’s banking for a long-term profitability analysis.E7 countries: China, India, Brazil, sector as a share of GDP. NIM rates have been less volatile and areRussia, Mexico, Indonesia, Turkey more closely related to the domestic asset Domestic banking asset projections base used in this study as the measure ofOther developed economies: banking size in each country.Australia, Republic of Korea, Spain Our baseline projections were derived byNewly emerging economies: assuming an underlying upward trend in the domestic5 credit to GDP ratio in Key assumptions and uncertaintiesArgentina, Vietnam, Nigeria, SaudiArabia, South Africa4 line with historic trends for the countries Our analysis rests on the following broad concerned (using IMF data). We also assumptions: allow for gradual convergence to theGDP projections norm for countries with relatively high or 1. Governments follow broadly growth- friendly policies across the periodWe began by taking our updated low initial banking to GDP ratios relative for the projections (e.g. maintainlong-term GDP projections as the basis to their state of economic development. reasonable macroeconomic stability,for our projections for domestic credit. This convergence occurs at a relatively remain open to trade and investment,As explained further in the Annex, these slow rate of around 2-4.5% per annum, maintain a reasonable rule of law etc.)projections incorporate the effects of: depending on the country concerned (as explained further in the Annex). 2. There are no catastrophic events that• the expected growth of the working permanently throw growth off track age population (as projected by Having generated these projections for (e.g. nuclear war, major global climate the UN); the ratio of domestic credit to GDP, we disasters) – as opposed to temporary then obtained the absolute amount of• projected growth of human capital cyclical fluctuations that we ignore domestic credit by applying these ratios (proxied by education levels) and as we are focusing here on long-term to our GDP projections at market physical capital (driven by assumed potential growth. exchange rates. investment to GDP ratios after These assumptions are, of course, allowing for depreciation of the Banking profitability subject to many uncertainties over the existing capital stock); and projection period. Our results should• total factor productivity growth We investigated the projected profitability therefore be taken as indications of the (global technological progress and for the banking sector by determining potential future scale of domestic banking lower income countries catching up the profits from the net interest margin assets and profits conditional on these with richer ones by making use of (NIM) on domestic banking assets for assumptions, rather than being forecasts their technologies and resources). each economy. Our approach was to take to which spurious precision is attached. data from Fitch on the NIM in different The purpose of the analysis is to pointThe projections also allow for real countries, and to project forward these to broad strategic trends in the long runexchange rate increases over time in values under a convergence scenario not to make detailed predictions that arethe emerging economies linked to their where the NIM in each country tends to bound to be wrong to a greater or lesserstronger expected productivity growth a common value by 2030 (given by the degree given the uncertainties involved in(the so-called Balassa-Samuelson effect). global weighted average NIM in 2004-8). any such long-term exercise.This means that real GDP growth in Applying the projected NIM rates to theemerging economies is typically higher domestic assets in an economy gives awhen measured in US $ terms than in measure of income from lending activitydomestic currency (or PPP terms). and thus indicates the level of profits. Banking in 2050, May 2011 7
