Emerging powers' takeover speeds up

The global financial crisis will hasten an economic changing of the guard, putting China and India at the top of the world banking industry, according to international consultancy PricewaterhouseCoopers.

PWC, in its report "Banking 2050", says the accelerating shift in economic power from the developed to emerging economies is dramatically changing the banking industry.

"The emerging economies' banking sectors are expected to outgrow those in the developed economies by an even greater margin than we projected before the financial crisis," it says.

By 2050, the leading "E7" emerging economies - China, India, Brazil, Russia, Mexico, Indonesia and Turkey - could have domestic banking assets and profits that exceed those in the G7 group of leading developed countries by around 50 per cent, PWC says. The G7 countries are the United States, Japan, Germany, Britain, France, Italy and Canada.

China could overtake the US in the size of its domestic banking sectors by around 2023, PWC says.

"India has particularly strong long-term growth potential and our projections suggest it could become the third-largest domestic banking sector by 2050 after China and the US, but ahead of Japan, the UK and Germany."

Brazil could also rise strongly over this period, PWC says.

David Tripe, a senior lecturer in banking studies at Massey University, said the changes meant Australian banks - which own the four big banks in New Zealand - would need to stay on their toes.

The prospect of one of the Australian banks being taken over was probably the thing most likely to have an impact on New Zealanders, he said.

"One of the things that always lurks around is the possibility that if the position of one of them weakens very much, there are some banks - particularly the Chinese - who would jump at the opportunity to acquire one of them and get a significant chunk of business. Of course, if they were doing that, there would be all sorts of xenophobia by the Aussies, but it is a realistic market prospect."

Tripe also noted that two Indian banks have started up in New Zealand in the past few years - Bank of Baroda in 2009 and Bank of India in 2011. He expects to see some of China's banks set up shop in New Zealand before long.

"The Australian banks are going to need to remember that there are some potentially significant competitors out there."

PWC found the emerging economies would overtake developed economies earlier than its original projections in a 2007 analysis.

"This suggests that the financial crisis has brought about an acceleration in the shift in economic power from the developed to the emerging economies," PWC says.

In terms of GDP growth, the global economic power shift from the G7 to the E7 is speeding up, PWC says. We see from the chart that in 2009, the GDP of the E7 is about one-third the size of the G7, but by 2050 the E7 could grow to be more than 60 per cent larger than the G7.

"We expect China could overtake the US by around 2030 based on GDP measured by market exchange rates," PWC says.

"However, we expect China's rate of growth to slow down over time due to its rapidly ageing population as a result of its single child policy and as its growth needs to become increasingly based on its own innovations rather than just replicating the innovations of the developed economies.

"India's rate of growth, by contrast, is expected to overtake that of China in the long run as it has more catch-up potential and its working-age population growth will be much stronger in the long term."

PWC projects E7 banking assets to overtake the G7 around 2036, compared with around 2044 in its 2007 report.

"The financial crisis therefore does appear to have accelerated this global shift of economic and financial power to the emerging economies.

"Although the exact transition dates are open to considerable uncertainty, it seems likely that China will have the largest domestic banking assets in the world at some point within the next 20-30 years and that India will move clearly into third place by 2050."

Not to be forgotten is Brazil, whose domestic banking assets are expected to grow relatively fast over the projection period, resulting in it overtaking Germany and Britain by around 2045.

Russia is projected to have strong growth, but not fast enough to overtake Britain, Germany or Japan within this period.

PWC's analysis suggests China and India could have a combined share of around 35 per cent of global banking assets by 2050.

"The main reason why the shift of global banking power to the emerging economies is now projected to be faster than in our 2007 report is due to the short - and long-term effects of the global financial crisis," it says.

"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."

Developed economies' financial systems came under severe stress from the crisis. The value of assets declined sharply and some financial institutions faced potential bankruptcy and had to be bailed out by governments.

Emerging economies, by contrast, were relatively shielded from these effects, leaving their banking systems in much better shape to fund long-term economic growth.

The financial crisis therefore led to a general downward revision for the estimates of sustainable trend growth across many developed economies, but little change in long-term trend-growth projections for the major emerging economies.

"As the emerging economies develop they will require increasingly sophisticated financial services and banks are likely to expand to meet this need and reap the benefits of greater economies of scale as a result," PWC says.

"In other words, the faster an economy develops, the faster its banking sector grows relative to the economy as a whole."