Transition and Opportunity: Southeast Asia’s Share of US$7 Trillion Value

Banks globally are at the fulcrum of a changing world and face a dramatic need to refresh and reposition to address falling valuations whilst meeting core financial and societal needs. 

Whilst banks are unlikely to return to profitability levels and valuations seen prior to the 2007-8 Global Financial Crisis, with the right actions they stand to unlock US$7 trillion in value through strategic changes, consolidation, new partnerships, simplified operations and embracing platform-based organizational dynamics. This corresponds to roughly doubling current valuations and improving price-to-book (P/B) ratios to 1.25, on average.

These are among the key findings of a recent report by Boston Consulting Group (BCG) titled To Seize a $7 Trillion Opportunity, Banks Need Bolder Strategies for Serving Customers and Society.  

Banks must frame these actions against a wider case for change—working with stakeholders to enable economic growth whilst financing the climate transition. Addressing these imperatives is acutely important in Southeast Asia, but banks in the region can be tentatively encouraged by relatively strong performance against many global peers. 

Bank valuations in the emerging Southeast Asian markets have benefitted from high economic growth expectations, contributing to a low share of bank equity trading below a P/B ratio of 1.0 relative to other regions, with just one-third (33%) trading below this measure in Southeast Asia, compared to 86% in Europe and 98% in North and East Asia. 

With the right interventions in place, transformation could empower banks to earn more than their cost of equity on a sustainable basis, increase valuations and improve shareholder returns.

Southeast Asian Banks Shine in Challenging Global Landscape
Banks’ share of total financial assets—measuring assets of banks, insurance companies, pension funds, nonbank financial institutions, and private capital firms—has been declining steadily in almost all economies over the last decade. At the same time, expectations on regulated banks continue to increase, with higher capital requirements, enhanced consumer protections, necessary investments into shared financial infrastructure, and further fee compression resulting from increased competition.

Axel Weber, one of the report authors and senior advisor at BCG, highlighted the urgency for banks to readjust their business models. “In more than a decade since the global financial crisis, banks have still not managed to adjust their business models to reflect the new reality they are operating in. Urgent actions and a bold vision are needed: banks must redefine where to compete, who to partner with, and how to deliver value amidst continued and multifaceted disruption.”

The average return on equity (RoE) for banks has fallen 450 basis points (bps) globally between 2006 and 2022, demonstrating a jarring direction of travel. Southeast Asian banks have fared better, declining just 200bps amidst a comparatively moderate increase in capital requirements.

Southeast Asia has also experienced nearly stable returns on assets, bucking the wider global trend. A relatively small drop in fee incomes has been compensated by improvements in cost efficiency, and virtually no change in the level of interest incomes—all this despite substantial asset growth averaging 9% per annum. 

As ever in this complex region, country-specific variations underpin the averages. Markets such as Singapore and Indonesia demonstrate stable, or even rising profitability. This stands in contrast to markets such as Thailand and Malaysia, where profitability declined in line with the global average RoE reduction. 

Whilst the relative regional performance is encouraging, Southeast Asian banks also face the imperative to embrace change to maintain and unlock further value in this challenging landscape.

Working closely with regulators will be a key step. This will help to bridge information gaps to ensure transparency around long-term regulatory objectives that can create win-win solutions for many economies. This is an essential collaboration if banks are to realize their role as catalysts of change.

Saurabh Tripathi, global leader of BCG’s Financial Institutions practice and a co-author of the report, urged an equally collaborative approach to evolving regulation. “Governments will place a heavy burden on banks to serve as catalysts for change, especially in the area of climate transition, whilst regulators will continue to request additional capital requirement. This creates an important opportunity for collaboration. Regulators can take complementary steps, without compromising on systemic stability and risks, that reinforce banks’ business models. These could be in the form of new approaches to regulation, consolidation where appropriate, the creation of industry utilities, or frameworks for easier outsourcing to enable more scale benefits, for example.”

Bold Moves Promise Big Rewards
Despite their encouraging position, Southeast Asian banks will need to join their global counterparts in a series of bold actions to unlock their share of a multi-trillion-dollar valuation prize.

Banks need to drive toward significantly improved productivity whilst radically reducing the cost of complexity if they’re to win competitively. Local market structures, adoption of innovative business models, and regulatory direction are all fundamental dynamics which banks must negotiate. 

Embracing a digital-first delivery concept and detailed cost-driver understanding will be a crucial first step.  This will allow banks to design a zero-based business model which will enable a step-change in productivity that is 40% higher than what is considered normal today.

Banks will also need to make portfolio decisions that enhance value. With capital, funding, and investment resources remaining challenged, an objective review of current allocations is vital. They should exit business lines or, at a minimum, reduce capital exposure to low-return asset classes and invest in new areas of strategic growth that possess more favorable levels of return on equity.

The dramatically simplified business models of banks must be supported by an actively managed balance sheet, a modern platform operating model, and a bold deployment of front-to-back digitization. This should be complemented by a comprehensive reimagination of functions that leverage AI and generative AI to enable significant efficiency gains and improve client and employee experience. 

This new operating model can empower banks to deliver vastly greater impact from data and technology, as well as help build strategic partnerships and capabilities that unlock further competitive advantage. 

Southeast Asian banks—particularly those in markets such as Singapore and Indonesia—are afforded a strong platform to leverage these recommendations, backed by robust relative performance against global peers. 

With an informed, holistic transformation, they can blaze a path forward to drive economic growth, finance an essential climate transition and create lasting shareholder value, all whilst unlocking their share of a US$7 trillion valuation boost.