  8. 8. 3. How large will the emerging economies become? Our analysis for banking The global economic assets rests heavily on the power shift from the G7 trends in GDP and GDP to the E7 is speeding up per capita of the countries “World in 2050: The accelerating shift studied. In our research in global economic power: challenges “World in 2050”, we and opportunities” presents our GDP published our projections projections for the 20 largest economies of the GDP for the different in the world. We have used the results from this analysis to determine the size economies considered in of domestic credit in these economies. this report. In this section Therefore to understand the results for we highlight some of the key the banks, it is useful to first understand the main changes we expect to see in the findings from this research size of these economies. relevant to the results for Figure 3 shows the GDPs of the E7 and our banking projections. G7 in 2009 and our updated projections for 2050 (measured in constant 2009 US$ at market exchange rates). We see from the chart that in 2009, the GDP of the E7 is approximately one third the size of the G7, but by 2050 the E7 could grow to be more than 60% larger than the G7. Our analysis also suggests that the E7 could overtake the G7 in terms of GDP at market exchange rates in around 2032 (at PPPs this could occur by 2020, but this is less relevant for the present report).8 Banking in 2050, May 2011
  9. 9. Figure 3: GDP projections for the G7 and the E7 to 2050 120,000 100,000GDP ($ bn 2009 prices) 80,000 60,000 40,000 20,000 0 2009 2050 n G7 n E7Source: IMF for 2009, PwC model projections for 2050We expect China could overtake the US allowing also for potential real exchangeby around 2030 based on GDP measured rate increases. This makes it one of theby market exchanges rates (it could be most rapidly growing economies over thisbefore 2020 based on PPPs). However, time period. However, to sustain thesewe expect China’s rate of growth to slow high growth rates India must continuedown over time due to its rapidly ageing to pursue growth-friendly policies (e.g.population as a result of its single child invest in infrastructure, open up itspolicy and as its growth needs to become markets to increased competition, reduceincreasingly based on its own innovations budget deficits, increase rural educationrather than just replicating the levels particularly for women and reduceinnovations of the developed economies. bureaucracy).India’s rate of growth by contrast is Table 2 shows how the projected averageexpected to overtake that of China’s in the growth rate for GDP measured in constantlong run as it has more catch-up potential 2009 US $ at market exchange rates canand its working age population growth be broken down into three components:will be much stronger in the long-term. population growth, real GDP per capitaIndia’s share of global GDP in $ terms growth and a real exchange rate change.could therefore increase from only 2%in 2009 to around 13% in 2050 after Banking in 2050, May 2011 9
  10. 10. Table 2 Components of projected potential GDP growth (% pa average, 2010-50)Country Contribution Contribution Real GDP growth Changes in real Real GDP from population from real GDP in domestic market exchange growth in US growth (%) per capita currency rates (%) $ terms (%) growth (%) terms (%)* (A) (B) (C = A + B) (D) (E = C + D)Vietnam 0.7 6.1 6.8 1.9 8.7India 0.8 5.3 6.1 1.9 8.0Nigeria 1.5 5.0 6.5 1.3 7.8China 0.1 4.6 4.7 1.1 5.8Indonesia 0.6 4.1 4.7 1.1 5.8Turkey 0.6 3.4 4.0 1.0 5.0South Africa 0.3 3.6 3.9 1.1 5.0Saudi Arabia 1.4 2.7 4.1 0.9 5.0Argentina 0.6 3.0 3.6 1.2 4.8Mexico 0.5 3.2 3.7 1.1 4.8Brazil 0.6 3.3 3.9 0.5 4.4Russia -0.7 3.2 2.5 1.4 3.9Republic of Korea -0.3 2.6 2.3 0.9 3.2Australia 0.7 1.9 2.6 -0.2 2.4US 0.6 1.8 2.4 0.0 2.4UK 0.3 2.0 2.3 0.1 2.4Canada 0.6 1.7 2.3 -0.1 2.2Spain 0.1 1.8 1.9 0.1 2.0France 0.2 2.0 2.2 -0.5 1.7Italy -0.2 1.9 1.7 -0.2 1.5Germany -0.3 1.9 1.6 -0.3 1.3Japan -0.5 2.1 1.6 -0.5 1.1Source: PwC long-term GDP growth model projections (World in 2050 report, January 2011)10 Banking in 2050, May 2011
  11. 11. There are several important points to note 3. The emerging economies’ marketfrom these GDP projections: exchange rates are expected to appreciate over time in real terms1. There is a natural segmentation due to relative stronger productivity of the countries into two groups: growth (the so-called Balassa- emerging economies (E7 and the Samuelson effect). This provides a newly emerging economies) with high boost to growth in all of the emerging expected rates of growth (typically economies when measured in 4% or more per annum including real real US$ terms. Note that this real exchange rate appreciation) and the exchange rate appreciation could arise developed economies (G7) with much due to nominal appreciation and/or lower rates of growth (typically less higher inflation rates in the countries than 2.5% per annum including real concerned.6 exchange rate changes). South Korea is an intermediate case here between Of course, as noted in the previous the E7 and G7. We will see a similar section, the precise growth projections E7-G7 growth differential when we shown in Table 1 are subject to many consider the expected growth rates of uncertainties and should be taken as domestic banking assets in Figures 4 indicators of economic potential rather and 5 on P13. than precise forecasts. However, the broad messages discussed above on2. Projected changes in population have relative growth rates of emerging and an important effect on some countries’ developed economies seem likely to be relative growth rates. For instance, more robust. Russia, Japan and Republic of Korea are expected to experience population falls, depressing overall GDP growth. Nigeria, Saudi Arabia and India are all expected to experience strong population increases, thereby boosting overall GDP growth. Some advanced economies (e.g. US, Australia) are projected to have stronger population growth than some emerging economies (notably China due to its one child policy).6 To illustrate this effect consider the problem of valuing a house located in the Euro zone in US$. Suppose its initial value is €100,000, and the market exchange rate is 1€/$. Then the value of the house in dollars is $100,000. Over time the value of the house will change as measured in local currency, reflecting local market conditions, the economy etc. Measured in US$ however, there could also be a corresponding change in value due to changes in the real exchange rate. If the euro appreciates against the dollar in real terms, it will be worth relatively more in dollar terms. So in our example, suppose that after one year there is an increase in the value of the house of 5% in the local market, and an appreciation of the euro against the dollar resulting in an exchange rate of 0.95 €/$. The value of the house at the end of the year is therefore €105,000 or $110,526. Here we can see that there is a higher rate of growth in the dollar value of the house, arising from the appreciating exchange rate, in addition to the increase in value due to local market conditions. The situation for international comparisons of GDP is analogous to this. Banking in 2050, May 2011 11
  12. 12. 4. Domestic banking assets – historic trends In this section we review how domestic banking assets in the countries of our study have varied over time. This is useful as it offers insights of important differences between countries and how they are likely to evolve. Country trends run, and therefore we project this ratio to fall over the coming decades to one that is more in line with other Developed economies developed economies. Figure 4 shows historical trends in the • The US has a relatively low ratio of ratio of domestic banking assets to GDP banking assets to GDP based on the for the major developed economies. The IMF domestic credit definition used general trend is that of a gradual upward here in comparison with most other trend in the ratio over time from around developed economies. This is likely 50-100% of GDP in 1986 to around to be due to the fact that in the US a 100-230% of GDP in 2009. However, much greater proportion of financing there are considerable variations in these takes place through securities markets trends across countries. We can note in rather than through bank lending.8 particular that: So whilst there are high levels of • The banking assets to GDP ratio leverage in the US economy as a for the UK and Spain has increased whole, a large proportion of this particularly strongly over the past 7 debt will be held by non-bank7 For the UK, we looked at this issue of excessive public and private sector debt levels in detail in an article years, resulting in ratios of over 200% organisations, and therefore do not in our November 2010 UK Economic Outlook report, of GDP. This is the result of property feature in this analysis based on the http://www.pwcwebcast.co.uk/ukeo_nov2010_debt.pdf booms in these countries as well as the IMF definitions used for this study.8 The average value of outstanding US securitised debt in 2009 has been variously estimated at between $3.6 role of leveraged private equity deals trillion and $5 trillion, or around 25-35% of US GDP. and general expansion of the financial However, whether it is appropriate to consider this as part of the assets of the banking sector, and whether sector’s role in these highly leveraged there may be double counting if we just add this into economies. We consider it most likely our measure of domestic credit, is less clear. For the purposes of this study, therefore, we note this point that this high level of credit relative but do not try to add in securitisation assets for the to GDP is unsustainable7 in the long US or other countries.12 Banking in 2050, May 2011
  13. 13. • South Korea is an interesting exampleFigure 4: Ratio of domestic banking assets to GDP in of a country that has changed fromdeveloped economies being an emerging economy into a developed economy over the last 30-40 years. Between 1988 and 2000 250.00 Republic of Korea had the lowest ratio of banking assets to GDP of the Domestic banking assets as % of GDP developed economies considered in 200.00 this study, but this ratio has since risen to a level more in line with the other developed economies. This mirrors 150.00 the broad trends we expect in the future from other emerging economies that are currently less far along the 100.00 development track than Republic of Korea (as discussed in Section 5 50.00 of this report). E7 Economies 0.00 1986 1991 1996 2001 2006 In Figure 5 we show the trend in the ratio of domestic banking assets to GDP for n Australia n Canada n France n Germany n Italy the E7 countries. We can note from this n Japan n Republic of Korea n UK n USA n Spain chart that:Source: IMF • China has by far the highest ratio of the E7 economies. In the past this has been due primarily to high levels of lending to state enterprises, althoughFigure 5: Ratio of domestic banking assets to GDP in the more recently property-relatedE7 economies lending has also grown rapidly in China and state enterprise lending 180.00 has declined in relative importance as the Chinese economy becomesDomestic banking assets as % of GDP 160.00 increasingly driven by private sector 140.00 companies. 120.00 • Some of the other countries display the effects of past financial and 100.00 economic crises. For instance, Brazil 80.00 has two sharp peaks in its ratio corresponding to its financial crisis 60.00 and hyperinflations between 1986 and 40.00 1994. More recently, however, its economy has been much more 20.00 stable and its longer term prospects 0.00 appear strong. 1986 1991 1996 2001 2006 n Brazil n China n India n Indonesia n Mexico n Russia n TurkeySource: IMF Banking in 2050, May 2011 13
  14. 14. • From the limited data we have forFigure 6: Ratio of domestic banking assets to GDP in newly Nigeria, we see a fair degree ofemerging economies volatility that could originate from a combination of political uncertainty and its dependence on oil revenues. 140.00 In absolute terms, Nigerian banking assets remain low relative to GDP Domestic banking assets as % of GDP 120.00 but have long-term potential if the government can follow broadly 100.00 growth-friendly policies and diversify its economy away from oil in the long 80.00 run. Banking sector development will be an important element in 60.00 this process for Nigeria and other emerging economies that have 40.00 traditionally been heavily dependent on revenues from natural resources. 20.00 0.00 Key changes due to the 1986 1991 1996 2001 2006 financial crisis n Argentina n Saudi Arabia n South Africa n Nigeria n Vietnam We can see varied trends in how economies’ ratios of domestic bankingSource: IMF ( no available 1994 data for Vietnam) assets to GDP have fared over the financial crisis period since 2007. In most developed economies this ratio kept on increasing, probably reflecting• Indonesia and Mexico have both Newly emerging economies a combination of a decrease/slowdown displayed sustained declining banking in GDP and increased lending to Figure 6 shows historic trends in banking asset to GDP ratios from 1999 and governments to finance their fiscal asset to GDP ratios in the newly emerging 1997 respectively, with Mexico interventions and growing budget economies. Our analysis of these stabilising around the middle of the deficits. For the E7 and newly emerging countries is limited by the availability of 2000s. This is most likely an after economies the ratios also increased, but data, but we can identify some effect of the Peso crisis (Mexico) and this largely reflected continued healthy broad trends: the Asian crisis (Indonesia), reflecting private sector growth after relatively a long recovery and rebalancing • Vietnam has shown a strongly short cyclical downturns due to the crisis. of their economies. This result is increasing ratio since 1998. As in In addition, some countries such as China important when we come to consider the case of China, this is most likely embarked on significant fiscal stimulus how developed economies will recover due to the large amount of lending programmes and encouraged higher from the financial crisis, particularly to state owned enterprises in earlier bank lending to prevent recessions for those that are highly leveraged periods combined with strong growth from taking hold. (e.g. UK, Spain). History suggests in property-related lending in more that it takes a long time for banking recent years. systems to recover fully from such • Argentina has seen a declining ratio major crises. of banking assets to GDP during its gradual and painful recovery from its financial crisis in the early 2000s.14 Banking in 2050, May 2011
  15. 15. 5. Projections of banking assets and profits to 2050Projections of domestic banking assetsFigure 7 shows the key result of this report. It shows the projected trend level ofdomestic credit in the G7, E7 and the World over the period to 2050. We project E7banking assets to grow significantly faster than those in the G7, and to overtake theG7 around 2036 (compared to around 2044 in our 2007 report on this topic). Thefinancial crisis therefore does appear to have accelerated this global shift of economicand financial power to the emerging economies. By 2050 the E7’s banking assets areprojected to be approximately 50% greater than those in the G7.Figure 7: Projections of domestic banking assets in the E7 and G7 350,000 300,000Domestic credit ($bn 2009 prices) 250,000 200,000 150,000 100,000 50,000 0 2009 2014 2019 2024 2029 2034 2039 2044 2049 n G7 n E7 n WorldSource: PwC analysis, IMF Banking in 2050, May 2011 15
  16. 16. It’s worth noting that the changes inFigure 8: Projected ratio of domestic banking assets to GDP relative E7/G7 banking assets are not exactly the same as the relative change projected in E7/G7 GDP. The reason 160 for this in our model is that the ratio of domestic banking assets to GDP alsoDomestic banking assets as % of GDP 140 evolves over time in different ways for the 120 E7 and G7, as illustrated in Figure 8. The average ratio in the G7 remains relatively 100 stable over the projection period. In the emerging economies the ratio rises fairly 80 quickly initially, but then converges more slowly on the world average towards the 60 end of the projection period. This is the 40 result of these economies maturing into developed economies with slower 20 trend growth rates by the end of the projection period. 0 2009 2014 2019 2024 2029 2034 2039 2044 2049 We also looked at projected changes in levels of domestic banking assets at a n G7 average n E7 average n World average country level. In Figure 9 we plot the changes in domestic assets over theSource: PwC analysis using IMF base year data for 2009 projection period for the US, China, India and Japan. The key results here are that China could overtake the US in 2023, and India could overtake Japan in 2033. In our previous analysis published in JuneFigure 9: Domestic banking assets for the US, China, India and Japan 2007, China was projected to overtake the US in 2043, and India to overtake Japan in 2041. Although the exact 80,000 transition dates are open to considerable 70,000 uncertainty, it seems likely that China willDomestic credit ($bn 2009 prices) have the largest domestic banking assets 60,000 in the world at some point within the next 20-30 years and that India will move 50,000 clearly into third place by 2050. 40,000 30,000 20,000 10,000 0 2009 2014 2019 2024 2029 2034 2039 2044 2049 n US n China n India n JapanSource: PwC analysis using IMF base year data for 200916 Banking in 2050, May 2011
  17. 17. Figure 10 shows the projected trends forTable 3: Comparison of previous results with updated results: banking assets in Japan, Germany, UK,overtaking years for E7 vs G7 economies Brazil and Russia. The key point here is that Brazil’s domestic banking assets Overtaking year Overtaking year are expected to grow relatively fast overCountry pairs (2011 analysis) (2007 analysis) the projection period, resulting in it overtaking both Germany and the UKE7 overtakes G7 2036 2046 by around 2045. Russia is projected toChina overtakes US 2023 2043 have strong growth, but not fast enough to overtake the UK, Germany or JapanIndia overtakes Japan 2033 2041 within this period.Brazil overtakes UK 2045 - In Table 3 we summarise some of theRussia overtakes Italy 2039 2047 key overtaking dates mentioned above, and compare them with the results fromMexico overtakes Italy 2048 2038 our 2007 projections. The main pointTurkey overtakes Canada 2045 - to note is that the analysis suggests that emerging economies will overtake theSource: PwC model projections (where no date is shown this indicates overtaking dates beyond 2050) developed economies earlier than we had anticipated before the financial crisis. The exception to this trend is transition for Mexico and Italy; we project that it is going to take longer for this to takeFigure 10: Domestic banking assets for Japan, UK, Germany, Brazil place than our 2007 projection hadand Russia suggested. We expect that this is due to Mexico’s domestic banking assets not 14,000 having grown as fast as other developing countries since our last report. 12,000Domestic credit ($bn 2009 prices) Projected changes in the shares of the world’s domestic banking assets are 10,000 shown in Figure 11. Our analysis suggests 8,000 that China and India could have a combined share of around 35% of global 6,000 banking assets by 2050. Other somewhat smaller emerging economies such as 4,000 Brazil and Russia will also see their shares rise significantly. The US, Japan and 2,000 Western Europe are all projected to see large falls in their share of global banking 0 assets in the coming decades. 2009 2014 2019 2024 2029 2034 2039 2044 2049 n Japan n UK n Germany n Brazil n RussiaSource: PwC analysis using IMF base year data for 2009 Banking in 2050, May 2011 17
  18. 18. We present in declining size order theFigure 11: Share of total global banking assets current and projected future values in 2030 and 2050 of domestic banking assets for each of the countries we Nigeria 1.1% analysed in Table 4. We see that in 0.1% 1.4% 2050 China is projected to have clearly Vietnam 0.2% the highest banking assets, with India 0.9% S. Africa 0.4% and Brazil moving up to acquire top 5 Argentina 0.7% 0.1% positions from the UK and Germany. S. Arabia 1.0% Mexico and Indonesia make large moves 0.4% 1.7% up the rankings over time, while Australia Turkey 0.5% and Canada fall back. The newly 1.6% Indonesia 0.3% emerging economies tend to occupy the Mexico 0.4% 1.9% lower rankings but with relatively fast 1.3% growth rates over time, particularly forRepublic of Korea 1.4% 1.2% Vietnam and Nigeria (although these Australia 1.9% are heavily dependent on continuing to 1.5% Canada 2.4% pursue broadly growth-friendly policies Spain 1.6% 4.8% as discussed in Section 3). 1.8% Italy 4.8% France 2.5% 5.0% What factors are Germany 2.7% 6.5% responsible for the 1.1% UK 3.4% 7.3% speeding up of change? Brazil 1.5% The main reason why the shift of 2.2% Russia 0.6% global banking power to the emerging 3.8% Japan 11.0% economies is now projected to be faster India 12.2% than in our 2007 report is due to the 1.4% 22.9% short and long-term effects of the global China 8.8% financial crisis. 14.8% US 21.7% • In the short-term, most developed 0.0 5.0 10.0 15.0 20.0 25.0 economies experienced a significant economic slowdown or recession in n 2050 share n 2009 share 2008-9, reducing significantly the growth of domestic banking assets.Source: IMF data for 2009, PwC model projections for 2050 • Emerging economies by contrast tended to maintain relatively high growth rates, although some temporary economic slowdown was experienced in certain cases. In 2010, however, emerging economies grew strongly in general, while the recovery in Europe in particular remained relatively weak.18 Banking in 2050, May 2011
  19. 19. Table 4 Global leader board of domestic banking assets in 2009, 2030 and 2050Country Domestic Country Domestic assets Country Domesticrankings assets 2009 rankings 2030 (US$ bn, rankings assets 2050in 2009 (US$ bn, in 2030 constant in 2050 (US$ bn, constant 2009 prices) constant 2009 prices) 2009 prices)1. US 14,772 1. China 31,018 1. China 72,2282. Japan 7,486 2. US 26,841 2. US 46,5443. China 6,006 3. Japan 9,774 3. India 38,4844. UK 4,989 4. India 7,848 4. Japan 11,9595. Germany 4,416 5. UK 6,082 5. Brazil 10,6246. France 3,401 6. Germany 6,047 6. UK 9,1127. Spain 3,271 7. France 5,136 7. Germany 8,4778. Italy 2,993 8. Italy 4,053 8. France 7,9099. Canada 1,618 9. Brazil 3,799 9. Russia 6,81110. Australia 1,324 10. Spain 3,756 10. Mexico 5,96511. Brazil 1,019 11. Russia 2,922 11. Italy 5,60112. India 945 12. Canada 2,810 12. Turkey 5,50213. Republic of Korea 935 13. Republic of Korea 2,515 13. Indonesia 5,12914. Russia 413 14. Australia 2,286 14. Spain 4,99215. Turkey 352 15. Mexico 1,804 15. Canada 4,76116. South Africa 250 16. Turkey 1,738 16. Vietnam 4,42617. Saudi Arabia 244 17. Indonesia 1,394 17. Republic of Korea 4,19118. Mexico 241 18. Saudi Arabia 1,088 18. Australia 3,81219. Indonesia 187 19. Vietnam 933 19. Nigeria 3,51420. Vietnam 113 20. South Africa 843 20. Saudi Arabia 3,30321. Argentina 86 21. Argentina 637 21. South Africa 2,72222. Nigeria 47 22. Nigeria 524 22. Argentina 2,205Source: IMF for 2009, PwC model projections for 2030 and 2050 (note the rankings relate only to these 22 countries; we would not rule out other developed countriesfeaturing in the rankings for some time periods although these are likely to lose ground to the emerging economies over time). Banking in 2050, May 2011 19
  20. 20. • Developed economies’ financialFigure 12: Average annual real growth rates of domestic banking systems came under severe stressassets 2010-2050 (% pa in US $ terms) due to the crisis. The value of assets declined sharply and some financial institutions faced potential bankruptcy and had to be bailed out Spain by governments. Emerging economies by contrast were relatively shielded Japan from these effects, leaving their UK banking systems in much better shape Italy to fund long-term economic growth. Germany • The financial crisis therefore led to a general downward revision for the France estimates of sustainable trend growth Australia across many developed economies, Canada but little change in long-term trend growth projections for the major US emerging economies (or evenRepublic of Korea upgrades due to the crisis revealing their greater resilience relative to Brazil earlier crises that often tended to S. Africa focus on emerging economies such as Latin America in the 1980s and early China 1990s or Asia in the late 1990s). S. Arabia Turkey Banking growth Russia differentials between Mexico emerging and Argentina developed economies Indonesia The strong growth in emerging Vietnam economies’ domestic banking assets can India be seen in Figure 12 where we plot the compound annual growth rate of the Nigeria different economies domestic banking assets. Here we note that the emerging 0 2 4 6 8 10 12 and developed economies can be divided into two groups: the developedSource: PwC model projections economies appear to have low growth (e.g. from US upwards in the chart), whereas emerging economies tend to have high growth rates, with Republic of Korea as an intermediate case as with our long-term GDP projections.20 Banking in 2050, May 2011
  21. 21. In our model the level of the quantityFigure 13: Net interest margin by country (2008) of banking assets is determined by both the overall size of the economy and the rate of growth in GDP per capita, which is assumed to translate into a rise Spain Average NIMs by country group in the ratio of banking assets to GDP UK G7 weighted average = 2.6% as economic development proceeds. Japan E7 weighted average = 4.1% Stronger rates of growth in both of these All, weighted average = 2.8% variables push up emerging economy Australia banking assets in our model. Nigeria, Canada India, Vietnam, China and Indonesia have the highest rates of growth in Vietnam GDP and GDP per capita in our sample India and this translates to strong growth in banking assets as well, albeit subject to France many uncertainties as discussed above Germany and dependent on continuing to pursue China broadly growth-friendly policies in these countries. Italy As described in Section 3, this growthRepublic of Korea is generally driven by improvements S. Arabia in physical and human capital in US emerging economies and catching up with technology levels in developed Mexico economies. We also expect the real Nigeria market exchange rate of all the emerging economies to appreciate over time to Turkey come in line with purchasing power Indonesia parity estimates. This increases banking assets measured in $ terms in all these Russia emerging markets. Population growth S. Africa also contributes positively to growth in Argentina India, Vietnam, Indonesia and Nigeria. There is a much lower contribution from Brazil population growth in China as a result of its ageing population and its one 0 2 4 6 8 10 12 14 16 child policy.Source: Fitch Banking in 2050, May 2011 21

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